USDA Raises 2016 Farm Income Forecast Versus February

Posted on 03/09/2017 10:26 AM

Outlook still calls for net farm income to be the lowest since 2009

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USDA forecasts net cash farm income at $94.1 billion in 2016, up from a February forecast of $90.9 billion, but down 13.3 percent from 2015. USDA also forecasts net farm income to be $71.5 billion, up sharply from their initial February forecast of $54.8 billion, but still down 11.5 percent from 2015 and would be the lowest since 2009, USDA said in their second update on 2016 farm income.

These declines follow the 17.5- and 12.9-percent reductions in net cash income and net farm income, respectively, that occurred in 2015, USDA noted.

But even those 2015 figures were revised substantially compared to the February forecasts. Net farm income for 2015 was revised up significantly to $80.7 billion-an increase of 43 percent since the February forecast, according to USDA. "Falling production expenses, including the price of fuel and inputs, was the largest contributor to this latest rally by farmers."

"Overall, farm income over the last five-year period reflects the highest average five-year period on record," USDA Secretary Tom Vilsack said in a statement. "Although net farm income for 2016 is forecast to decline relative to 2015, the 2014 Farm Bill has provided for a comprehensive farm safety net that will ensure financial stability for America's farming families." 

For the second year in a row, however, USDA noted production expenses were down in 2016. Total production expenses are forecast down $10.1 billion (2.8 percent) over 2015, led by declines in farm-origin inputs (feed, livestock/poultry, seed) and fuel/oils.

Cash receipts are forecast to fall $25.7 billion (6.8 percent) to $353.4 billion in 2016, led by an $18.7-billion (9.8 percent) drop in animal/animal product receipts and a $7.1-billion (3.7 percent) decline in crop receipts. The expected drop in 2016 cash receipts is led by declines in nearly all major animal/product categories (including dairy, meat animals, and poultry/eggs), as well as vegetables and melons. Feed crop and food grain cash receipts are also expected to fall.

While overall cash receipts are expected to decline, receipts for several commodities— including turkeys, rye, hay, cotton (cotton lint and cottonseed), miscellaneous oil crops, potatoes, and sugarcane/sugar beets—are forecast to rise by at least 1 percent in 2016.

Direct government farm program payments are forecast to increase in 2016 by $2.7 billion, or 24.8 percent, to $13.5 billion.

Noting the 2.8 percent fall in overall production expenses, USDA said that is "partly offsetting the decline in cash receipts. Notably, expenses for inputs that typically are produced by the farm sector itself—including feed and livestock/poultry purchases—are expected down (6.2 percent). Also, expenses for fuels and oils are forecast down by 13.2 percent in 2016. If realized, expenses across each of these three categories will have fallen for 3 straight years. Interest expenses are forecast to decline (2.4 percent) relative to 2015 due to falling real estate interest expenses. In contrast, cash labor expenses are forecast to increase due to an increase in hired labor costs."

Farm sector equity is seen down $61.2 billion, 2.4 percent from 2015, "as the decline in farm sector assets outpaced the modest decline in sector debt relative to 2015." And farmland values have declined as USDA notes the value of real estate, the largest component by far of the asset portfolio, is forecast down by $36.9 billion (1.5 percent).

Crop insurance: Wheat has been the largest recipient (almost 37 percent) of 2016 crop-year-to-date Federal Crop Insurance Corporation (FCIC) indemnities, followed (in descending order) by corn, cotton, and soybeans. FCIC indemnities paid in 2016 are expected to decrease by over $1 billion from 2015.

Farm program payments to hit $13.5 billion. Direct government farm program payments are forecast to rise by 24.8 percent in 2016 to $13.5 billion, according to USDA, with the Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) programs expected to account for 64.1 percent of program payments. PLC payments in 2015 went to long-grain rice (51.5 percent), peanuts (41.4 percent), and canola (7.1 percent). In 2016, about 40 percent of PLC payments are expected to be issued to producers with peanut base acres, 30 percent to producers with wheat base acres, 10 percent to producers with corn base acres, and 10 percent to producers with grain sorghum base acres.

Operators with corn base acres received almost 84 percent of Agriculture Risk Coverage-County (ARC-CO) 2015 payments, reflecting both corn price declines and the large number of corn base acres on which payments are made. About 65 percent of ARC-CO 2016 payments are expected to go to producers with corn base acres, 15 percent to wheat base producers and another 15 percent to producers with soybean base acres.

The forecast increases in 2016 payments reflect expected declines in seasonal average crop prices. Payments are targeted to begin after October 1, 2016, following adjustments for adjusted gross income, payment limits, and other factors.

Commodity certificates, available beginning with the 2015 crop, allow producers to exchange collateral pledged to CCC for an outstanding, nonrecourse Marketing Assistance Loan (MAL). Marketing Loan Benefits (MLBs)—Marketing Loan Gains (MLGs), Loan Deficiency Payments (LDPs), and the reintroduced Certificate Exchange Gains (CEG)—are forecast to increase due to expected lower prices for upland cotton and peanuts. Few payments are expected for participants in the Dairy Margin Protection Program (MPP). After netting fees and premiums paid, the program will return $6 million to the Federal Government.

