AGRICULTURAL INCOME AND FINANCE October 17, 1996 Approved by the World Agricultural Outlook Board ----------------------------------------------------------------------------- AGRICULTURAL INCOME AND FINANCE Situation and Outlook is published four times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20005-4788. AIS-62. Please note that this release contains only the text of AGRICULTURAL INCOME AND FINANCE--tables and graphics are not included. Subscriptions to the printed version of this report are available from the ERS-NASS order desk. Call, toll-free, 1-800-999-6779 and ask for stock #AIS, $18/year. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- NOTE: This report, scheduled for release on October 15, was delayed until October 16 by technical problems. This release corrects a formatting error in the October 16 release, which caused a few lines of text to appear out of context at the end of the report. Contents Summary 1995 Farm Income Estimates Farm Income Down in 1995, Despite Record Cash Receipts Farm Sector Income by Farm Size Classes Now and Then: A Comparison of Farm Production in 1975 and 1995 Farm Sector Debt Up $4 Billion in 1995 Cost of Production for 1995 Crops, Livestock, and Milk Returns to Grain Crops Higher in 1995, But On Fewer Acres Farm Business Outlook A Slowing 1995 U.S. Economy Still Contributed to Rising Farm Costs 1996 Farm Income Forecast Above Previous 5-Year Average List of Tables Appendix Tables Economics Editor Dave Peacock (202) 219-0805 Leader, Farm Sector Financial Accounts Roger Strickland (202) 219-0806 Leader, Commodity Costs, Returns and Production Bob McElroy (202) 219-0802 Approved by the World Agricultural Outlook Board. Summary released September 27, 1996. The next summary of the Agricultural Income and Finance Situation and Outlook is scheduled for release on December 17, 1996. Summaries and text of Situation and Outlook reports may be accessed electronically. For details on electronic access, call ERS Customer Service (202) 219-0515. The Agricultural Income and Finance Situation and Outlook is published four times a year. See back cover for subscription information. Summary Farm Income Forecast for 1996 Above Previous 5-Year Average The forecasts of net cash income of $58 billion and net farm income of $51 billion for 1996 represent substantial increases over 1995. Net cash income averaged $53 billion between 1990 and 1995. Net farm income averaged $43 billion. Crop receipts are forecast to be a record for 1996. Even though overall livestock receipts are forecast to increase compared with 1995, cattle receipts in 1996 could be the lowest in the 1990's. Strong crop receipts are a major reason for the expected higher income. Tight worldwide grain supplies have kept grain prices relatively high while U.S. production of corn, wheat, and soybeans is expected to be larger than last year. At the same time vegetable, fruit, and greenhouse receipts should continue their steady growth. Overall, livestock receipts are expected to be up, led by hog, poultry, and dairy producers. Financial problems may continue for beef producers. Farm Asset Growth To Continue The value of U.S. agricultural assets (excluding operator households) on December 31, 1996, is forecast at $1,012 billion, up 4.2 percent from 1995. About three-quarters of the increase is due to rising real estate values. Nonreal estate assets are expected to increase about $9 billion in 1996. Livestock and poultry values in 1996 are expected to rise after falling by nearly $13 billion in 1995. The value of crops stored and purchased inputs on hand are expected to rise in 1996 after dropping in 1995. The value of machinery and equipment is forecast to rise about $2 billion, in part due to favorable credit conditions. Farm Debt Expected To Rise Again in 1996 Total debt is projected to rise another $3-$4 billion in 1996. Total farm business debt rose by about $4 billion during 1995, reaching nearly $151 billion, its highest since 1986. The impact of this continuing increase in debt on farm incomes will be moderated by the combined effects of relatively high 1996 commodity prices and interest rates slightly lower than in 1995. Final Estimates for 1995 Show Farm Income Down Final 1995 farm income estimates confirm that even with record cash receipts, both net farm and net cash income were down from 1994. Net farm income in 1995 was nearly $14 billion, or 28 percent, less than 1994. Net cash income was lower by $1.7 billion, or 3 percent. Both income indicators were the lowest measured in the 1990's. The total value of 1995 crop sales was up almost $6.3 billion over 1994, despite lower production levels for most major crops. Commodities produced in 1994 and sold in calendar year 1995 made possible much of the increased crop sales value. Partially offsetting increased crop sales was a $1.3-billion decline in livestock receipts. Beef prices in 1995 were lower every month than in 1994. Increased expenses offset larger gross revenues in 1995. Major areas of increased expenses were feed, fertilizer, interest, and labor costs. Grain Crop Returns Higher in 1995, Acreage Smaller Costs and returns estimates show that higher 1995 prices led to higher returns for corn, grain sorghum, wheat, and rice, despite lower yields and higher expenses. Average barley returns above cash costs in 1995 were nearly double 1994. However, a decline in the value of soybean production, along with higher costs, caused returns above total economic costs to fall about $2-$4 per acre from 1994 to 1995. Peanut and cotton returns were also down for 1995, the result of lower yields. Acres planted to major crops in 1995 tended to decline from 1994, with the exception of durum wheat, soybeans, and cotton. Total U.S. planted acreage declined 1.7 percent. In response to favorable prices, cotton acreage has shown dramatic increases in the Southeast in recent years. Crop prices received by farmers in 1995 were up an average of 6.7 percent, but average livestock prices were down 3.2 percent. Returns to market hogs increased as a result of more favorable prices. However, feeder pig prices did not follow the upturn in market hog prices, and returns to feeder pig production were down. As beef production increased and more beef moved through the market, cattle prices declined. Consequently, returns above total economic costs for beef producers declined in 1995. 1995 Farm Income Estimates Farm Income Down in 1995, Despite Record Cash Receipts Farm marketings maintained in 1995 by drawing upon inventories from 1994's bumper harvest. Higher crop prices contributed to higher cash receipts, but production expenses also rose significantly. Farm Income Down in 1995 Even though cash receipts reached a record high in 1995, both net farm income (which accounts for changes in inventories and capital replacement) and net cash farm income (which excludes these items) declined from 1994. Net farm income fell by $13.6 billion, a 28-percent decline, while cash farm income was lower by $1.7 billion, or 3.3 percent (table 1 and fig. 1). Both indicators of farm income were at the lowest measured in the 1990's. Net value added also declined in 1995, by $12.5 billion (table 2 and fig. 2). Net value added, a more encompassing estimate of the farm sector's contribution to the economy, reflects the economic returns generated from production agriculture earned by farm employees, lenders, and landlords in addition to farm operators (defined as those individuals who share in the risk of production). Net value added and net farm income both measure only the income generated from the current year's production. Farm marketings increased by $5.0 billion in 1995. As in 1994, cash receipts derived from crop sales rose while livestock receipts continued to decline (fig. 3). The total value of 1995 crop sales was up almost $6.3 billion from 1994, yet production levels were down for most major crops (fig. 4). Corn production, which typically represents close to one-fifth of crop sales value, was below average for the current decade and far below the previous year's excellent crop. Both area planted and corn yields in 1995 fell significantly short of 1994. With smaller yields in 1995, production of soybeans and wheat were also both down from 1994. Much of increased crop sales value was made possible by crops produced in 1994's bumper harvest and sold from inventories in calendar year 1995. Consequently, a $3.4-billion reduction in the value of inventories offset a significant share of the additional crop sales in 1995. The remaining difference in crop sales value can be attributed to better prices received for major crops sold in 1995. Countering the increased crop sales was a $1.3-billion decline in livestock receipts, continuing a slide that began in 1994. Lowered value of beef sales accounted for the decline in livestock receipts. Monthly beef prices in 1995 were even lower than in the corresponding months for 1994. Although total beef production was 4 percent larger in 1995, the additional output was more than outweighed by declining prices. Higher earnings from farm-related activities such as custom machinery work and farm forestry, were partially offset by modestly lower government payments (fig. 5). Two key components of farm income, production and the value of inventories, reversed direction in 1995, compared with 1994. Although farm marketings were up $5.0 billion in 1995, gross farm income was $5.4 billion lower. The lower gross farm income is a reflection of the decline in production during calendar year 1995. In 1994's bumper crop year, farmers marketed $180.8 billion of crops and livestock during the calendar year and added $8.2 billion of farm products to their inventories. Together, farm marketings and increased inventories in 1994 represented $189 billion in crop and livestock production for the year. In 1995, farmers marketed products valued at $185.8 billion, but part of the additional cash sales were accomplished by withdrawing inventories valued at $3.4 billion from earlier years' production. Thus, $182.4 billion in crops and livestock were produced in 1995. The gross farm income generated by the Nation's farm sector during calendar year 1995, after all adjustments, was $5.4 billion less than in 1994. When an $8.1-billion rise in production expenses is added to the $5.4-billion decline in gross farm income, net farm income declined substantially from 1994 to 1995 (fig. 6). Net cash income in 1995 also declined from 1994, but not as dramatically as the fall in net farm income. Farmers retained stocks from 1994's bumper harvest, hoping to sell at better prices in the coming year. Crop prices were indeed higher for 1995. Thus, farmers were able to maintain or increase cash receipts for major crops in 1995 despite a mediocre production year. However, the 1995 increase in gross cash income of $6.1 billion was not enough to offset $7.8-billion in added cash expenses, causing the farm sector to have $1.7 billion less in cash income in 1995 than in 1994. The value added by the farm sector for 1995 reflects a decline similar to the farm income measures. Final output for crops and livestock declined $4.7 billion and $1.9 billion respectively, only partially offset by an $1.8-billion increase in returns from services and forestry. At the same time, intermediate consumption outlays used in producing these goods and services increased $4.8 billion. Falling final output and rising costs resulted in $12.5 billion less to be distributed among the providers of resources to the farm sector. While employees and lenders received a bit more for their contribution to farm production in 1995, nonoperator landlords with share-rent contracts received somewhat less in rents. Overall, returns to nonoperator contributors were up $1.1 billion. Farm operators, who typically benefit most from the increases and assimilate most of the declines, absorbed the burden of the reduced value added in 1995. The portion of value added received by farm operators declined $13.6 billion. Corn, Wheat, Soybeans, and Cotton Account for Almost Three-Fourths of Increased Crop Receipts Cash receipts for corn, which leads all other crops in total value marketed, were $17.4 billion in 1995, up from $14.7 billion in 1994. A slightly larger quantity of corn was marketed in 1995 than in 1994. Yet, the 7.3-billion bushel corn crop produced in 