This past week the U.S. Department of Agriculture released its latest estimates of U.S. net farm income. The report left many scratching their heads; the outlook for 2019 significantly improved since the initial March estimate. Specifically the current estimate of $88 billion in net farm income for 2019 is much more than the March estimate of $69 billion. This week’s post digs into the details and considers how the changes came to be.
Net farm income increases
Figure 1 shows real or inflation-adjusted U.S. net farm income where 2019 equals 100, going back to 1929. That’s a long data series but helps to provide context. For example the orange line is the 91-year average of $84.8 billion. It’s common for the U.S. farm economy to spend several years at or slightly less than that level. For example income was regularly at about those levels during the 1960s and 1990s. The black lines represent one standard deviation more than and less than the means – plus or minus $26.7 billion. Data points at more than or less than that range represent historically better or worse levels.
The current 2019 estimate of sector income is $88 billion. That level represents a strong recovery since farm income decreased to less than $66 billion in 2016. While the change in estimated 2019 net farm income was most evident, it’s the changes in the 2018 forecast that tell most of the story.
Current changes reflect 2018 data
The USDA has a long window for making forecasts and estimates of net farm income. For each year there are five releases across 19 months. That long time frame is why the 2018 forecast was adjusted in August 2019. Since the March report the USDA was able to incorporate expense data gathered by the Agricultural Resource Management Survey. Visit www.ers.usda.gov/data-products for more information.
Figure 2 shows an overview of changes to estimated 2018 net farm income between March 2019 and August 2019. In March the USDA estimated 2018 farm income at $64 billion. The latest estimate for 2018 is almost $86 billion. The two largest categories that drove the improvement were decreased production costs – an $8.7 billion improvement – and a decrease in capital consumption – a $6.5 billion improvement. Both of those categories contributed to a positive increase in farm income. The third category – “other” – was mostly comprised of decreases in labor and rent expenses paid.
Figure 3 shows the same type of information for the 2019 estimates. Net farm income improved by almost $19 billion or a 27 percent increase. For 2019 there were both improvements and setbacks. Decreased values of crop and livestock production negatively contributed to the outlook. Across the board the USDA is expecting a decreased value of agriculture production in 2019. Value of agricultural production for 2019 decreased from $430 billion in March to $415 billion in August. Those estimates include commodity-insurance indemnities, which have been forecasted to be more in the latest data.
A source of improvement has been an increase in expected direct payments at $8 billion. The increase represents the first round of Market Facilitation Program 2019 payments. Should the second round of payments be authorized, that category would be increase more. A potential third round of payments would be made in the 2020 calendar year.
The largest sources of improvement have been the decreased cost structure, decreased production expenses, decrease in capital consumption and the “other” category. Keep in mind there is carry-through between Figure 2 and Figure 3. For example the USDA finding producers spent less on labor compensation in 2018 directly impacts 2018 but also carries into 2019 because the cost structure has decreased. In other words the reduced costs structure observed for 2018 creates positive benefits in future years.
For producers the declines in the value of production from crops and livestock are particularly frustrating and front-of-mind. For many that decline translates into less-than-budgeted revenue projections.
Forecasting farm income difficult
Forecasting and estimating net farm income is difficult. For example in early March the USDA released its first 2019 forecast before the planting-intentions report. A lot has changed since then and it’s only August. That’s to say that much can – and does – change during the USDA’s forecast time frame. Figure 4 shows the range of how much USDA forecasts can change across time. The vertical line shows the spread between the best and worst forecast made. The black dot shows the final forecast. Since 2000 the average range between the worst and best forecast is $18.5 billion.
The purpose of showing Figure 4 is to highlight how much variation can occur for a single net farm income estimate.
Wrapping it up
As the Margin Squeeze began we pointed out there were three ways of meaningfully improving the farm economy.
- Variable costs moderate.
- Fixed costs decline.
- Output prices improve.
The latest net farm income data shows that improvements have come primarily from a reduced cost structure.
A fourth factor has been at play since 2018 – Market Facilitation Program payments. Those ad-hoc payments have been a significant contributor to the farm outlook. In 2019 total payments from the 2018 and 2019 programs account for more than $10 billion, a substantial share of net farm income.
While there have been improvements to the farm economy in the form of a reduced costs structure – something we will look at in more detail in future posts – it’s important to keep in mind a significant portion of the farm economy has been propped up by the Market Facilitation Program payments. One on hand it’s good to see net farm income has broken out of the range of $60 billion to $70 billion that we seemed stuck in. But we now need to wonder how the farm economy will eventually transition off those payments – whether it will be gradual or abrupt. We wonder if a decline in payments will be offset with increased commodity prices.
The improved cost structure and recent payments lead to better net farm income and a more-favorable farm-economy outlook. While that’s a welcome improvement, it’s not a time to be comfortable or declare the worst is behind us.
The improvements are not sustainable. Many questions linger as 2020 comes into focus.
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