Farm Profit Recedes From Record High While Cash Margins Improve

After establishing a record in 2004 ($73.6 billion), net farm income of $64.4 billion is forecast for 2005. The mid-1990s, late 1980s, and early 1970s are the only recent runs of such high nominal earnings. In the 1990s, average (constant dollar) net farm income was $52.6 billion per year; and in the 1980s it was $42.2 billion.

Cash margins, the difference between farming’s gross cash income and cash expenditures for production inputs, are forecast to be $78.1 billion in 2005, slightly higher than the $77.8 billion earned in 2004. Gross cash income, at $263.4 billion, is projected to be about $2.7 billion less than the record level established in 2004. A reduction in cash expenditures of $3.0 billion is expected to offset the dip in farm income.

Production value and expenses to fall in 2005

The value of farm production is projected to drop $21.3 billion from 2004’s record. Still, the 2005 forecast of $249.2 billion would be the second highest on record. The value of crop production is forecast to be down by $18 billion in 2005, partly a consequence of strong recent yields for major food and field crops and a robust recovery in soybeans. End-of-crop-year stocks are expected to reach all-time highs and hang over a number of commodity markets. On average, soybean prices are expected to fall as much as $3 a bushel. Corn and sorghum prices are expected to drop better than 50 cents a bushel, and wheat around 40 cents a bushel.

Both the value of livestock production and livestock cash receipts are forecast to be $117.9 billion in 2005, which would be the third consecutive year in which they have both exceeded $100 billion. Beef and turkey receipts could grow $300 million and $100 million from 2004. Dairy producers could see cash receipts slip by nearly $2.8 billion, even though 2005 receipts would still be the second highest on record. Pork receipts are expected to fall about $1 billion in 2005, but still be the second highest on record.

Forecast production expenses of $208.9 billion in 2005 is a drop of 1.2 percent from the 2004 forecast ($211.4 billion). Feed expenses are expected to fall by $2.3 billion, livestock purchased by $1.8 billion, and other operating expenses by $0.9 billion. Some of this decline is expected to be offset by a $1.1-billion rise in manufactured inputs--due to increases in fertilizer, fuels and oils, and pesticides--and a $1.3 billion rise in overhead.

Farm operator households’ incomes continue to rise

The income earned by farm operator households in 2005 will continue a multiyear string of increases. Average farm household income for 2005 is forecast at $73,059, up 2.8 percent from 2004. Increases in government payments and other farm-related income were insufficient to cover declines in cash receipts, resulting in a modest reduction in gross farm cash income. The 1.9-percent decline in farm income follows a 7.9-percent increase in 2004. The 3.4-percent increase in off-farm income is a modest improvement over 2004, but enough to offset the decline in farm income.

Income outlook and financial circumstances vary among farms

Net cash income for farm businesses is projected to decline from an average of $59,700 in 2004 to $59,000 in 2005. Average net cash income is projected to decline in 2005 for most crop farms. The exceptions are farms that specialize in wheat, cotton, and rice, where increased government payments will offset the expected decline in sales. Aside from corn farms, the expected decline in average net cash income for other crops is modest (between 6 and 12 percent).

The income outlook for livestock producers is more mixed. Average net cash income of beef, poultry, and other livestock farms is expected to increase in 2005. Beef producers will see a return to 2003 incomes, with abundant hay and grain holding down production costs. Average incomes of hog and dairy producers are expected to decline in 2005, but remain well above 2003 levels.

In 2005, average net cash income is projected to increase in most regions. The largest increases are anticipated in the Prairie Gateway (15 percent), where cotton, rice, and beef will do well, and in the Southern Seaboard (8 percent), which specializes in poultry. The largest decline in average net cash income is expected in the Heartland (14 percent), where corn and soybeans dominate. Average incomes are expected to decline by 5 percent in the Northern Crescent, where dairy is most common.

Farm asset and equity values continue to grow in 2005

Supported by the continuing high level of net cash income in 2005, farm business asset, debt, and equity values are expected to rise through the end of the year. The value of U.S. farm business assets is forecast to gain 3.6 percent over 2004's $1.45 trillion. The value of farm real estate, accounting for over four-fifths of farming's assets, is expected to increase by 4.5 percent, following a gain of 6 percent in 2004. Historical high nominal net cash income, improvement in the general economy, and a robust housing market are anticipated to support further growth in farmland values. Year-end 2005 inventory is expected to decline from 2004.

Farm business debt is expected to rise about 3.6 percent in 2005, surpassing $213 billion. Debt secured by farm real estate is anticipated to rise more than 5 percent, while nonreal estate loan balances are expected to rise less than 2 percent. Sector equity (net worth) is expected to rise about 3.5 percent, as the gain in asset values exceeds the increase in debt levels by about $44 billion.

Farm business balance sheets have shown improvement in the last couple of years, following a decade of relative stability. After ranging between 14.8 percent and 15.2 percent during 1992-2002, debt-to-asset ratios are expected to decline to 14.2 percent during 2004 and 2005. Recent increases in debt have been offset by larger gains in farm asset values. As a result of farm real estate values rising faster than farm mortgage debt, the degree of farmland leverage declined slightly. This has provided farmland owners with an added equity cushion to lessen the impact of any short-term declines in income or asset values.