1995 was 27 percent below 1994's record crop of 10.1 billion bushels. A drawdown on the large unsold inventories held over from 1994's record crop permitted farmers to maintain sales quantities. Rising prices throughout the year, continuing into the post-harvest period, boosted corn revenues (fig. 7). The smaller crop and strong demand for corn, especially exports, bolstered corn prices. (Average annual corn output during 1985-94 was 7.8 billion bushels.) Over half of calendar 1995 corn sales took place in the later half of the year when prices were highest. Prices during October, November, and December 1995, when a third of the year's corn sales occurred, averaged $0.85 per bushel (or 42 percent) more than the same months in 1994. By contrast, prices were their lowest in the final 3 months of 1994 when over half of 1994 corn sales took place. The net result was a $2.7-billion increase in 1995 sales value over 1994. The increased 1995 cash sales, however, were more than offset by a $3.0-billion decrease in the value of corn inventories. Wheat receipts were up $910 million in 1995, accounting for about 15 percent of the overall increase in crop receipts. Harvested acreage was down slightly for 1995, and average yield was down 4.8 percent, the lowest since 1991. Both 1995 production and sales were down slightly from 1994, but 1995 prices were considerably higher (fig. 8). From July through December, when 60 percent of the crop was marketed, 1995 prices averaged over a $1 per bushel more than for the same months in 1994. Unlike corn and soybeans, wheat production in 1994 was not exceptional, and a large inventory of the unsold 1994 crop was not available to sell at 1995's higher prices. Soybean receipts increased by $376 million, equivalent to 6.0 percent of the net increase in crop revenues. Slightly more soybeans were marketed in 1995 than in 1994. Area planted to soybeans was up in 1995, in contrast to decreased corn acreage, and production was high, but not nearly equaling 1994's record crop. In fact, 1995 market offerings exceeded production, thanks to the carryover of unsold beans from the previous year's harvest. Even though the average of monthly prices for 1995 was not as high as for 1994, the immediate post-harvest prices for 1995 were significantly higher than the year before (fig. 9). Prices during September-December of 1995 averaged $0.92 (or 17 percent) higher than for these same months in 1994. Since about 50 percent of soybean sales for both years occurred during September-December, the higher 1995 prices for these months translated into expanded revenues from 1994. At year's end, however, the withdrawal from soybean inventories valued at $582 million, more than exceeded the increased receipts generated from higher prices. Cotton sales for 1995 were up by $860 million, equivalent to 14.1 percent of the total increase in the value of crop sales. The quantity of cotton sold in 1995 nearly equaled 1994 sales, exceeding annual production. Total output in 1995 was 8.6 percent less than in 1994, so the level of cotton sales was also maintained by selling from inventories carried over from the prior year. In the case of cotton, however, a reduction of inventories valued at $114 million was not nearly enough to offset increased crop revenues. Higher prices, more than sales of inventories, account for the increase in cotton receipts. The largest share of cotton was marketed during the final months of the calendar year, October-December, representing 67 percent of 1995 sales and 71 percent of 1994 sales. Prices during these 3 months averaged 9 percent higher in 1995 than in 1994 (fig. 10). The annual (unweighted) average price was 17 percent higher in 1995. Consequently, producers benefited from higher prices in the early months of 1995 as well. Vegetables Are Major Contributor to Higher Crop Receipts A small decline in vegetable yields, due to unfavorable weather in some growing areas, and a slightly lower harvested acreage (a little under a percentage point) caused 1995 vegetable marketings to dip from the 1994 level. Continued strong demand boosted vegetable prices, with growers' cash receipts climbing by more than 7.5 percent from 1994. In fact, the increased value of vegetable cash receipts in 1995 was equivalent to 16 percent of the overall increase in crops revenue from 1994. In 1995, almost $8 out of each $100 of cash receipts in agricultural commodity sales came from vegetables, up 40 cents from 1994. Among the large number of vegetables produced in the United States, potatoes and lettuce account for the largest share of cash receipts. Potatoes accounted for $1.40 (18 percent) of the $8.00 in vegetable cash receipts, while lettuce, which surpassed tomatoes in value of marketings, accounted for a little over a $1 (13 percent). Florida's fresh tomato growers experienced a decline in their marketings because excessive rain in late fall delayed their harvest, and Mexican growers responded by exporting tomatoes earlier to the United States. Better than 47 percent of U.S. cash receipts from vegetables come from California and Florida. Cash receipts from vegetables represent about 35 percent of California's cash receipts from all crops and 27 percent of Florida's. Cash receipts from potatoes enable Washington and Idaho to follow Florida in importance as vegetable producing States. And for Idaho, cash receipts from potatoes constitute better than 22 percent of its total for all commodities. Lettuce growers in 1995 brought 11 percent less product to the market than in 1994. Lower marketings, with continued strong demand, caused prices to rise by nearly 75 percent, and cash receipts from lettuce rose by more than 50 percent. These higher cash receipts enabled Arizona to move from ninth place in vegetable cash receipts in 1994 to fifth in 1995. Cattle Receipts Down Again in 1995 In 1995, livestock receipts were $1.3 billion less than in 1994, which was $2.0 billion under 1993. The predominant influence on the value of livestock sales was the fall in receipts from cattle and calves. For the second year in a row cattle and calf receipts registered more than $2.5 billion in annual declines. Prices for cattle and calves, compared to same months of 1994, were lower throughout 1995 (fig. 11). Despite these falling prices, beef production continued to edge upward in 1995 (fig. 12). Ending year inventories for 1995 were above 1994, suggesting that the beef production cycle was still on an upswing. Declining pork revenues were also a major component of falling livestock receipts in 1994, but more favorable prices for pork in 1995 contributed to a modest gain in hog receipts in 1995. Even so, hog receipts were still almost $1.0 billion below those registered in 1993. Dairy receipts were nearly unchanged in 1995. Continuing steady gains in broiler revenues helped prevent even larger declines in total livestock receipts. Production Expenses Rise in 1995 For Third Straight Year Production expenses in 1995 were $175.6 billion, up $8.1 billion (4.9 percent) from 1994. After remaining nearly level at around $153 billion from 1990 through 1992, production expenses have risen more than 4 percent in each of the last 3 years (fig.6). The total increase since 1992 has been $23.1 billion (15.2 percent). The increase in 1995 was more than the 4.3 percent growth between 1993 and 1994. The pattern of changes in 1995 expenses is more varied than those that occurred in 1993 and 1994 and appear tied more to specific circumstances than to generalized expansion. Feed Expenditures Follow Ups and Downs In Feed Grain Prices Estimated expenditures for feed were $24.5 billion in 1995, up $1.9 billion (8.4 percent) from 1994. This was the fourth straight year that feed expenses rose significantly, and the third straight year that feed posted the largest increase among production expenses. This pattern is likely due to shifts in the structure and location of animal production. A larger proportion of animals are being raised on large, specialized operations that buy most of their feed. More dairy production, for example, is occurring in the Southwest and Mountain States where raising feedstuffs other than hay on the farm may be uneconomical. Due to large feed grain and soybean harvests in 1994, feed prices were relatively low during the last quarter of 1994 and the first half of 1995. Lower costs encouraged livestock, dairy, and poultry producers to expand further already relatively high inventory and production levels. Total beef production increased around 3 percent over the year, and the January 1, 1996 cattle and calf inventory was up. Cattle on feed were up 3 percent overall and 10 percent in feedlots with 1,000 head and greater capacity. Total poultry production rose around 4 percent; the total number of eggs increased slightly. Although hog producers cut production during the first half of 1995 due to low returns during 1994, they too began modest herd rebuilding during the summer. As a result, the December 1 hog breeding inventory was slightly larger in 1995 than in 1994. Having committed themselves to higher production levels, these producers found it necessary to continue purchasing relatively large amounts of feed even though feed prices began to soar during the last quarter of the year. The increase in the value of feed used in the last quarter, the product of the poor 1995 harvest and continued high demand for feed, more than offset the gain from less expensive feed during the earlier part of the year. The pattern of corn used as feed, which constitutes roughly 65 percent of all feedstuffs, is illustrative. The total value of corn used as feed, seed, and residual rose 13.2 percent in 1995. The total value of all grains used as feed, seed, and residual rose 8.2 percent. Purchased Livestock and Poultry Expense Falls With Lower Feeder Cattle Prices. Total livestock and poultry purchases fell nearly $700 million (5.2 percent) to $12.6 billion in 1995. The value of interstate sales of cattle and calves **footnote #1**which constitutes 80 percent of the total, fell around $900 million (8.4 percent). *** footnote #1*** Interfarm sales of cattle and calves within the same State are counted as neither receipts nor expenses. ***end footnote*** Interstate sales of cattle and calves had already fallen $1.4 billion (11.6 percent) in 1994. Both total liveweight and average value per cwt were down in 1994. In 1995, in line with the increases in cattle production and inventories, total liveweight rose 6 percent. However, the average value fell 14 percent, pressured by continued low prices for beef and the rise in feed grain prices in the second half of 1995. All other categories of livestock and poultry rose in 1995. The value of hog and pig inshipments increased 21 percent in response to higher demand from hog producers during the last half of the year. Total chick and poult purchases rose 7 percent. Fertilizer Expenses Pushed Up By Higher Nutrient Prices. Estimated fertilizer and soil conditioner expenditures were $10.0 billion in 1995, up 9.3 percent from 1994. Significantly lower acreage and crop production reduced fertilizer quantities for the first 6 months of 1995 by 3.9 percent, as tabulated by the Association of American Plant Food Control. However, prices of fertilizer nutrients, particularly nitrogen, rose so much that expenditures increased. The National Agricultural Statistics Service (NASS) Prices Paid Index (PPI) for fertilizer rose 15 percent over the year and was up 21 percent from the previous year in April 1995. Estimates of the cost of primary nutrients used in making fertilizer showed nitrogen prices rising 25 percent over the year and 30 percent comparing the first 6 months of 1994 and 1995. The cost of phosphorus and potash also rose. Because nitrogen comprises more than half of the quantity of primary nutrients applied, the rise in its cost drove the composite index. Agricultural Chemical Expenses Continued To Rise Despite Fall in Crop Production Estimated expenditures for agricultural chemicals rose $500 million (6.9 percent) to $7.7 billion. Despite the drop in crop production, estimates of the volume of active ingredients in conventional pesticides used by agriculture (prepared by EPA's Office of Pesticide Programs based on proprietary data) rose 1.4 percent, to 966 million pounds. Estimated herbicide use fell 5 percent, in