AGRICULTURAL INCOME AND FINANCE November 12, 1997 September 1997, AIS-66 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. 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, $27/year. ERS-NASS accepts MasterCard and Visa. ----------------------------------------------------------------------------- Contents Summary Farm Income Estimates, 1996 Net Value-Added and Net Farm Income Attain New Highs in 1996 A Look at Farm Sector Cash Income by Sales Class Gives Insight Into Farm Diversity Debt Repayment Ability Improves With Higher Income Levels and Favorable Interest Rates Offsetting Larger Debt Cost of Production for Crops and Livestock, 1996 Although Input Expenses Rose in 1996, Strong Market Prices Led to Higher Net Returns Farm Business Outlook General Economy Strong in 1997, Speedup from Moderate Agriculture Likely To Produce Strong 1997 Income -- Though Earnings Not Expected To Equal 1996 Record Special Article Introduction of Size Class for Value-Added Accounts List of Tables List of Figures 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 Farm Business Economics Branch Chief James Johnson (202) 219-0001 *The Economic Research Service is moving. The new number for Dave Peacock, AIS Economics Editor, will be (202) 694-5582 beginning November 10, 1997. Summary Agriculture Likely To Produce Strong 1997 Income -- Though Earnings Are Not Expected To Equal 1996 Record The Economic Research Service forecasts farm net cash income in 1997 to be $54.7 billion, close to the 1990-96 average, but down from the nearly $60 billion record for 1996. Net farm income, which includes changes in farm inventories, is forecast to be $45.9 billion, close to its 1990-96 average, which follows a record $52 billion for 1996. Farmers will earn slightly less from 1997 crop sales than the record $109 billion for 1996 due to expected lower feed grain prices. Livestock receipts in 1997 will increase from the $93-billion attained in 1996. Higher beef cattle prices--a product of reductions in the beef herd--will be the most important influence. This year should be the turnaround point after 3 years of steady declines in cattle and calf receipts. With hog production expected to be at least as high as in 1996, hog receipts in 1997 will exceed the $12.6-billion achieved in 1996. Total farm production expenses are forecast to increase less in 1997 than the 4-percent increase in 1996. Lower feed prices are the major factors dampening production expenses. Higher prices for labor and young livestock could be among the strongest upward pressures on farm expenses. Farm Assets, Debt, and Equity Keep Rising The value of farm sector business assets rose 6.2 percent in 1996 to $1 trillion. Farm asset values are expected to grow another 4.5 percent in 1997. Farm real estate asset values are expected to continue increasing in 1997, but slightly less than in 1996. Total farm business debt rose by almost $6 billion during 1996, reaching nearly $157 billion, its highest level since 1986. Total debt is forecast to rise another $5 billion in 1997. Reduced incomes and slightly less favorable interest rates in 1997 suggest that some farmers may find it more difficult to service higher debt levels. However, there is little evidence that growing debt in 1997 will precipitate widespread financial stress in the sector. The value of farm business equity has risen for more than a decade. Significant gains are expected in 1997 as farm asset values rise faster than farm debt. Farm sector equity in 1997 is expected to be almost $100 billion more than in 1995, and over $300 billion greater than in 1985. Final Estimates Show Net Value-Added and Net Farm Income Attained New Highs in 1996 Net value-added and net farm income reached record levels in 1996, rising substantially from 1995. Net value-added for 1996 was $19.1 billion more than in 1995, a rise of 25 percent, and $9.5 billion greater than its previous high in 1994. The $22.6-billion rise in final output far exceeded the $3.4-billion in out-of-pocket costs, resulting in considerably more income to be distributed among the farm operators, farm employees, lenders, and landlords who provide resources to the farm sector. Net farm income, that portion of net value-added earned by farm operators, jumped $15.4 billion from 1995 to 1996. Although Input Expenses Were Higher in 1996, Strong Market Prices Led to Higher Net Returns Acres planted to major U.S. crops in 1996 were up 5.1 percent over 1995 and were at the highest level in over 10 years. Harvested acreage also rose (4.2 percent) and was also at the highest level in 10 years. Farmers planted an additional 11.6 percent of corn, 9.4 percent of wheat, and 2.6 percent of soybeans. Despite production increases for many crops, prices generally remained high. The overall prices received index for crops was up 12.5 percent for the year. On the expenses side, the 1996 prices paid index for general inputs rose 5.5 percent. Net Value-Added and Net Farm Income Attain New Highs in 1996 Net value-added and net farm income reached record levels in 1996, rising substantially from 1995 (table 1, table 2, and fig.1). Net value-added for 1996 was $19.1 billion more than in 1995, up 25 percent, and $9.5 billion greater than its previous