This past week the U.S. Department of Agriculture released its first estimate of net farm income for 2019. While it’s an early look, there are a few things that caught our attention. This week’s post reveals a few key insights, especially about 2018.
Net farm income improves
Figure 1 shows real – or inflation-adjusted – net farm income from 1929 to 2019 in 2019 dollars. During the 91 years of data, farm income has averaged $84.2 billion; it’s shown in orange. Furthermore the black lines in Figure 1 illustrate one standard deviation above and below that mean. The chart helps provide context to the current estimate of farm income.
The USDA’s initial and early estimate for 2019 is for net farm income at $69.4 billion. That’s an improvement from the current 2018 estimate of $64.2 billion. We’ll have more to say about 2018 in a bit.
Although the forecast for better income caught most of the headlines, farm financial conditions are still challenging. Historically speaking a net income of $69.4 billion remains depressed. Since 1990 net farm income has only been less than $70 billion six times. What makes the farm economy in recent years such a challenge is that three of those depressed-farm-income years have occurred during the past four years – 2016, 2018 and 2019. And 2017 was hardly a banner year.
That said it’s also important to say that current conditions remain much stronger than in the 1980s when real farm income decreased to less than $50 billion in 2019 dollars.
Changes from 2018 varied While the forecast farm-income increase is welcome news, we were curious about the drivers of the improvement. Figure 2 summarizes the source of change between 2018 and 2019. In green are the categories that contributed to an increase, while those in red decreased income.
The USDA is expecting better values for crops at an increase of $3 billion and for animal production with an increase of $1.1 billion. As 2019 unfolds, those categories will be affected by final 2019 production and market prices.
The other source of good news was the decreased forecast production expenses. At $5.5 billion, that category was the largest source of change. Given some of the recent price movements in products like fertilizer, one might wonder whether that change will hold.
The last specific category observed was a decline in direct farm payments. The USDA has projected those to be $2.5 billion less.
That decline is from the wind-down of the Market Facilitation Program payments as well as a decline in expected Agriculture Risk Coverage and Price Loss Coverage payments.
If realized, an outcome where farm income in 2019 increases from a combination of better values of farm production, decreased costs of production and in the face of decreased direct government payments would be a positive story for agriculture. That said this is an early projection with several revisions to come during the next 18 months and more.
Past year disappointing
In our opinion the updated 2018 farm-income estimate was the biggest story from the USDA’s March update. At $64.2 billion, farm income in 2018 was at the most depressed level since 2002. More specifically farm income in 2018 is currently estimated to be less than 2016 levels. That’s significant because 2016 was the previous low-water mark for the current farm-economy slowdown. Put in other words, 2018 was the most challenging year for agricultural producers in recent memory. For a farm economy looking and hoping for a recovery, 2018 was a disappointment.
Furthermore farm income in 2018 was supported by trade aid. Without those payments, farm income in 2018 would have decreased to less than $60 billion. That would put it back to levels not seen since the 1980s.
While the Market Facilitation Program payments were authorized in 2018 for 2018 production, a portion of that money wasn’t distributed until 2019. The estimate of net farm income in 2019 includes $3.5 billion in Market Facilitation Program payments.
Market Facilitation Program payments were certainly important to U.S. agriculture. The payments, however, were less of a Band-Aid and more of an infusion to keep the farm economy from slipping into critically dangerous territory. Without the payments, today’s conversation about the farm economy would be much different. On the other hand one also must wonder where the farm economy would be without the trade war.
Wrapping it up
The USDA’s first estimate of 2019 farm income provides some positive news. Real net farm income is expected to be 8 percent more.
The major sources of improvement – better values of production and decreased costs of production – are encouraging. The looming question for 2019 is if those forecasts are accurate.
Beneath the surface – or maybe at the surface – challenges in the farm economy remain. Net farm income in 2018 is currently forecast at the worst levels in recent years. Furthermore farm income in 2018 was supported by $5.2 billion in Market Facilitation Program payments, something that we have been warned will not be repeated in 2019.
From The National Grain and Feed Association: “(U.S. Secretary of Agriculture Sonny) Perdue noted that no more trade-mitigation payments are likely in 2019. ‘There’s not contemplated a trade-mitigation program for 2019,’ he said. ‘Farmers are very resilient and adept at making their planning and marketing decisions based on the current market. These facts are known now unlike they were in 2018. So farmers even under financial duress will make their best business decisions for 2019 without the expectation of a market facilitation program.’”
The final sentence above is important. It’s clear many farmers will be under financial duress if incomes do not improve. If the trade war is not resolved soon, even those businesses making their best business decisions are unlikely to find a welcoming economic environment. We would expect the financial pain in the sector to be substantial without a trade deal. Such a situation could send income tumbling even further.
As 2019 unfolds we fully expect farm-income estimates to change. Those estimates may change significantly. At some point the farm economy will need to break out of the $60 billion range that it’s spent three out of the past four years in. In our minds, a level of farm income that would signal a meaningful improvement in the farm economy – and begin to alleviate concerns – would be $80 billion or more. Such an improvement would require a lot of things to undergo meaningful improvement. The latest USDA estimates – and especially the 2018 reductions – would lead us to lessen our expected probabilities of such improvements occurring in 2019.
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