line with reduced corn acreage. Estimated insecticide use, though, rose 16 percent during 1995, following an estimated 27-percent increase during 1994, in response to "severe pest outbreaks" brought on by rain and other unusual weather patterns. Estimated use of fungicides increased marginally after increasing substantially between 1993 and 1994. Continued problems with potato blight were the principal reason for expanded fungicide application. Overall, NASS' annual average Prices Paid Index for agricultural chemicals rose 5.3 percent during 1995. Coupling EPA's estimate of increases in agricultural chemical use with the rise in the PPI would indicate a percentage increase nearly equivalent to the 6.9-percent rise in expenditures estimated in farm income accounts. When the diminished size of the 1995 harvest became known, farm operators, anticipating significantly higher acreage of major field crops in 1996 and having greater-than-anticipated cash receipts from rising grain prices, may have begun purchasing supplies of chemicals expecting prices to rise as spring 1996 planting time approached. And, in fact, after reaching a low point in September 1995, NASS' PPI for chemicals rose 2 percent through April 1996. Another factor that may be contributing to increases in agricultural chemical expenses is increased custom application. Federal and State laws now require licensed applicators for many more chemicals. Furthermore, farm operators are becoming increasingly wary of applying many chemicals themselves. More Hours Worked and Increased Wages Contributed to Higher Labor Expenses Total labor expenses were $16.3 billion (up 6.4 percent from 1994), with hired labor at $14.3 billion (up 6.0 percent) and contract labor at $2.0 billion (up 9.1 percent). The 1995 increase was more than the 2.1-percent increase in 1994 but less than the 8.5-percent increase in 1993. Both average wage rates and estimated hours worked increased in 1995. However, the 1.8-percent rise in NASS' Wage Rates Index was smaller than the nearly 3-percent increases in both 1993 and 1994. Conversely, the Farm Labor Survey (FLS) April/July/October number of hours worked during the survey week rose 4.8 percent, while this number dropped in 1994 and rose only modestly in 1993. The changes in the wage rate index and the number of hours worked would point to an increase of around 7 percent in hired labor expenses for 1995. Cash receipts for vegetables, fruits, and nuts, the principal crops where contract labor is employed, rose 6.8 percent. Citrus fruit production was up nearly 10 percent. The FLS national number of agricultural service workers (workers hired on a contract basis) in the four survey weeks was nearly the same as in 1994, but their FLS weighted average wage rates in California, which accounts for about a third of all agricultural service workers, rose around 6 percent. Interest Expenses Jump Again Total interest expenses were $12.8 billion in 1995, up 8.1 percent from 1994. Interest on nonreal estate debt was $6.7 billion, up 12.4 percent from 1994, and interest on real estate debt was $6.1 billion, up 3.7 percent from 1994. The $951-million increase in interest expenses was nearly identical to the $968-million increase in 1994. Although nonreal estate debt, excluding Commodity Credit Corporation (CCC) loans, increased $2.5 billion (3.6 percent) in 1995, a rise of 0.6-percent (to 7.2 percent) in the average interest rate accounted for around three-fifths of the increase in nonreal estate interest. The opposite was the case with real estate interest, where an increase in debt of $1.5 billion (2.0 percent) accounted for almost all of the increase, as average real estate interest rates were flat. Repayment of CCC loans, which are considered nonreal estate debt, was particularly heavy in 1995. Operators paid $232 million in interest, up 178 percent, as they repaid $8.2 billion in loans, up 84 percent from 1994. This represents the heaviest retirement of CCC-loan debt since 1987 and 1988. Other Intermediate Product Expenses Vary Expenses for petroleum fuel and oils was $5.7 billion in 1995, up 6.8 percent from 1994. All other intermediate product expenses totaled $43.7 billion, an 8-percent increase overall from 1994. However, the changes in components varied greatly. Repair and maintenance expenses, including operator dwellings, were up 2.6 percent. However, repair and maintenance of farm business assets only increased 4.7 percent, led by a nearly 6-percent rise in motor vehicle and machinery repair and maintenance. At $4.8 billion, machine hire and custom-work changed less than $2 million as a 24-percent increase in machinery and equipment leasing was offset by decreases in crop-related custom-work. Marketing, storage, and transportation expenses rose around 7 percent, a much smaller increase than in each of the 2 preceding years. The increase would have been even less had price increases for packaging and containers in the general economy not pushed estimated purchases of marketing containers up more than 17 percent. Other significant increases in miscellaneous expenses were outlays for general management expenses (13 percent), utilities (9 percent), and tools and shop equipment purchases (5 percent). Insurance premiums increased less than 1 percent. The only significant decrease was in livestock services and supplies expenditures, which were down 4 percent. Property Taxes Continue Slow Rise Property taxes paid continued their pattern of slow, steady growth in 1995, increasing 3.5 percent to $6.9 billion. Real estate tax payments were estimated up 4.2 percent to $6.2 billion. After three year-to-year declines in the period between 1978 and 1984, property tax payments have risen every year except 1991. Taxes do not respond immediately to changes in the value of real and other property because rates are set by legislation, and reassessments of property values are periodic. However, the steady rise in tax payments corresponds to the overall increase in the real estate values and reflects the capacity of operations to pay assessed taxes in a timely manner. Net Rent to Nonoperator Landowners Follows Decrease in Crop Production Net rent to nonoperator landowners was $10.9 billion, down 5.7 percent from 1994 due to a drop in share rents that corresponds with the sector's lower annual value of production. Total landlord gross income, excluding forest products, was $17.1 billion, down 3 percent. Cash rent rose 6 percent to $7.5 billion. However, share rent ($8.9 billion) was down 16 percent and direct Government payments received by landlords ($1.3 billion) fell 11 percent. Expenses paid by all landlords, including capital consumption, were $6.8 billion, nearly unchanged. Nonoperator landlords netted $9.2 billion, down 4 percent. Forest product receipts credited to nonoperator landlowners added $1.7 billion. Capital Consumption Up Slightly Total capital consumption, including operator dwellings, was estimated at $19.7 billion, up 1.7 percent from 1994. However, operator dwelling capital consumption rose more than 8 percent due to a 9.4-percent rise in operator dwelling values. Capital consumption for farm business capital items only was $16.5 billion, up less than 1 percent. Capital consumption of service buildings has decreased steadily since 1981 as nominal investment has fallen to around one-third of its 1979 peak. Tractor capital consumption has risen each year since 1988 except for 1992, but at a slower rate over the last 3 years. The overall increase is due to both the climb in the average prices of tractors, which elevates their replacement value, and increased investment. Capital consumption of other machinery and equipment declined slightly for the first time since 1992. Investment in machinery and equipment has been nearly level since 1991, after large increases in 1989 and 1990, as farmers show a greater inclination to lease these items rather than purchase them. Leader, Farm Sector Financial Accounts - Roger Strickland Tel: (202) 219-0806 E-Mail: rogers@econ.ag.gov Cash Receipts - Larry Traub Tel: (202) 219-0819 E-Mail: ltraub@econ.ag.gov Cash Receipts - Cheryl Steele Tel: (202) 219-0793 E-Mail: cherylj@econ.ag.gov Expenses - Chris McGath Tel: (202) 219-0808 E-Mail: cmcgath@econ.ag.gov 1995 Farm Income Estimates Farm Sector Income by Farm Size Classes Most farms in the United States are small, but the largest share of farm production comes from bigger farms. The net cash income accounts for the U.S. farm sector by farm size classes for 1995 and 1994 are presented in tables 4a and 4b. These income statements include cash receipts and cash expenses for farm operations, and are thus income statements of all participants who share in the risks of production, which include not only managing farm operators but partners, contractors, and shareholders. This is more inclusive than a farm income statement for the managing or primary operator. As a consequence, dividing a net cash income in the tables by the number of farms will give an estimate of an average farm operation's contribution to the Nation's net cash income, like the estimates presented in the appendix table 11 by States, but should not be construed to represent an income account for people who live on farms. USDA's annual Farm Costs and Returns Survey (FCRS) is used to partition the national estimates. Observations in the FCRS are weighted to agree with USDA's estimates of farm numbers. Seven size classes are based on the farmers' estimates of annual sales. Sales include current year production sold in the current year, plus the marketing of crops produced in prior calendar years, and sold from inventories. Most Farms Are Small The number of farms increased slightly to 2,071,520 in 1995, and the percent of farms in each major size class remained relatively constant. Most farms are small. Almost 71 percent of all farms have annual sales of less than $40,000, while less than 1 percent of all farms have sales greater than $1 million. Farms with over $250,000 in sales account for less than 6 percent of all farms but dominate American agricultural output. These large farms sell over 62 percent of the Nation's livestock and over 53 percent of the crops. They have 56 percent of the gross cash income compared with 53 percent of the cash expenses. Around 70 percent of the livestock purchases, 60 percent of feed expenses, 74 percent of hired labor expenses, and 50 percent of the machine hire and custom work expenses were paid by these farms. Over 64 percent of the Nation's net cash income is earned by them. Less than one-third of the direct Government payments went to these farms. Farms with sales above $1 million and small farms with less than $20,000 in annual sales appeared to have faired best among size groupings in 1995. Total cash receipts and per farm estimates of cash receipts increased from 1994 to 1995 for these two outside groups. Farms between the two end groups faced declines in total and per farm cash receipts. Cash expenses showed no clear pattern of change by groups from 1994 to 1995. The farms among the largest and smallest sales groups appeared to have achieved gains in net cash income from 1994 to 1995, while those in other sales categories experienced declines. Pacific Region Has the Most Large Farms Farm size distribution varied across the Nation. In the Pacific region almost 4 percent of the farms had over $1 million in sales. This was over three times the percentage in the Mountain region, which had the second highest percentage of large farms. The Northern Plains, Corn Belt, and Lake States were dominated by mid-sized farms. Farms with less than $40,000 in sales accounted for more than 80 percent of the farms in the Appalachia, Southern Plains, Southeast, and Delta regions. Texas had the largest number of small farms in 1995, with over 152,000 farms reporting sales of less than $20,000. At the same time, California with over 3,000 had the largest number of farms with over $1 million in sales. Farm Size - Robert Dubman Tel: (202) 219-0809 E-Mail: bdubman@econ.ag.gov 1995 Farm Income Estimates Now and Then: A Comparison of Farm Production in 1975 and 1995 Changes in cash receipts can reveal trends in the commodity mix produced by the farming sector and regional shifts in production. Production of agricultural commodities is the principal determinant of the year-to-year changes in