high in 1994. Because net value-added represents the total value of the farm sector's output of goods and services, less payments to other (non-farm) sectors of the economy, it reflects production agriculture's addition to national output 1/. --------- 1/ ERS value-added estimates are used by the Bureau of Economic Analysis (BEA) for the National Income and Product Accounts (see p.32 Agricultural Income and Finance, AIS-58, September 1995) and by OECD in their international agricultural accounts. --------- It also represents the sum of the economic returns to all the providers of factors of production: farm employees, lenders, landlords, and farm operators (fig.2). The $22.6-billion rise in final output far exceeded the $3.4- billion in out-of-pocket costs represented by intermediate consumption outlays, resulting in $19.1 billion more to be distributed among the providers of resources to the farm sector. As a consequence, hired workers received 6.1 percent more than in 1995 and lenders received an increase of 3.9 percent for their contributions to 1996 farm production. The earnings of non-operator landlords were up 19.3 percent, reflecting several factors. Holders of share-rent contracts benefitted from the additional $17 billion in crop production. Indications are that the implementation of the Federal Agriculture Improvement and Reform Act of 1996 has resulted in two significant trends in rental arrangements. First, landlords are renegotiating contract terms and raising rents to reflect the value of the Government's payments and the certainty of the multi-year schedule of payments. Second, landlords are substituting cash leases for crop-share leases, obtaining higher rents and lessening the risk sharing. NOTE: The value-added format is now used to present the agricultural sector income accounts for the United States and the States, replacing the traditional net farm income format. The underlying accounting concepts remain the same under the new format and the value for net farm income is identical. The presence of more disaggregated components under the value-added format makes it much easier to discern what forces are driving the changes and trends in farm income. Changes in commodity production is the cause of most of the volatility in the income accounts, and much more detail is available to the reader in the value-added format. For example, the critical impact of the value of feed grain production on the gyrations in net farm income is clearly observable in the value-added format but not the previous presentation format. Likewise, the additional contributions in 1996 of soybeans, poultry, and dairy are clearly evident. Perhaps most importantly, the value-added approach to sector accounting has the advantage of being the format accepted and utilized internationally, thereby enabling comparisons across countries, which became more important with the sweeping changes in federal agricultural programs enacted under the Federal Agricultural Improvement and Reform Act of 1996 (commonly called the 1996 Farm Bill). One feature of the 1996 Farm Act is the elimination of government controls on production as a requirement for federal support payments to farmers. Producer planting decisions will now be based on incentives from the marketplace, which is truly global in scope. For those who may wish to verify or otherwise have a better understanding of the relationship between the new and old presentation formats, two tables providing a map of how to do a crosswalk between the two formats are available in the national farm income section of the ERS Home Page (www.econ.ag.gov) or by requesting a copy from the Farm Sector Financial Accounts Team Leader (Telephone: (202) 219-0806, after November 10, call (202) 694-5592). ******** End note Net farm income, which jumped $15.4 billion from 1995 to 1996, is that portion of net value-added earned by farm operators (defined as those individuals and entities who share in the risks of production). In fact, the major share of the 1996 increment to net value-added accrued to farm operators. Typically it is the farm operators who benefit most from the increases and assimilate most of the declines arising from short term, unanticipated weather and market conditions. However, due to the rise in earnings of farm employees, lenders, and landlords, net farm income rose less in 1996 than the increase in overall net value-added (table 1-1, fig. 1-2). Net cash income rose by $8.8 billion, a 17.1-percent increase from 1995 to 1996 (table 1-3). Net cash income reflects the cash earnings generated by the farm business which are available for debt servicing, capital purchases, and distribution to farm households to cover family living expenses. Net cash income, unlike net farm income, does not include the value of home consumption, changes in inventories, capital replacement, or implicit rent and expenses related to the farm operator's dwelling, which do not reflect cash transactions during the current year. Consequently, net cash income is more appropriate as an indicator of solvency than a measure of the value of the sector's output, which is viewed more accurately using either net value-added (for the sector) or net farm income (for operators). Net