"The balance sheet forecast indicates a fourth consecutive year in which farm solvency measures have deteriorated," USDA observed. "Liquidity positions have likewise deteriorated, but the changes in both measures have been slight generally and these indicators of financial health remain near historic lows."

Farm sector equity is predicted to decline 2.4 percent in 2016 to $2.49 trillion, the second consecutive year of declining equity after a record $2.60 trillion in 2014. While farm sector debt is expected to fall less than 1 percent in 2016, the decline in farm equity reflects a larger expected decline (2.2 percent) in the market value of farm sector assets.

The last 2 years' performance reverses the 2009-2014 string of gains, which reflected a farm sector characterized by high crop and livestock prices, growing global demand, emerging markets for biofuels, rising incomes/net cash flows, and favorable credit market conditions, USDA noted. "Commodity price declines beginning in 2015 and continuing into 2016 reflect a reversal of many of these favorable agricultural trends."

Farm asset values are forecast to decline by 2.2 percent in 2016, and farm debt is forecast to decrease by 0.8 percent. Farm sector equity, the net measure of assets and debt, is forecast down by $61.2 billion (2.4 percent) in 2016. The decline in assets reflects a 1.5-percent drop in the value of farm real estate, as well as declines in animal/animal product inventories, financial assets, and machinery/vehicles.

"The decline in farm debt is driven by lower nonreal estate debt (down 4.6 percent), reflecting a change in farmers’ management decisions (such as reducing input expenditures) but also an increase in short-term commercial bank loan rates, which make debt more expensive," USDA noted.

Farm real estate debt in 2016 is expected to reach an historic high of $213.6 billion in nominal terms, nearly 2 percent above the previous high set in 2015. "The Farm Credit System, the largest lender of farm real estate loans to the farm sector, has seen its retail real estate loan volume grow in the first half of 2016, reflecting continued demand for the purchase of cropland," USDA stated. "Commercial bank real estate loan volume for purchasing or improving real estate increased in the first half of 2016; however, loans using real estate as collateral have declined."

Somewhat surprisingly, USDA noted that after farm nonreal estate debt peaked in 2014, it declined in 2015 and is expected to continue to decline through the end of 2016. "Declines have been reported by the year's midpoint both for commercial bank and Farm Credit lenders," USDA stated. "Commercial banks' largest decline has been in loans for operating expenses incurred both for crop production and care of livestock. The decline reflects reduced loan demand due to reduced profit margins and lower expected farm sector cash flows from reduced commodity prices, as well as significant repayments in early 2016."

Given that debt is predicted to grow faster than farm assets in 2016, the farm sector debt-to-asset ratio and debt-to-equity ratios are expected to nudge upward relative to 2015, USDA noted. "This suggests a modest increase in farm financial risk. Still, the farm sector continues to benefit from its strong balance sheet and continued positive (although reduced) cash flows."

Compared to the February forecast for 2016, the August forecast is improved for assets, debt, and equity. Farm sector assets are forecast to increase in contrast to February's forecast, reflecting improved cash income forecasts for both 2015 and 2016. The improvement in net cash incomes for 2015 and 2016 have also reduced the need for debt financing in 2016 anticipated in February. The improved outlook for 2016 assets and debt raises our forecast for 2016 farm equity (net worth) relative to the February 2016 forecast. As a result, farm sector solvency ratios for August 2016 are projected to improve relative to their February ratios as well.

Comments: Lots to consider in this updated forecast from USDA. Not only were the 2016 figure revised upward from February, but sizable adjustments to 2015 were also made. This, according to USDA documentation, "The 2015 calendar year forecast process culminates in August 2016 when NASS estimates of State and US production are available and expense data gathered through the 2015 he Agricultural Resource Management Survey (ARMS)."

Even as producers struggle with low commodity prices, this updated set of forecasts from USDA may well raise more than a few eyebrows in ag circles. Another perhaps surprising notation is the mention that loan demand is reduced for operating expenses, something which has not necessarily been signaled in updates from Federal Reserve banks, etc. So these forecasts, while being hailed by USDA, are certain to raise some questions.


ERS: Lower Net Cash, Farm Income Forecast for 2016

Both below 10 year moving average

In 2016, US net cash farm will fall to $94.1 billion and net farm income will fall to $71.5 billion, both are below their 10-year averages in both nominal and inflation-adjusted terms, according to the Economic Research Service (ERS).

Net cash farm income (NCFI) and net farm income (NFI) are two common measures of farm sector profitability. NCFI includes cash receipts and farm program government payments less cash expenses; it represents the net cash income available to farmers in a given year.

NFI is a broader measure that represents the net value added to the US economy by the agricultural sector, and includes noncash transactions such as changes in inventories, capital replacement, and implicit rent and expenses related to the farm operators’ dwelling. Following several years of high income, both measures have trended downward since 2013.

Lower forecasts for NCFI and NFI reflect price declines across a broad set of agricultural commodities in 2015 that are expected to continue in 2016. A forecast increase in government payments and decline in production expenses in 2016 only partially offset the drop in commodity receipts.


NOTE: This column is copyrighted material; therefore reproduction or retransmission is prohibited under U.S. copyright laws.



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