farm income. And weather, through its effects on crop yields, is the driving force behind the volatility in production. Price fluctuations and inventory accumulations or drawdowns also play a role in determining the level of national, regional, and State farm income, but these tend to be functions of production levels in the current and prior year. Production is reflected in cash receipts, value of inventory change, and of home consumption, and can be measured as their sum. However, cash receipts comprise most of the total and may be used as a proxy for value of production. Cash receipts have been computed and published by State and commodity for decades and provide a voluminous database with significant historical information. Historical comparisons can reveal national trends where specific commodities have increased or declined in importance, changes in the commodity mix comprising the farming sector within individual States, and regional shifts in production of individual commodities. For readers and users whose interests are more focused on a commodity, State, or region, there is the opportunity to examine farm revenues to determine if changes have occurred in the mix or relative importance of specific commodities across States or regions and if those changes have positively or negatively affected farm income. One effective means of facilitating such an analysis is to contrast snapshots at two points in time, perhaps 20 years apart. In doing so, one must take into account difference in factors beyond the control of producers which may have affected production, such as weather extremes, changes in farm programs, and unusual economic conditions. An exhaustive analysis is beyond the scope of this publication, but a comparison of 1995 and 1975 is presented with the intent of being suggestive of the myriad of State and commodity analyses that are feasible. It is important to remember that inflation makes it hard to compare dollar figures representing estimates spaced 20 years apart. An instructive way to minimize the effects of inflation and detect changes in the structure of revenues is to work with the share of cash receipts represented by various farm products for the selected years. Revenue shares computed annually as the percent of the total sales summarize the combined changes of quantity and price at each point in time. Commodity Mix Reflects Changes in Eating Habits, Export Demand Cash receipt composition reflects changes in domestic and export demand. Many of the differences noted over the last 20 years may be a reflection of changes in our domestic eating habits. Relative revenues from vegetables and fruits show an increase between 1975 and 1995 (table 6). Lettuce, which was not even in the top 25 commodities ranked in 1975, was ranked 16th in 1995, ahead of rice. While the 1995 ranking of lettuce likely reflects the increased frequency with which people are eating out and the pervasiveness of salad bars in all types of food establishments, it also illustrates some of the unusual conditions that must be considered in this type of analysis. Problems with lettuce production in the spring of 1995, caused a sizable jump in prices, and a consequent 50-percent rise in cash receipts. Even so, checks of the published 1993 and 1994 rankings show lettuce as number 17 and number 23 for these years, helping to confirm its current position among the top 25 commodities. Other changes identified over the 20-year period probably also are related to changing consumer preferences. Relative receipts from food grains have declined. Relative hog receipts have fallen as a percent of total, while broiler revenues have expanded significantly. Dairy and egg revenues show a slight decline. In the same time frame, a rapidly-growing greenhouse and nursery industry has more than doubled its portion of total sector revenues. By contrast, tobacco receipts have declined as a share of cash earnings, reflecting falling domestic consumption that has not been offset by expanded exports. Cotton gained an increased share of 1995 receipts as compared with 1975, taking advantage of the strong export demand in recent years, and is undergoing a significant regional shift in production. Fruit and Vegetable Share of Cash Receipts Up, Hogs Down In 1975, fruits and vegetables together represented 10 percent of revenues. By 1995 their share had increased to 13.8 percent. The leading fruits in 1995 were grapes, oranges, and apples. Each of these commodities increased their ordinal ranking among the top 25 between 1975 and 1995. Grapes were 15th in 1995, up from 25th in 1975. Total livestock receipts appear to be a modestly smaller share of the total marketings in 1995 than in 1975, but this generalization masks significant changes within the livestock sector. Notably, the 2-decade period has witnessed a sizable decline in the importance of hog revenues and a parallel expansion in receipts from broilers. Cattle and calves remained the number one commodity in cash receipts from 1975 to 1995, although the 1995 share was down by 1.4 percentage points, from 19.7 percent of all receipts to 18.3 percent. Greenhouse/Nursery Output Responds To Increased Demand In the last 2 decades, a rapidly growing greenhouse and nursery industry has more than doubled its portion of total sector revenues. Changing lifestyles and rising disposable incomes have increased purchases by consumers, particularly for lawn and yard products. The growth of suburban office parks in campus-like settings has also contributed to a surge in demand for ornamental plants. Production tends to be concentrated in heavily-populated, coastal states. Producers are often located near population centers, where they take advantage of their proximity to consumer markets by specializing in farm products that have a high value per acre and are relatively perishable and costly to transport. Other leading commodities produced in these areas include vegetables and fruits. Land values are high around population centers and farming must compete with non-agricultural uses of the land. As a consequence, only high-valued crops can outbid the competition in these states. Cotton Production Shifts Toward Southeast Cotton maintained its 9th position in the ordinal rankings but increased its share of total cash receipts from 2.6 percent in 1975 to 4.1 percent in 1995. A substantial share of cotton production shifted from the southwestern states to southeastern states. Cotton's higher share of U.S. farm receipts in 1995, as compared with 1975, is the consequence of strong export demand in recent years. The regional shift is apparent in that California and Arizona each slipped in state rankings, while Texas, Georgia, Mississippi, and North Carolina advanced within the ranking. Planted area of cotton has expanded by 3.5 million acres since 1993. Georgia, Texas, North Carolina, Louisiana, Arkansas, and Alabama accounted for 75 percent of this recent acreage increase. Acreage in California and Arizona expanded far less rapidly in response to recent cotton price increases, accounting for 5 percent of additional cotton area planted in 1995 over 1993. The regional shift from the Southwest to the Southeast is the result of changing comparative advantage in costs of production. Farmers in the southeastern states have moved rapidly to expand production in recent years in order to take advantage of the rebound in profitability of a crop that for so long was the backbone of the region's economic history. The resurgence of yields, attributable to the success of the government-sponsored boll weevil eradication program, restored the profitability of upland cotton and the recent rise in market prices has brought a degree of prosperity to producers not seen in decades; dating back to the initial infestation of the boll weevil. Producers of cotton grown on irrigated lands in the southwestern United States and California, are experiencing a continual degradation in the economics of production. The costs of irrigation water is rising due to competition from other uses, particularly urban demands, and land irrigated for decades is losing productivity. Even though cotton prices have been high, alternative uses for farmland are particularly competitive in California. Leader, Farm Sector Financial Accounts - Roger Strickland Tel: (202) 219-0806 E-Mail: rogers@econ.ag.gov 1995 Farm Income Estimates Farm Sector Debt Up $4 Billion in 1995 Rising debt, interest rates affect debt repayment ability. Farm Debt Nearly $151 Billion in 1995 Total farm business debt rose by about $4 billion during 1995, reaching nearly $151 billion (fig. 23), its highest since 1986. The combined effect of lower net cash income, rising farm debt, and higher interest rates burdened farm operations' ability to service their debt obligations in 1995. Interest Expenses Increase in 1995 Interest expense rose about $1 billion in 1995, contributing significantly to the $1.7 billion reduction in net cash income. Almost $750 million of the increase in interest expense was on nonreal estate debt (fig. 24). Despite declining in the second half of the year, average interest rates on new bank loans to the farm sector increased from 7.8 percent in 1994 to 9.5 percent in 1995. Actual debt relative to the maximum amount of debt supportable by net cash income available for loan payments measures debt repayment capacity utilization. (See AIS-58 for a description of this measure). Operators with debt are using some portion of their credit capacity. Debt repayment capacity utilization, the ratio of actual debt to maximum debt repayment capacity, measures the extent of farm operators use of their potential credit repayment ability. A rise in utilization indicates that debt has increased faster than farmers' ability to repay, while a fall suggests that income is growing at a rate that allows easier repayment of debt, even though debt levels may be rising. Higher debt levels, combined with relatively low 1995 net income and rising interest expenses, translated into an increase in debt repayment capacity utilization, as evidenced by its rise from about 45 percent in 1993 to over 58 percent in 1995 (fig 28). Expanding Operations Using Cash, Not Debt Farm mortgage debt rose about 2 percent in 1995, a relatively modest increase compared with the rise in the value of farm real estate. Nominal land values have been rising annually since 1987, and, in some Corn Belt States, the rate of growth has exceeded 10 percent in recent years. While farm debt is rising, it does not appear to be increasing as rapidly as land values (fig. 26). The rate of growth in land values and anecdotal evidence suggests that farmers were bidding up the price of land as they seek to gain economies of size through expansion. However, the rising price reflects the addition of adjacent acreage to existing operations, with sales being cash transactions, rather than relying on issuance of new debt. Nonreal Estate Debt Rising More Rapidly Than Mortgage Debt Farm business nonreal estate debt rose over 12 percent from the beginning of 1993 through the end of 1995 (fig. 23). During this same period, farm mortgage debt increased less than 5 percent. If these relative growth rates persist, nonreal estate debt will exceed farm mortgage debt for the first time in the year 2000. This is due partially to the growing use of favorable credit terms offered by machinery manufacturers and input suppliers. While supplier financing originated as a means of increasing sales, the business units providing this service have developed into profit centers on their own. The shift away from real estate credit also reflects a rise in cash sales of farmland, which has reduced the demand for purchase money mortgages. Simultaneously, farmers' appear to be more reluctant to mortgage real estate to obtain slightly more favorable loan conditions when financing short- and intermediate-term assets. Farm Credit System Reports Growth In Nonreal Estate Lending The change in Farm Credit System (FCS) total farm loans outstanding increased from 1 percent in 1994 to over 4 percent in 1995. Rapidly rising nonreal estate loan volumes have accounted for much of the recent increase. Nonreal estate loans rose 6 percent in 1994 and 12 percent in 1995. FCS now accounts for over 17 percent of all nonreal estate loans, its largest share of this market since 1985. Farm Credit System