cash income exhibits less volatility than net farm income, as producers try to manage their cash flow to meet multiple objectives: payment of debt and family expenses, smoothing of year-to-year income fluctuations in order to minimize income taxes liabilities, and maximizing income by postponing sales in anticipation of higher prices or accelerating sales in anticipation of lower prices. Agricultural Sector Output 11 Percent Higher in 1996 Final agricultural sector output, the value of the agricultural sector's output of commodities and services before expenses, rose $22.6 billion in 1996 (table 1). Higher output, reduced by an increase in intermediate consumption outlays of $3.4 billion, accounts for most of the $19.1-billion jump in net value-added. The value of final 1996 crop output soared $17 billion, reflecting rebounds in acreage and yield for major crops, both of which had declined in 1995, following 1994's record harvest (fig. 3). Crop prices were much higher in the first half of 1996 relative to the same period in the prior year and tended to remain stable in the latter half of the year, despite the rebound in production (figs. 7, 8, 9, 10). With the large harvest, farmers added $4 billion of harvested crops to the end-of-year inventories for later sale. Inclusion of the inventory change enables a full accounting of a current year's production in the tabulation of the calendar year's farm sector output (table 1, figs. 1 and 2). The total value of livestock production in 1996 was $4.4 billion higher than the previous year, the first increase in 3 years (fig. 3). Substantial increases in the sales of hogs, poultry, and dairy products more than offset a $4-billion decline in cattle production. Market prices available to farmers for hogs, poultry, and dairy were all up in 1996 (fig. 12). The $4-billion fall in cattle production was a combination of declining receipts and a reduced national herd size. Total cattle receipts in 1996 declined from 1995 by $2.9 billion in decreased value of sales and $1.1 billion from a reduction in the herd (inventory adjustment). After having declined for the three prior years, beef prices stabilized near 1995 levels (fig. 11), but herd liquidation continued, as producers were caught in an ongoing cost-price squeeze without prospects of an immediate turnaround. Production inputs purchased and utilized within the current production year, called intermediate consumption outlays in table 1, rose a modest $3.4 billion (3.1 percent) in 1996. Changes in individual components were not particularly noteworthy but were consistent with adjustments occurring in production. Livestock purchases were down, reflecting a continuation of the downturn in the beef cycle. Expenditures related to crop production were generally up, in line with the increase in acreage planted (table 1). Net government transactions, the flow of funds between the agricultural and government sectors, fell to under a billion dollars in 1994. By 1995, this measure had fallen below $100 million, and declined further to $30 million in 1996. This decline reflects that the agricultural sector has recently paid government (mostly to state and local entities) nearly as much in taxes and fees as it received in (Federal) payments under various farm programs. Net government transactions reached a recent high of $11 billion in 1987 in the midst of the farm sector's financial crisis (fig. 6). The significant decline in this measure is a reflection of both the general decrease in government payments since 1987 (most of which were developed to support farm operator incomes), and the steady growth in licensing fees and property taxes collected from the agricultural sector. (Income taxes are not included in the accounts because they are not incurred in production.) Government payments to the agricultural sector in 1996 had fallen to 44 percent of their record 1987 level, while the sector's payments to government entities reached 139 percent of their 1987 amount. Lower government payments in the 1990's (except for 1993) were due to the relatively high prices and low deficiency payments, partially the result of an expansion in demand, including growth in exports of agricultural commodities. Farm Marketing Receipts Up in 1996 World economic growth and trade liberalization are providing increased opportunities for U.S.exports, and this environment has translated into strong export growth for the U.S. crop and livestock sectors in the 1990's (see box on U.S. agricultural exports). In 1996, the value of marketings of all farm commodities rose by $14.6 billion (tables 1-4). Continuing an unbroken trend stretching back to 1987, cash receipts from sales of crops exceeded that of the previous year, having risen 42 percent since 1987. In contrast, livestock receipts also rose in 1996 by $5.9 billion, after 2 years of decline (fig. 3). The increases in livestock receipts were powered by increases of $3.3 billion and $2.9 billion in sales of poultry and dairy products, respectively. Receipts from sales of meat animals declined slightly as a drop in cattle sales more than offset a $2.4-billion rise in hog sales. ***** Begin box Agricultural Exports Surpass $60 Billion U.S. agricultural exports were a