Rising commodity prices are main driver in higher farm income forecast for 2021

U.S. net farm income is forecast to reach $116.8 billion in 2021, up $22.0 billion (23.2%) from 2020 with the 2020 result up $15.7 billion (19.9%) from 2019, according to the Farm Sector Income Forecast from USDA’s Economic Research Service (ERS).

Some initial highlights:

·      Higher crop receipts increase forecast income to highest level since 2013.

·      Gov’t payments to fall dramatically as ad-hoc, disaster payouts decline.

·      Input costs rising in nearly every category.

 Net cash farm income is forecast to increase and reach $133.0 billion in 2021, up $17.0 billion (14.7%) from 2020, ERS said. Net cash farm income includes cash receipts from farming as well as farm-related income (including gov’t payments) minus cash expenses. It does not include noncash items — including changes in inventories, economic depreciation, and gross imputed rental income of operator dwellings — reflected in the net farm income.

Higher cash receipts offsetting downturn in gov’t payments, higher expenses. Farm cash receipts are expected to reach a high of $427.3 billion in 2021, up $64.7 billion (17.8%) from 2020, ERS said, with crop receipts forecast up $35.4 billion (17.9%) from 2020 levels to $233.0 billion. Corn, soybeans, and wheat combined account for much of the rise in cash receipts — $35.3 billion (36.4 %). Total animal/animal product receipts are expected to increase by $29.3 billion (17.7%) to $194.3 billion following increases in receipts for broilers, cattle/calves, and hogs.

But working against the increase in crop receipts in the overall farm income picture is a fall in direct gov’t farm program payments of $18.5 billion (40.4%) in 2021, putting them at $27.2 billion. “Much of this decline is because of lower supplemental and ad hoc disaster assistance to farmers and ranchers for the coronavirus (COVID-19) pandemic compared with 2020 and the closure of the Market Facilitation Program,” ERS said.

Supplemental and ad hoc disaster assistance payments in 2021 are forecast at $19.9 billion, down $11.7 billion from 2020, “primarily because of lower total payments from Covid-19-related assistance programs,” ERS detailed. Also lower in 2021 compared with 2020 are forecast pandemic assistance, including the Coronavirus Food Assistance Program (CFAP). Payments in calendar year 2021 from these USDA programs are forecast at $8.0 billion, down sharply from $23.5 billion in 2020.

Non-USDA pandemic assistance (payments from the Paycheck Protection Program (PPP), administered by the Small Business Administration) is forecast at $8.7 billion for 2021, compared with $6.0 billion in 2020. However, ERS cautioned this area could be “revised as more data become available, with any unforgiven amounts included in farm debt instead of direct payments.”

As for the farm programs embodied in the 2018 Farm Bill, ERS forecasts just $95 million in payments under the Agriculture Risk Coverage (ARC) program in calendar 2021, down $1.2 billion from 2020. Price Loss Coverage (PLC) payments in 2021 are expected be $2.1 billion, a reduction of $2.8 billion from 2020 levels. “ARC payments are expected to decrease in 2021 because of higher commodity prices for all covered commodities and higher yields in 2020 compared with 2019 levels, particularly for corn and soybeans,” ERS noted. “PLC payments are expected to decrease in 2021 because of higher prices for all covered commodities in 2020 compared with 2019.”

Dairy producers enrolled in the Dairy Margin Coverage (DMC) program are forecast to receive net payments totaling $1.1 billion, up from $200 million in 2020 due to higher feed costs.

Conservation payments from the financial assistance programs of USDA's Farm Service Agency and Natural Resources Conservation Service are expected to be $4.0 billion in 2021, up 3.9% from 2020.

There are also still $83.9 million from the Market Facilitation Program (MFP) included in the 2021 forecast.

Another factor lowering the income picture are production expenses as they are forecast to hit $387.6 billion in 2021, up $29.8 billion (8.3%) from 2020. “Nearly all categories of expenses are forecast to be higher in 2021, with feed and livestock/poultry purchases expected to see the largest dollar increases,” ERS said.

Feed expenses are seen rising to $64.4 billion, up $7.6 billion (13.4%) from 2020 in nominal terms, reflecting higher prices for feed commodities. Livestock and poultry purchases are forecast to increase by $4.5 billion (15.6%) to $33.5 billion in nominal terms.

Fuel and oil expenses are projected to increase to $15.8 billion, up $3.9 billion (32.2%) from 2020, mostly due to the Energy Information Agency's November forecast of higher diesel prices in 2021, up by 72 cents per gallon compared with 2020.

But fertilizer-lime-soil conditioner expenses are forecast to hit $27.5 billion in 2021, up $3.1 billion (12.5%) in nominal terms from 2020. However, pesticide costs for 2021 are forecast to have declined slightly in nominal terms—less than $10 million (less than 0.1%).

Interest expenses are also expected to increase by $1.3 billion (6.6%) in 2021, totaling $20.6 billion, because of higher interest expenses on real estate debt.

Farmers’ working capital to increase again. The improved farm income picture is also adding to farmers’ working capital. USDA currently forecasts that to rise to $92.85 billion in 2021, up from $84.75 billion in 2020, and the highest since it was at $121.04 billion in 2014 and is the fifth straight increase in working capital.

Perspective: While higher incomes are welcome, especially via higher crop prices versus higher gov’t payments that were seen in 2019 and 2020. Still, the increased costs for 2021 appear poised to rise again in 2022, and that will likely tap into that working capital level which bottomed out in 2016 at $65.19 billion. Despite rising debt, farmers are still in solid shape from a debt-to-asset and debt-to-equity perspective. The debt-to-asset ratio in 2021 is forecast at 13.91, basically unchanged from 13.90 in 2020, while the debt-to-equity ratio is at 16.16 in 2021, nearly steady with the 2020 mark of 16.14. While the highest levels for both readings since 2002, they are still well shy of the levels seen at the height of the farm crisis in 1985 when the debt-to-asset ratio hit 22.19 and the debt-to-equity ratio w