real estate lending has not grown at a similar pace. However, after declining annually in all but one year during 1984-94, FCS real estate lending posted a 1995 gain of over $210 million. The FCS has recently emphasized convenience in loan application and short approval time on smaller mortgage loans, attempting to gain a larger share of the part-time and lifestyle farm markets. Farm debt - James Ryan Tel: (202) 219-0796 E-Mail: jimryan@econ.ag.gov Costs of Production for 1995 Crops, Livestock, and Milk Returns to Grain Crops Higher in 1995, But On Fewer Acres Input prices up 2.6 percent, led by fertilizer and interest. Although input prices, and therefore production expenses, rose, generally higher commodity prices led to higher cash returns. Acres Planted Down 1.7 Percent; Crop Prices 6.7 Percent Higher Acres planted to major crops in 1995 tended to decline from 1994 with the exception of durum wheat, soybeans, and cotton. Total planted acreage declined 1.7 percent. Cotton acreage has shown dramatic increases in recent years, particularly in the Southeast. U.S. cotton acreage reached 16.9 million acres in 1995, up 23.4 percent from 1994, but yields dropped 26 percent. The general price index for agricultural production inputs (NASS' prices paid index) rose 2.6 percent for 1995. There was considerable variation among inputs. The largest percentage increase was for fertilizers (up 15.3 percent) followed by the interest expense category (up 11.6 percent). On the return side, prices received for 1995 were up an average 6.7 percent for crops and down an average 3.2 percent for livestock. Cotton prices rose the most (17.4 percent) followed by food grains (12.6 percent) and feed grains (5.7 percent). Oilseed prices fell an average 5.5 percent. For livestock and dairy, red meat prices were down 5.6 percent and dairy products were down 1 percent. How 1995 prices affected individual farmers and ranchers depends on each operation's mix of commodities. Higher corn prices offset higher costs of growing corn even though corn yields were down. On average, the enterprise saw higher net cash returns to corn production in 1995. On a corn-soybean operation, net returns would depend upon the relative mix of corn to soybeans. Hog returns improved slightly in 1995 so if this same operation also raised hogs, whole-farm returns would likely have increased. New survey data for wheat and oats are underlying the 1994 and 1995 estimates for those crops. These data were collected through the Farm Costs and Returns Survey for the 1994 production year. In a few months, economic basebooks will be available describing the financial and structural characteristics of growing these two commodities. The availability of these publications will be announced through the ERS Home Page (http://www.econ.ag.gov). Costs for 1994 have been revised for several other crops, particularly sugar crops and burley tobacco. Next September, new survey data for peanuts, sorghum, and burley tobacco will be incorporated into the costs of producing those crops. Cost and Return Highlights by Commodity, 1995 Corn -- Corn grain production in 1995 was estimated at 7.37 billion bushels, down 27 percent from the record 10.1 billion bushels in 1994. While the average corn yield declined substantially from 1994 to 1995, the 1995 yield was only 5 percent below the average for the previous 5-year period. More significant to corn growers was rising corn prices during 1995. Corn prices were about $2.20 per bushel in early 1995, but rose to more than $3 by year's end and continued upward into 1996. Higher corn prices more than offset lower corn yields and raised the gross value of corn production per acre by about 9 percent. The total cash cost per acre of corn was up 5 percent from 1994 to 1995, while the economic cost was only 4 percent higher. Returns above cash and economic costs increased about $14 per acre in 1995. Higher corn prices also reduced the deficiency payments to corn producers. With corn prices above the target price, most corn growers did not receive a deficiency payment. Only producers using the 0/85/92 option received program payments. Among all corn growers, Government program participation enhanced the gross value of corn production very little during 1995 and, on average, the added value of participation did not cover participation costs. With average 1995 yields of 115.8 bushels per planted acre, corn growers would have covered all cash costs of production at a price of $1.79, cash costs plus capital replacement at $2.07, and total economic costs at $2.88. This compares with 1994, where bumper yields of 143.15 bushels resulted in breakeven prices of $1.38 (over cash costs), $1.61 (over cash plus capital replacement costs), and $2.25 (over total costs). Still, rising returns tended to improve the financial situation of the average corn acre. The corn enterprise itself improved and, with soybean returns essentially unchanged from 1994, the typical corn/soybean farm would have seen rising farm-level returns. For those corn and/or corn-soybean operations that also had hogs, the rising 1995 hog returns would have added even more to farm profits. Grain sorghum -- Area planted to sorghum fell to 9.5 million acres in 1995, from 9.8 million in 1994. Average U.S. grain sorghum yields fell from 66 bushels per planted acre in 1994 to 49 bushels in 1995. Total 1995 U.S. grain sorghum production was down 30 percent from 1994 (460 million bushels in 1995 vs. 650 million in 1994), and, as a result, the price per bushel at harvest rose by 46 percent. The higher prices offset lower yields, raising the value of sorghum production 7 percent. Cash costs of producing the crop rose slightly, but returns over cash expenses rose by $1.23 per acre. However, economic costs indicate that long-run residual returns to management and risk remained negative. High 1995 prices eliminated deficiency payments and, with no mandatory set-aside requirements, program payments fell considerably. When program participation costs and returns are included in the budget, net returns to the average sorghum acre fell. At 1995 average yields, the breakeven price for sorghum was $2.52 (cash costs), $3.08 (cash plus replacement costs), and $4.08 (total economic costs). This compares with 1994's $1.73, $2.15, and $2.90, respectively. As with other feed grains, sorghum returns over cash expenses rose for the year. Sorghum farms with a commodity mix including wheat would have added to these returns due to the generally rising wheat returns. Oats -- Oat acreage varies dramatically year over year as do yields. U.S. oat production was a record low in 1995 because of substantially reduced acres planted. Yields and prices were moderately higher in the chief oat-growing regions. Lower straw prices were offset by higher grain prices, keeping the gross value of production relatively steady. In general, oat producers use less inputs than producers of other commodities. There were no significant changes in costs for 1995. Total cash costs averaged $73.80 per acre planted for grain, down about $1 from 1994. However, the gross value of production rose by an even lesser amount, leaving net returns over cash costs down by about 50 cents per planted acre. Barley -- U.S. farmers planted barley on 6.68 million acres and produced 359.1 million bushels in 1995, 4 percent below 1994's production and the lowest since the drought-reduced crop of 1988. The area harvested for grain totaled 6.28 million acres, down 6 percent and the smallest since 1903. South Dakota reported the largest decline with planted acreage reduced from 340,000 acres in 1994 to only 180,000 acres in 1995, a 47-percent reduction. North Dakota, where one-third of the barley is produced, had a poor crop. Delayed planting due to a cool, wet spring followed by excessive heat in mid-June reduced yields drastically (18 percent). In Montana, cool, wet weather occurred later in the growing season, providing good conditions for high yields. Nationally, barley yields averaged 53 bushels per planted acre, up 1.5 bushels from 1994, but down from the record high yields in 1992. Total cash costs rose 12.5 percent to $108.64 per planted acre, while economic costs rose 9.4 percent to $187.14 per acre. Value of the 1995 crop increased 25 percent from 1994 due to higher yields and prices. On a per bushel basis, the total economic costs averaged $3.52, up 6.6 percent from 1994. Harvest price averaged $2.53 per bushel, covering the cash costs, but only three-fourths of the economic costs. At the national level, barley cash returns nearly doubled from 1994. However, there was wide regional variation due to weather effects on yields. Those farmers with cash costs near the national average would have had a breakeven price of $2.04 per bushel, compared with $1.86 in 1994. Total costs could be covered at a price of $3.52. Wheat -- For 1995, U.S. farmers planted wheat on 69.2 million acres and produced 2,186 million bushels, down 5.8 percent from 1994. Area and production of spring wheat dropped as a result of late planting, while unfavorable harvest conditions reduced winter wheat production. Spring freezes also contributed to lower winter wheat production in the Southern Plains region. Despite a zero-percent ARP, planted area continued to decline for the third year in a row. Excess moisture and cool conditions prevented some spring wheat from being planted, especially in South Dakota, where planted area fell 40 percent from 1994 to 1.2 million acres in 1995. In Montana, the spring wheat area was up 14 percent as area that was not planted to winter wheat in the fall of 1994 was planted to spring wheat. Favorable rains and mild growing conditions increased plant populations above average in most winter wheat areas. However, several States, especially Kansas, reported record low head weights in 1995 as frost damage, disease, and rains during harvest reduced yields. Nationally, wheat yields averaged 35.8 bushels per harvested acre, down 1.8 bushels from 1994 and the lowest in 4 years. In North Dakota (a major spring wheat producing State), yields were down 4.5 bushels per acre because of disease, insects, and summer heat. Among types of wheat, yields were lower for both durum and winter wheat, but slightly up from 1994 for spring wheat. Durum wheat yields dropped sharply to 30.5 bushels, down 5.1 bushels and the lowest since 1989. Cash costs per planted acre rose 13 percent to $93.36 per acre, while economic costs rose 10 percent to $170.03 per acre. Lower wheat yields and increased production costs pushed per bushel total economic costs to $5.33, a 15-percent increase. The price received at harvest averaged $4.08 per bushel, an increase of $.92. As a result, the gross value of production rose 22 percent, which was more than enough to cover cash costs and capital replacement, but not enough to cover total economic costs. Wheat returns over cash expenses are difficult to interpret due to regional yield differences. National average yields fell slightly, but higher wheat prices were offsetting, and net cash returns rose. As with barley growers, those wheat farmers with a cost structure near the national average would have benefited from the rising returns. On the other hand, those farmers whose wheat crop was damaged and who had yields substantially below the national average would not have seen such high returns. Rice -- U.S. 1995 rice production was down 12 percent from 1994's record. Both rice acreage and yields declined. Plantings were down because of producers' response to a 5-percent acreage reduction program and declining prices at planting time. National average yields per planted acre fell 10 percent from the 1994 record because of poor growing conditions. Yields were reduced because of prolonged high temperatures in August covering most of the Gulf Coast and Delta growing regions. California also had less than ideal conditions as an exceptionally cool, wet spring delayed plantings and led to a slow start for plant development. Competition from heavy weed growth in the summer also contributed to the reduced California yields. Despite lower yields, U.S. 1995 gross value of production increased dramatically compared with 1994 due to a huge jump in rice prices. Harvest-time prices were boosted by large world import demand, tight international long grain supplies and high prices, and