record $60.4 billion in calendar year 1996, 8 percent higher than in 1995. Strong prices for grains and soybeans boosted bulk exports 12 percent to $28.1 billion, the highest since 1981. High-value product (HVP) exports reached a record $32.3 billion. Bulk Exports Led Growth in 1996 In 1996, bulk export growth accounted for much of the rise in U.S. agricultural exports. Even though export volume declined, higher grain and soybean prices boosted the export value to $28.1 billion. Corn export volume fell 13 percent, but increased prices raised the value 15 percent. Wheat shipments also declined, but export value surged 15 percent due to higher prices caused by tight supplies. Soybean volume, unlike grains, rose 12 percent to a record 25.6 million tons in 1996. Soybean exports to China, Mexico, and Indonesia were especially strong, setting records in 1996. At $286 per ton, soybean export prices were nearly 21 percent higher than in 1995, boosting the total value of soybean shipments 36 percent. While cotton exports declined 26 percent in both volume and value, exports to Canada and Mexico were a record 64,000 tons and 150,000 tons, respectively. HVP Exports Advance for Eleventh Consecutive Year Although high-valued product's (HVP) continued an 11-year upward trend, HVP exports increased only 5 percent in 1996, primarily due to the slowdown in beef exports and small horticultural export gains. HVP gains were largely due to increased poultry meat, animal feed, and soybean meal exports. Poultry meat exports jumped 23 percent to a record $2.5 billion. Shipments to Russia were a record 937,000 tons. China represented a small but rapidly growing market for poultry meat in 1996. U.S. pork exports also reached records, 306,000 tons and $1 billion in value. Exports of animal feeds and fodders advanced 5 percent to $2.6 billion in 1996. Sharply higher prices boosted the value of soybean meal exports 45 percent, its highest export value since 1988. U.S. horticultural product exports increased nearly 4 percent to about $9.9 billion, largely due to gains in wine and nuts. (See Economic Research Service, Foreign Agricultural Trade of the United States, 1996 Calendar Year Supplement for additional details on 1996 agricultural exports. Monthly agricultural trade information is published in the Economic Research Service's, U. S. Agricultural Trade Update). ****End box Strong growth in U.S. grain use supported commodity prices, and 1996 was a favorable year for feed crop farmers, who planted more acres, benefitted from higher yields, and sold their production at high prices. Both domestic and export demand were strong, with low carryin stocks. Corn and soybean sales were up an impressive $2.9 billion and $2.4 billion, respectively. Notable gains in sales were also achieved by wheat ($841 million), cotton ($610 million), greenhouse/nursery ($446 million), sorghum grain ($441 million), rice ($293 million), and potatoes ($235 million). Corn production, which typically represents close to one-fifth of crop sales value, contributed $6.1 billion to the rise in the value of crop production, as producers sold $3 billion more than in 1995 and added another $3.1 billion to year-end inventories for future sale. Soybeans also made a $2.9-billion contribution and, unlike corn, had almost no buildup in inventory. With the notable exception of cattle, which is in the downward phase of its multi-year production cycle, 1996 was, financially speaking, a good year for producers of farm commodities. While not always at record levels, both prices and yields were generally favorable, putting farmers in the enviable position of having commodities to market when prices were at advantageous levels. This and the relatively small expansion, by recent historical standards, in total production expenses (3.1 percent) are key explanations for the $15.5 billion rise in net farm income (table 2 and fig.1). Net cash income in 1996 also increased from 1995, but not as dramatically as the rise in net farm income. Farmers were able to build stocks from the excellent harvest in 1996. These accumulated stocks are reflected in net farm income for 1996 because the commodities are valued and booked as change in inventories; but the postponement of their sale moves cash income into future years. Since the valuation of inventory is not a market transaction, it is excluded from net cash income accounting. Despite the postponing of substantial crop sales into the next year, the gain of $15.6 billion in gross cash income was more than double the $6.8 billion in added cash expenses, resulting in a hefty 17.1 percent rise in 1996 net cash income over 1995. Corn, Wheat, Soybeans, and Cotton Account for Three-Fourths of Increased Crop Receipts Cash receipts for corn, which leads all other crops in total value marketed and composed 20 percent of the increase in receipts from all commodities, were $21.6 billion in 1996, surpassing the previous record high of 18.6 billion in 1995 (table 4). Yet, the manner in which the two consecutive sales records were attained was very different. The modest, by recent standards, 7.4-billion bushel corn crop produced in 1995 was 27 percent below 1994's record crop of 10.1 billion bushels. However, in 1994, market