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Positive farm profitability false in 2020

Positive farm profitability false in 2020

Most agricultural economists and policy wonks saw it coming. The U.S. Department of Agriculture’s September 2020 farm-income projections suggested net farm income – a broad measure of farm profitability across the entire farm sector – would reach $103 billion this year. That’s an increase of 23 percent from the prior year and the best level since 2013’s record.

That was before the second $14 billion Coronavirus Food Assistance Program and before new crop inventories began to shrink as the outlook for U.S. agricultural exports improved. Assuming those export sales are realized, USDA’s December 2020 Farm Income Forecast confirmed what many expected. Nominal net farm income in 2020 will reach almost $120 billion, an increase of 43 percent from 2019 and the second-best of all time. Yet farm cash receipts from crop and livestock sales have decreased $3 billion and are the worst since 2016. Today’s article reviews USDA’s most recent farm-income projections.

2020 farm income, expenses detailed

While farm profitability will certainly be better in 2020, it’s a false positive. Farm cash receipts from the sales of all crop and livestock commodities are now projected at $367 billion, a decrease of $3 billion or 1 percent from 2019.

Cash receipts this year will be the least since 2016 and they remain $57 billion less than the $424 billion in cash receipts received during 2014. There has been some relief in production expenses; at a projected $344 billion they’ve decreased $5 billion or 1 percent from 2019 – the least since 2011.

Driving farm income in 2020 is $46.5 billion in federal payments, including those provided through farm-bill and conservation programs. There’s also the ad hoc support related to Chinese retaliatory tariffs, natural disasters such as wildfires and hurricanes, and now the COVID-19 pandemic.

Congress authorized many of those ad hoc disaster programs well before the late-season rally in commodity prices driven by the improved outlook for U.S. agricultural exports to China. It’s clear that federal support has helped agricultural producers. The multiplier effect will also likely help boost rural economies and may contribute to a decline in family-farm bankruptcies during 2020.

When removing federal support from net farm income – for demonstration purposes only – farm-related net farm income totals $73 billion, which is an increase of $12 billion from 2019. But it’s $40 billion less than 2013’s record. Federal support as a percentage of net farm income in 2020 is now projected at 39 percent. Federal support as a percentage of gross income is now projected at a record 10 percent. The obvious question many are asking is, “What’s next?”

Farm income for 2021 very uncertain

To boost farmer and rancher net income next year, two things must happen.

  • Current export commitments must continue to increase and must also be realized as export inspections. Continued strength in demand for U.S. agricultural products will help tighten supplies and boost farm-level prices.
  • Any future disruptions due to COVID-19 must be minimal. More importantly as a vaccine becomes available COVID-19 restrictions must be lifted. Should those circumstances be realized, the U.S. agricultural sector will be on a stronger footing in 2021.

But several factors could roil the farm economy moving into 2021. Export commitments are at record numbers but the cancelation of outstanding sales is possible. That would ultimately reduce exports, boost inventory levels and put downward pressure on prices. An improving South American crop could also put downward pressure on U.S. prices. And additional COVID-19 lockdowns could create farm-price volatility like it did in the spring.

The USDA’s first projection for 2021 farm income and expenses will be released in February. One thing is certain, net farm income or profitability in 2021 will be less. Without additional financial support of some sort, federal assistance in the form of traditional farm-program and conservation-program payments are likely to return to historic levels of $10 billion to $12 billion. Assuming the strength in commodity prices continues and removing a large portion of recent ad hoc support, net farm income is likely to decrease to the $90 billion to $100 billion range, significantly less than our current level – proving that farm income in 2020 is indeed a false positive.

John Newton is the chief economist with American Farm Bureau Federation Market Intel; visit www.fb.org/market-intel for more information.

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