diminished U.S. crop prospects. Total rice costs of production per planted acre averaged $630.17 for 1995, 4 percent above 1994. Increased fertilizer and chemical costs offset lower seed and fuel costs. Higher interest charges boosted operating capital costs and higher value of production and share-rent costs increased land costs. At U.S. average yields of 55.72 cwt per acre, cash costs would have been covered at a price of $7.69. At the higher yields in 1994, cash costs would have been covered at $6.93. But because higher prices raised the gross value of production, 1995 net returns over cash costs averaged $60.03, compared with a minus $21.22 in 1994. Long-run residual returns to management and risk improved significantly because of the higher rice prices, rising from a minus $203.15 in 1994 to a minus $141.51 in 1995. Of course, this is excluding program payments and the associated costs of participation. When these additional costs and returns are included, the long-run returns were still negative, but improving (minus $53.91 in 1994 and minus $50.59 in 1995). Sugar beets -- Sugar beet production in 1995 totaled 28 million tons, down 12 percent from 1994. Area planted totaled 1.44 million acres, 2.3 percent below 1994. The largest area decline was in California, where beet area fell 18 percent from 1994 to 117,000 acres in 1995. Planted acreage increased the most in Minnesota where beets were planted on 426,000 acres, an increase of 11,000 acres. Sugar beet plantings experienced a late start in 1995 due to excessive soil moisture from a wet spring. Adverse weather conditions caused many northern States to complete planting 2 weeks behind normal. Heavy rains and hail in Colorado and Nebraska damaged the beet fields and a late spring freeze in Idaho caused many beet fields to be replanted. The hot weather and a heavy infestation of root aphids limited the crop's growth in Michigan. Cercospra leafspot infestation was more prevalent in 1995 than in many years in the Red River Valley and Great Lakes regions. Frequent delays due to heavy rains and wet fields made the 1995 harvest most difficult in the Red River Valley. In the Ohio Valley, the harvest was delayed due to erratic warm weather that was unsuitable for beet storage. Among beet producing States, Colorado suffered the most due to a difficult growing season; beet yields were down 4.5 tons. In 1995, above-average yields were reported in Wyoming only, 2.3 tons above 1994. For sugar beet farmers, rising input prices raised total cash costs of producing beets 3 percent to $563.36 per planted acre. Total variable cash costs rose to $425.87 per acre, 1.6 percent above 1994. Beet yields per planted acre averaged 19.55 tons, 10 percent below 1994. Factors such as late planting, disease problems, and yield-reducing conditions at harvest were responsible for low yields. As a result, total cash costs on a per ton basis rose to $28.82, a 15-percent increase over 1994. Total economic costs and returns are difficult to discuss at this time, as both depend on 1995 beet prices, which are not yet available. The 1995 beet prices used for estimating the gross value of production and the share rent component of the land costs have been held at their published 1994 level. If 1995 beet prices were to remain at the 1994 level as the budget assumes, there would be an increase of 2 percent in the total economic costs and a loss of $41 per acre. The 1995 cost and return estimates will be revised next year. The production costs and returns for 1994 published in this report are revised from those previously published. The revised 1994 total cash costs of producing sugar beets were down $5.78 per acre from the previous 1994 estimate, and total economic costs were revised down $11.77. Sugarcane -- Production of sugarcane for sugar and seed in 1995 was estimated at 30.9 million tons. This was virtually unchanged from 1994. Total U.S. harvested acreage was up slightly from the previous year while yields were unchanged. At the State level, however, Louisiana saw a sizable increase in acres to above 1993, while in Hawaii, acreage continued to decline as plantations were closed. On the cost side, total U.S. cash expenses for growing the 1995 cane crop averaged $831.81 per harvested acre, only $1.36 more than in 1994. As with beets, hired labor accounts for the largest single expense. Labor costs fell $7 per acre at the national level, although there were regional variations. This decrease is primarily due to the lessening importance of Hawaii (with its very high labor costs) in calculating the U.S. weighted average. As with beets, economic costs of production are difficult to interpret. With the 1995 sugarcane price still unavailable at the State level, land costs are preliminary. If 1995 prices were to remain at 1994 levels as the budgets assume, there would be an increase of 3 percent in total U.S. economic costs. This would also result in increasingly negative long-run returns to management and risk. On the other hand, if prices rise, land costs would also rise but so would the value of the sugarcane, which would more than offset the increased land cost. This would result in higher returns to management and risk than are shown in the preliminary estimates. Soybeans -- Soybean production totaled 2.15 billion bushels in 1995, down 14 percent from the record high of 2.52 billion in 1994. Although the average soybean yield was much lower than in 1994, the 1995 yield was typical of recent history, only 3 percent below the previous 5-year average. In contrast, soybean prices surged higher in 1995, beginning the year at less than $5.50 per bushel and ending it at around $7. Despite higher prices, the gross value of soybean production was much the same in both 1994 and 1995. Per acre costs of soybean production were only slightly higher in 1995 with cash costs up 2 percent and economic costs up 1 percent. Overall, a decline in the value of soybean production, along with higher costs, caused returns above cash and economic costs to fall about $2-$4 per acre from 1994 to 1995. With soybean returns over cash expenses relatively stable in 1995, the soybean farm's mix of commodities played a major role in determining farm profitability. Additional corn acreage would likely have earned more money than in 1994 and hog cash returns were also up. Peanuts -- Area planted to peanuts continued to decline in 1995, and was the lowest since 1985. The 1.5 million acres planted to peanuts in 1995 had an average yield of just under 2,300 pounds. This compares with 1.6 million acres planted in 1994 with an average yield of just over 2,600 pounds. After recovering in 1994, peanut producers saw yields fall back almost to 1993 levels. U.S. production rose 36 percent from 1993 to 1994 only to fall by 18 percent from 1994 to 1995. Average gross value of production per planted acre fell dramatically (from $748.14 in 1994 to $674.27 in 1995) while cash expenses fell only slightly (down $2.47). Gross value of production exceeded cash production expenses in both 1994 and 1995. Prices change little from year to year due to the levels of the quota support rate, so effects on net returns are primarily due to changing yields. Residual returns to management and risk were positive in 1994 but became negative in 1995 because of the low yields. Peanut production cost and return estimates for 1994 have been revised from those published previously to reflect new information from the most recent Farm Costs and Returns Survey. Gross value of production fell as price was revised downward. Cotton -- A strong export demand for cotton continued during 1995. Acres planted to cotton increased about 23 percent, with most of the increase occurring in the Southeast. However, average U.S. cotton yields decreased by more than 33 percent. Although prices remained high during 1995, lower yields reduced cotton returns 18 percent from 1994 to 1995. Total variable cash expenses for the United States increased by about 8 percent from 1994 to 1995, with fertilizer, fuel, and repairs accounting for about 79 percent of the increase. U.S. total fixed cash expenses increased almost 9 percent as a result of higher interest rates and the method of allocating fixed costs among the farm's individual enterprises. U.S. total economic costs increased from $464 in 1994 to $502 in 1995. Excluding the increase in total cash expense, capital replacement and unpaid labor accounted for 74 percent of the increase in total economic costs. When the direct effects of Government programs for cotton are included in the estimates, gross returns, production costs, and net returns are all higher. There were no deficiency payments for cotton in 1995. Marketing loan proceeds were zero in 1995. The additional production costs are those incurred by producers to participate in the Government program for cotton (cover crop seed, fuel and lubricants, repairs, labor, etc.). The total gross value of production for cotton without Government program effects for 1995 was $388.79, while the total cash expenses were $360.42. The total gross value of production for cotton with Government program effects for 1995 was $389.37 and the total cash expenses were $367.84. Flue-cured tobacco -- Total variable costs of producing an acre of flue-cured tobacco were essentially unchanged between 1994 and 1995. While most individual input costs increased, selling costs (warehouse fees, no-net-cost assessments, marketing assessments, inspection and grading fees), declined from $198 in 1994 to $110 in 1995, offsetting increases in other inputs. A sell-off of flue-cured tobacco placed under the loan program lowered loan stocks, thereby decreasing the risk of losses in operating the price support program. The largest change between individual cost items per acre was selling costs (decreased by $88), followed by fertilizer and lime (increased by $30), and curing and heating fuel (increased by $23). Total ownership costs per acre rose 8 percent ($523 to $564) from 1994 to 1995. Continued increases in machinery prices raised capital replacement costs from $290 in 1994 to $321 in 1995. Both general farm overhead and land and quota costs decreased by almost 15 and 18 percent, respectively, reflecting an increase of $10.20 per 100 pounds for the average market price of flue-cured tobacco and a decrease of 487 pounds per acre in yield. Land and quota charges decreased from $979 per acre in 1994 to $800 due to lower yields. General farm overhead declined by $41 per acre. Burley tobacco -- The variable costs of producing an acre of burley tobacco in 1995 declined by $25 (from $2,441 to $2,415). Total costs per acre, excluding land and quota costs, decreased from $3,368 to $3,333. Since per acre selling costs (marketing fees, no-net-cost and marketing assessments, and inspection and grading fees) are influenced by yields, the decline of 277 pounds in yield resulted in a $109 per acre decrease between 1994 and 1995. Variable costs actually would have increased 2 percent from 1994 to 1995 if selling costs were excluded. Machinery and barn ownership costs rose from $508 to $548 per acre (8 percent), capital replacement costs increased by $5, but general farm overhead decreased by almost $50 per acre. Land and quota charges declined from $1,363 per acre in 1994 to $1,200 in 1995 because yields were lower and market prices were a little higher. Hogs -- Both cash and economic costs of hog production changed little between 1994 and 1995. Rising corn prices throughout 1995 did not drive up feed costs from 1994 because annual average prices were much the same in each year. The value of market hogs increased from 1994 as barrow and gilt prices improved throughout the year from about $32 per cwt in December 1994 to nearly $50 by August 1995. In contrast, feeder pig prices were slower to respond and remained below 1994 levels during much of 1995. Returns above cash and economic costs improved for farrow-to-finish and feeder pig-to-finish operations because of greater hog prices. However, returns to feeder pig production were down in 1995. Hog returns over cash expenses for 1995 rose considerably from 1994. Feed costs fell slightly for the year. For next year, however, high feed grain prices for the 1995 crop will likely have a sharp impact on livestock producers. For hog producers growing part or all their own feed, the decision to sell