prices were depressed by the large harvests, and farmers retained sizable quantities in inventories for future sale. The resulting drawdown of the large unsold inventories held over from 1994's record crop permitted farmers to expand sales quantities in 1995. The smaller crop and strong demand for corn, especially exports, bolstered corn prices. Benefitting from prices that were rising throughout the year and continued upward into the post-harvest period, producers were able to boost corn revenues even with a small harvest (fig. 7). The rebound in corn production in 1996, in combination with prices that were relatively strong during and after the harvest season, enabled corn sales to top that of the prior year. The net result was a $3-billion increase in 1996 sales value over 1995. With the increased 1996 cash sales and another $3.1 billion of new corn production being added to year-end inventories, 1996 was a banner year for corn producers. Wheat receipts were up $841 million in 1996, accounting for about 10 percent of the overall increase in crop receipts. Harvested acreage and yields were up slightly for 1996, resulting in increased production. Prices were higher for much of the year and remained strong throughout the year; and as a consequence, sales were up 9 percent from 1995 (fig. 8). Soybeans were also a high spot for the U.S. agricultural sector in 1996, as acres, yield, and production were all up from the prior year, and prices received by farmers were at exceptionally high levels compared with 1995 and 1996, due to low inventories and short supplies (fig. 9). Soybean receipts increased by a whopping $2.4 billion, an amount equivalent to 27 percent of the net increase in crop revenues. A change of this magnitude is particularly noteworthy, simply because corn is usually the only crop for which the annual change can be expected to approach, much less exceed, $2 billion. Cotton sales for 1996 were up by $610 million, equivalent to 7 percent of the total increase in the value of crop sales. Cotton acreage was down in 1996, but yields were up 30 percent, leading to increased production. Prices did not fall dramatically in the face of the rebound in production, the result being a 9-percent rise in cotton sales (fig. 10). Given that acres planted were down almost 14 percent, producers experienced a considerable improvement in their returns. Vegetable Receipts Were Down in 1996 With the notable exceptions of potatoes, dry beans, cucumbers, and chili peppers, cash receipts from the sale of vegetables were generally down in 1996. Lettuce suffered the largest decline in value, $563 million or 28 percent, compared with 1995. In 1995, cash receipts from lettuce had soared to 56 percent above those of 1994. Receipts in 1995 were the result of prices spiking to an exceptional level due to short supplies caused by adverse weather. Unusual spring floods in the Salinas Valley of California in 1995 resulted in lower production of lettuce, and market prices approached $50 per hundredweight (cwt) for several months. With the pervasiveness of salad bars in restaurants and the introduction of packaged pre-cut lettuce in grocery stores, strong demand for lettuce continued despite rising prices. In 1996, the lettuce harvest rebounded and prices retreated. Although lettuce growers brought only about 6 percent more product to the market than in 1995, these additional market offerings were enough to cause head lettuce prices to drop by almost 37 percent (nearly back to their 1994 level). California and Arizona accounted for 97 percent of 1996 lettuce receipts. More than 47 percent of U.S. cash receipts from vegetables come from California and Florida. Cash receipts from vegetables represent about 32 percent of California's cash receipts from all crops and 26 percent of Florida's. Cash receipts from potatoes enable Idaho and Washington to follow Florida in importance as vegetable producing States. Potatoes were Idaho's leading commodity in cash receipts, generating more than 21 percent of the State's total cash receipts from all commodities. Fruits and Nuts Contribute to Expanded Farm Sector Receipts U.S. fruit and nut receipts in 1996 rose 6 percent over 1995, with a 7-percent increase in noncitrus fruit receipts and less than 1 percent increase in citrus receipts. In 1996, grapes, apples, oranges, and almonds showed strong domestic and international demand in the fresh and processed markets. Grapes, the United States' leading fruit and nut commodity in value of cash receipts, are experiencing a remarkable boost in export demand, especially for wine varieties. The U.S. wine industry has become increasingly important to U.S. agriculture. Nearly 55 percent of the 1996 grape crop was used for wine. U.S. grapes are not only important to the agricultural sector's contribution to the Nation's economy, but are important to the world's supply. The U.S. agricultural sector contributes 10 percent of the world's grape output, the third largest after Italy and France. In 1996, grapes ranked number 15 according to each commodity's contribution to U.S. agricultural cash receipts, ahead of apples and oranges, but also ahead of such crops as rice or barley (table 4). Total U.S. grape receipts were