grain or feed it will be a major decision. Milk -- Cash and economic costs of producing milk for the United States in 1995 were down 3 percent from 1994. Much of the decrease was due to lower feed costs. With 1994 corn and soybeans yields much improved, concentrate costs in 1995 declined almost 5 percent from a year earlier. Average 1995 hay costs were down 13 percent. Silage costs also declined 13 percent. Even though the total gross value of production declined 2 percent from 1994-95, residual returns to management and risk improved. Residual returns increased from a negative $1.99 per hundredweight of milk sold in 1994, to a negative $1.70 in 1995. Cow-calf -- Cash and economic costs for U.S. cow-calf operations in 1995 were relatively unchanged from 1995. Lower feeder cattle prices and pasture costs more than compensated for the 41-percent increase in grain costs per bred cow. Grain prices rose in response to drought conditions last summer and fall, and the late harvest. However, the total gross value of production declined 15 percent from 1994. As beef production increased in 1995 and more beef moved through the market, cattle prices declined considerably. Consequently, residual returns to management and risk declined further, reaching a negative $272.85 in 1995. Leader, Commodity Costs, Returns, and Production - Bob McElroy Tel : (202) 219-0802 E-Mail: rmcelroy@econ.ag.gov Corn and soybeans and hogs - Bill McBride Tel: (202) 501-8309 E-Mail: wmcbride@econ.ag.gov Sorghum and peanuts -- Nora Brooks Tel: (202) 219-0384 E-Mail: nbrooks@econ.ag.gov Barley, wheat, and sugar beets -- Mir Ali Tel: (202) 219-0374 E-Mail: mirali@econ.ag.gov Rice and oats -- Janet Livezey Tel:(202) 501-8312 E-Mail: jlivezey@econ.ag.gov Cotton and tobacco -- Dargan Glaze Tel: (202) 501-8307 E-Mail: dglaze@econ.ag.gov Dairy and cow-calf -- Sara Short Tel: (202) 501-8315 E-Mail: sshort@econ.ag.gov Sugar cane -- Bob McElroy Tel : (202) 219-0802 E-Mail: rmcelroy@econ.ag.gov Farm Business Outlook A Slowing 1995 U.S. Economy Still Contributed To Rising Farm Costs Despite the slowing of the U.S. economy in 1995, farm sales increased. However, factors underlying the slowdown contributed to rising farm costs. The Fed's Tightening Had the Desired Effect, Slowing 1995 Growth Overall, the economy slowed in 1995, with real activity dropping 1.5 percentage points from 1994's healthy 3.5 percent growth. Consumption spending and residential investment were the primary contributors to the slowing, as both sectors were affected by the Federal Reserve Board's (the Fed) tighter monetary policy and private debt that was near record highs throughout 1995. Trade counterbalanced this weaker domestic demand, with export growth accelerating, while import growth slowed significantly. This movement in the international sector was anticipated because the value of the dollar declined from the second quarter of 1994 through mid-1995, and slowing U.S. domestic economic activity reduced import demand. Despite the slowdown in the economy, employment expanded by nearly 2 million persons in 1995. At the same time, the average unemployment rate dropped to 5.6 percent, half a percentage point lower than 1994. With tighter labor markets, both real wage and real disposable income growth accelerated to 3.4 percent. Both of these labor market indicators were a percentage point above a year earlier. Real 1995 per capita disposable income grew somewhat slower at 2.6 percent, but was also a percentage point above 1994's level. At 5.6 percent unemployment, and with accelerating wage settlements, the Fed viewed the economy as being near full employment and felt the prospects for an uptick in inflation had increased. High capacity utilization (at 83.0 percent in early 1994 and above 84.0 percent by late 1994-early 1995) reinforced Fed concerns about a rekindling of inflation, as did worries about a meaningful Federal budget deficit reduction that surfaced in early 1995. As a result, the Fed tightened monetary policy throughout 1994 and into the first half of 1995. The Federal Funds rate rose from an average 3.2-percent in the first quarter of 1994, to 6.0 percent in the second quarter of 1995, remaining just under 6.0 percent for the rest of the year. Short-term rates followed suit, with the 6-month Treasury-Bill rate (T-Bill) rising from 3.6 percent in the first-quarter of 1994 to 6.4 percent in first-quarter 1995, before dropping back to around 5.5 percent for the rest of 1995. The Prime rate and long-term interest rates generally followed this pattern as well, though long-term rate movements were more moderate. The Prime rate began rising from its first-quarter 1994 level of just over 6.0 percent, peaked at 9.0 percent in second-quarter 1995, and remained just under that level for the remainder of the year. The 10-year Treasury Bond yielded slightly over 6.5 percent in first-quarter 1994, reached just over 8.0 percent in the last quarter, and gradually declined to 6.3 percent at the end of 1995. The Fed was plainly worried about future inflation and did its part in slowing demand, but actual inflation was, and remained, quite tame. Producer prices for finished goods rose a low 1.9-percent in 1995, following 1994's even lower 0.6 percent. Consumer price inflation was also modest, registering 2.9 and 2.4 percent in 1995 and 1994, respectively. Aside from the Fed's actions, unit-labor costs (ULC) played a very significant role in keeping inflation low. Since the recession in 1991, through 1994, ULC rose more slowly than the rate of inflation. In 1995, the rise in ULC exceeded the growth in prices by just 0.9 of a percent. This suggests that the economy has ample room for some upward movement in wages before cost-push becomes a cause for concern. But it should be noted that inflation can be demand driven as well. Capacity utilization rates, along with anecdotal evidence about bottlenecks in certain sectors, did indicate that this type of inflation, demand-pull inflation, was a growing possibility and explains the Fed's actions. Rising Interest Rates Have Wide Ranging Impacts In the General Economy and the Farm Sector Though interest rates moderated in later-half 1995, the collective impact of their year-and-a-half rise was felt throughout the economy. Consumption growth slowed 0.8 percentage points, to 2.3 percent in 1995, though debt levels played a role as well. In particular, new car and light truck sales fell 3.1 percent in 1995, though admittedly off record 1994 sales. Residential investment had boomed in 1994, growing 10.8 percent. Higher interest rates not only raised costs to builders, but slowed housing demand well below anticipated levels, leaving builders with a very high inventory. As a result, residential investment contracted 2.3 percent in 1995. By slowing U.S. domestic demand, interest rate movements indirectly affected imports. The near 13.0-percent drop in the dollar's value from first-quarter 1994 to second-quarter 1995 also had a significant impact. In all, U.S. real import growth in 1995, at 8.9 percent, was fairly strong, but, had slowed 4.6 percentage points from 1994's rate. Notably, the largest decelerations occurred in imports of industrial supplies and automobiles. Both of those categories registered real growth of 11.7 percent in 1994, while growing just 2.8 and 2.5 percent, respectively, in 1995. The farm sector was also affected by rising interest rates and the resultant rise in interest expenses. Farm mortgage rates closely shadow the 10-Year Bond, while the Prime rate foreshadows interest charged for short-term operating loans. Additionally, variable-rate loans in the sector closely mirror movements in the 6-Month T-Bill. The farm interest rates reported here do tend to be less volatile than rates in the general economy. This is true in part for technical reasons since rates are reported under the average cost of funds basis, reflecting the average yield on all outstanding loans. But it is true also because many rural banks depend on consumer deposits for loanable funds, and the interest rates they pay on those deposits are fairly stable. With a more stable cost of funds, these banks can afford more stable loan rates. Specifically, farm interest rates on nonreal estate loans moved from 1994's 8.9 percent, to 1995's 9.6 percent. Farm mortgage rates were essentially unchanged from 1994, hovering around 8.0 percent. In a less directly identifiable way, the rural and agricultural banking system has reaped significant benefit from the macroeconomy. The long-lasting (20 of 21 quarters registered growth since the 1990-91 recession), noninflationary expansion has greatly contributed to stability and strengthening of the farm banking system and its ability to expand credit to farms. This has happened despite fluctuations in farm income and the inherent uncertainties that accompany farming. Domestic Food Demand Slows, While a Weaker Dollar Boosts the Agricultural Economy Even though per capita income growth accelerated to 2.5 percent in 1995, real growth in the domestic consumption of food and beverages slowed slightly to 1.9 percent. Despite slowing domestic demand, prices for finished consumer foods at both the producer level and the consumer level advanced nearly 2.0 percent and 3.0 percent, respectively in 1995. These price rises were in line with general inflation, but faster than those registered in 1994. This reinforces the notion that the rise in farm income was more of a price event, brought on by a poor crop year in 1995. Though domestic demand was weak, significant support for farm earnings came from the international sector. Agricultural export sales reached a record $55.8 billion in 1995, a rise of 22 percent and $10.1 billion over then-record 1994 export sales. While low inflation in the agricultural sector helped keep U.S. agricultural goods competitive internationally, by far the biggest factor was the near 14-percent fall in the dollar's value from early 1994 through mid-1995. Normally, the dollar exchange rate responds to movements in interest rate differentials, particularly over the short-run. However, the dollar declined despite U.S. interest rates that generally rose relative to foreign rates. This conundrum is partially explained by net-capital inflows to the United States that exhibited some weakness in late 1994, and that were down more than 80.0 percent (on privately held asset movements) in 1995. These movements in capital flows were rooted overseas, where, for example, Japan's banks and economy were experiencing severe strains. Foreign economic activity also was a contributing factor to the surge in agricultural exports, but it was not a major force. Real world growth, excluding the U.S., reached a modest 2.5 percent in 1995 and was not much higher than the growth registered in 1994. Increasing Oil Prices Help Push Up Costs Oil prices rose significantly in 1995, helping to push up farm production expenses. The composite Refiners-Acquisition Price of crude oil averaged $17.23 per barrel for 1995, 11.0 percent above 1994. At their 1995 peak of $18.60 for May, oil prices were 16.0 percent above 1994 year-end levels. These increases should be most directly felt in fuel prices, and the Producer Price Index for refined petroleum products did register a 2.9-percent rise in 1995. Though such a movement appears modest, it does represent a 7.6-percentage point turn around, as those same prices declined 4.7 percent in 1994. Crude oil prices impact fertilizer prices indirectly through their influence on natural gas markets. The National Agricultural Statistics Service's (NASS) Prices Paid Index for fertilizer was up 15.0 percent in 1995, and nitrogen prices rose 25 percent. Crude petroleum price movements have a more direct impact on pesticide prices, with agricultural chemical prices measured by NASS up 5.3 percent for 1995. These price movements played a significant role in the near 8.0-percent rise in 1995 manufactured farm input expenses. Fertilizer, pesticides, and fuel, the components of manufactured farm input expenses, accounted for $1.7 billion of the $8.2 billion upturn in total farm production expenses. First-Half 1996 in Review First-half 1996 growth was significantly stronger than 1995, registering annual rate growth of 2.0 percent in the first quarter and 4.2 percent in the second. The sectors that were responsible for 1995's slower growth were the sectors responsible for the rebound in early 1996. Consumption grew around 3.5 percent in both quarters, on improved consumer confidence, greater job growth, strong disposable income growth in later 1995, and somewhat lower short-term interest rates. Somewhat surprisingly, residential investment also proved strong in the first half. Long-term interest rates did show some downward drift, but not enough to explain the 7.4 and 15.1 percent expansion in the first and second quarters, respectively. Frequently, home purchasers sitting on the fence will be pushed into action when they perceive interest rates to be on an upward swing, and that appears to be the case in this instance. Interest rates were down modestly, with the Fed loosening money policy slightly, off weaker 1995 growth and inflation that remained in check. The Federal Funds rate was down some 50 basis points from fourth-quarter 1995 through second-quarter 1996. Other short-term rates mirrored the Federal Funds rate, with the Prime rate down just under 50 basis points over the same period, and the T-Bill rate down 14 basis points. The 10-year Treasury Bond bucked this trend, rising 44 basis points, as long-term markets did not reflect lower inflationary expectations. Internationally, the dollar rebounded about 4.0 percent over the first 2 quarters of 1996. Foreign exchange markets appear to be anticipating an upturn in later-half 1996 U.S. interest rates, as well as acknowledging that the dollar may be modestly undervalued after depreciating in 1995. Oil prices continued their upward movement in the first-half of 1996, reaching $21.60 per barrel in April and averaging $19.46. Later Half 1996 Second-half GDP growth will be slower, with overall 1996 growth slightly above 2.5 percent. Producer and consumer price inflation should accelerate somewhat, with yearly averages between 2.5 percent and 3.0 percent. Domestic interest rates should average slightly less in 1996 than in 1995, even as they increase in late 1996 responding to tightening labor markets and a slight ratchet up of inflation. Still, with inflation relatively low, real U.S. interest rates were comparatively attractive bringing a stronger dollar. The improved growth in Japan and Mexico and the sharp pickup in Canadian second-half growth, with good Asian growth, will more than offset the slowdown in European growth in 1996. Crude oil prices rose 12 percent compared with 1995. Natural gas rose 25 percent in 1996. Overall, the U.S. and world economy will be only mildly supportive of the farm financial condition in 1996. The picture on expenses is mixed. Higher oil and natural gas prices will induce increases in direct energy and fertilizer prices. The low interest rates of early 1996 will make interest expenses lower than in 1995. The higher minimum wage will marginally raise labor costs. Other raw and industrial materials used in farming have, on the whole, seen below average price increases. Even though the dollar is stronger than in 1995, it is only about as strong as it was in 1994. While the overall foreign growth rate did not change from 1995, our major agricultural export customers, as a whole, grew faster in 1996. Overall, the world economy supported strong U.S. farm export growth. Macroeconomy - Tim Baxter Tel: (202) 219-0635 E-Mail: tbaxter@econ.ag.gov Farm Business Outlook 1996 Farm Income Forecast Above Previous 5-Year Average Crop receipts forecast to be a record. Livestock receipts are forecast to increase, but cattle receipts could be the lowest in the 1990's. Farm Income in 1996 Expected To Be Up Considerably from 1995 The 1996 net cash income forecast of $58 billion and net farm income forecast of $51 billion represent substantial increases over 1995. For perspective, during the 1990's net cash income has averaged $53 billion while net farm income averaged $43 billion. For historical farm income numbers and 1996 forecasts see appendix tables 1 and 3. Strong crop receipts are a major reason for the expected higher income. Tight worldwide grain supplies have kept grain prices high while U.S. production of corn, wheat, and soybeans is expected to be larger than last year. At the same time, vegetable, fruit, and greenhouse receipts should continue their steady increase. Overall, livestock receipts are expected to be up but many cattle producers may not share in the bounty. Receipts for hogs and poultry should increase compared with 1995 and dairy producers may have a particularly strong increase in their receipts. The increase in dairy receipts will be almost entirely due to higher prices rather than higher production. Financial problems may continue for beef producers - cattle receipts are forecast to be the lowest in the 1990's. For historical crop and livestock cash receipts and 1996 forecasts see appendix table 4. More crop acres and continued heavy livestock production should contribute to higher 1996 expenses. Fertilizer and fuel prices were high during the planting season. On the other hand, interest rates continue to be moderate, which should leave 1996 interest expenses close to the 1995 level. For historical information on farm expenses and 1996 forecasts see appendix table 5. Farm Asset Growth Continues The value of U.S. agricultural assets (excluding operator households) on December 31, 1996 is forecast at $1,012 billion, up 4.2 percent from 1995. About 77 percent of the increase is due to rising real estate values. Expanding cash receipts and returns to farm assets, and favorable interest rates are stimulating continued growth in farm sector investments. The Economic Research Services's (ERS) year-end estimates of farm business real estate assets are now based on USDA's June Agricultural Survey, conducted in the summer following the accounting year. Because the final December 31, 1995 farm business real estate estimates are not yet available, the December 31, 1995 estimate is preliminary, while the December 31, 1996 estimate is a forecast. ERS uses economic models that forecast farmland values based upon expected farm income and interest rates charged on real estate loans. Farmland value indicators from other sources, such as the land value assessments provided by District Federal Reserve Banks, are also considered. The September 1996 estimate of the value of 1996 farm business real estate assets is a bit higher than the June 1996 estimate as recent data indicate stronger growth in farmland values, particularly in the Midwest. Nonreal estate assets are expected to increase about $9 billion in 1996. Livestock and poultry values in 1996 are expected to rise after falling by nearly $13 billion in 1995. The $13-billion drop in 1995 livestock and poultry values was primarily due to an $8 billion drop in the value of cattle and calf inventories. The number of cattle and calves on inventory increased by 1 percent in 1995, but the average value per head fell by over 19 percent. The value of crops stored and purchased inputs on hand are expected to rise in 1996 after dropping in 1995. The value of machinery and equipment is forecast to rise about $2 billion, in part due to favorable credit conditions. Farm Debt Expected To Rise Again in 1996 Total debt is projected to rise another $4 billion in 1996. The impact of this continuing increase in debt on farm incomes will be moderated by the combined effects of relatively high 1996 prices and generally favorable interest rates. Taken together, these factors indicate that indebted farm operators will have adequate income available to meet principal and interest payments on their loans. Improving incomes and more favorable interest rates in 1996 suggest that farm operations could afford to service higher debt levels, but the decline in debt repayment capacity utilization from 58 percent in 1995 to a projected 52 percent in 1996 reflects farmers restraint in taking on new debt. There is no evidence that growing debt levels in 1996 will precipitate widespread financial stress in the sector. Farmers realize that they probably face substantial reductions in Government support levels once the transition payment period ends. Farmers also recognize that prices for many commodities will probably not maintain current lofty levels indefinitely. Therefore, farmers appear to be taking advantage of current high income levels to improve their operations' balance sheets, rather than leveraging the favorable income levels to acquire additional resources through debt-financed expansion. While nonreal estate debt is expected to increase about 3 percent in 1996, the early season demand for production credit was less robust than many had projected. Farmers who benefitted from 1995's general price rise may have had adequate cash available to begin the 1996 season without drawing on operating credit lines. Financial Ratios Forecast for 1996 Suggest Gains Over 1995 Rising farm sector asset and equity values and growing returns to farm assets and equity, could lead to higher rates of return on farm assets and equity in 1996. Forecast rates of return on farm assets and equity from current income are expected to be considerably higher than in 1995. Total returns to farm assets, including returns from real capital gains, are forecast to be 3.9 percent, compared with 2.6 percent in 1995. On average, rates of return on farm sector investments in 1996 are higher than in 1995. The debt-to-asset ratio measures debt pledged against farm business assets, indicating overall financial solvency. The debt-to-asset ratio is forecast to be 15.3 percent in 1996, and is estimated to be at 15.5 percent in 1995. For the farm sector as a whole, solvency indicators remain favorable. Net cash flow expands on net cash income to account for both internal and external sources of funds, and thus provides a broader indication of the resources available to farm businesses to invest in the sector, and to meet current debt obligations. As farm debt and interest expenses have fallen since the end of the "farm financial crisis" of 1980-86, the ratio of debt-to-net cash flow (after interest payments) of 2.3 in 1993 was below the pre-boom 1970-74 average of 2.4 (fig.__). However, this ratio rose to nearly 3.0 in 1994 and 1995 as debt levels rose and growth in net cash flow moderated. The debt-to-net cash flow ratio is forecast to be 2.8 in 1996. Farm income forecast - John Jinkins Tel: (202) 219-0798 E-Mail: jjinkins@econ.ag.gov Farm asset forecast - Ken Erickson Tel: (202) 219-0799 E-Mail: erickson@econ.ag.gov Farm debt forecast - James Ryan Tel: (202) 219-0796 E-Mail: jimryan@econ.ag.gov **** Box 1 *** Net Cash Flow is Defined As Follows: Net cash flow (after interest expenses) = net cash income + change in loans outstanding + net change in other financial assets + net rent to nonoperator landlords (excluding capital consumption) - capital expenditures (excluding operator dwellings) - interest expenses (excluding operator dwellings) ***** End Box 1 **** ****** Box 2 ****** ERS Income Forecasts Will No Longer Be Published As Ranges ERS publishes seven forecasts of farm income for a given year before publishing the first official estimate. The December 1996 issue of this publication will include the first 1997 farm income forecast; the September 1998 issue will include the final 1997 farm income estimate. Starting with this issue, ERS will publish its farm sector income forecasts as numbers instead of ranges. This change will make it easier to compare forecasts with historical data and gauge possible changes in farm sector financial conditions. However, farm income forecasts are no more certain now than in the past. In the June issue of this publication, for instance, ERS presented the 1996 net farm income forecast as a range of $45-$55 billion. That $10 billion range pointed out that in the middle of 1996 much could yet happen to change the farm income outlook. In the absence of the ranges, table 8 will help forecast users understand how forecasts may differ from final estimates. For 1991-95, the table shows the average difference in each of the seven forecasts and the first official estimate. To illustrate, the seventh net farm income forecast was on average $2 billion different than the first official estimate. The averages in the table consider only the absolute amount of the difference -- not whether the forecast was higher or lower than the final estimate. [Table 8] END-OF-FILE