up a total of 14 percent, with wine receipts reflecting a 24-percent increase in 1996, raisin varieties a 10-percent increase, and fresh table grapes a 5-percent increase over 1995. Receipts were up, reflecting higher grower prices resulting from lower utilized production and increased consumer demand. Prices to growers for grapes increased 17 percent for fresh use and 16 percent for processing uses. Receipts to the United States' second most important fruit commodity, apples, increased 17 percent to $1.8 billion in 1996, the highest in the past 5 years. A short supply on the East Coast and strong exports to East Asia can both be credited for raising prices to growers. Record fresh usage of apples has been noted, as well, due to a large crop and excellent quality. A smaller crop for fresh market apple utilization on the East Coast, due to weather and pollination problems, lowered production in some key States. U.S. orange receipts rose 5 percent in 1996 to $1.8 billion, setting a record for the 5-year period. Quality problems with navels and a strong domestic demand for Valencia's lowered the export supply. Domestic demand for fresh market Valencias was especially high, increasing Valencia receipts 25 percent. Almond receipts climbed to over a billion dollars in 1996. Almonds, ranking 23 among the U.S. leading commodity receipts, are showing growth in domestic and international markets. The United States is the world's largest producer and exporter of almonds. Cattle Receipts Down Again in 1996 Cattle and calves remained the top-ranked commodity in generation of cash receipts (table 4) for 1996, comprising 15 percent of all commodities, even though their value of sales fell by $2.9 billion or 8.4 percent. Following trend, the sales value of cattle and calves has declined by $8.2 billion, or 21 percent, since 1993 due to lower prices (fig. 11). Historically, cattle production and the related herd size has evidenced the existence of a multi-year cycle and indications are that cattle are in the downward phase of that cycle. Increases in poultry, pork, and dairy product sales prevented livestock receipts from falling for the third consecutive year in 1996. Value of poultry sales have been on the upward trend for the last decade and experienced an unusually large jump in 1996. Long-term per capita consumption trends indicate increased consumer demand for poultry meat. Increasing diet awareness among consumers may be a factor contributing to increased poultry consumption. While the adoption of large scale production and marketing practices similar to those employed in broiler production over the last several decades are thought to be lowering production costs for hogs, increased prices throughout 1996 appeared to be the key factor in increasing the value of pork sales in 1996 (fig. 12) and in increasing producer returns over 1995 (see 1996 Cost of Production for Crops and Livestock). Total Expenses for Purchased Inputs and Services Rose 3 Percent in 1996 Total expenses for purchased inputs such as feed and fertilizer and services such as repairs and custom work -- called "intermediate consumption outlays" in table 1--were estimated at $112.4 billion in 1996, up $3.4 billion (3.1 percent) from 1995. This year's annual increase was the smallest in the last 4 years. Feed expenses rose by $1.4 billion, or equivalent to 42 percent of the total increased expenses, leading all other input and service expense items which also expanded in 1996. Increases in items directly related to crop production -- fertilizer and lime, pesticides, and seeds -- followed in order as the major contributors to expanding expenses. Since the early 1980's, the ratio of "intermediate consumption outlays" to the agricultural sector's final output has remained close to 50 percent. Farm production has become more dependent upon purchased inputs and services during the last decade and a half than during 1960-79 and 1950-59 when "intermediate consumption outlays" to the agricultural sector's final output averaged 45 percent and 38 percent, respectively. Feed Expenses Rise Again in 1996 Estimated expenditures for feed were $25.2 billion in 1996, up $1.4 billion (5.9 percent) from a revised estimate of $23.8 billion in 1995. Feed costs in 1995 were $1.2 billion (5.3 percent) more than in 1994. This makes 1996 the fifth straight year that feed expenses have risen significantly, and the fourth straight year that their rise has been the largest increase among production expenses. This pattern is likely due to shifts in the structure and location of animal production, which has increased the percentage of purchased feed to all feed. A larger proportion of animals are being raised on large, specialized operations that buy most of their feed. In addition, dairy and hog production have expanded in the southwest and mountain areas where raising feedstuffs other than hay is uneconomical. In each of the last 2 years, a coupling of large animal stocks with increased reliance on purchased feed has been the major reason for increased outlays for livestock feed. Relatively low feed prices during the last quarter of 1994 and the first half of 1995 encouraged many livestock, dairy, and poultry producers to expand already relatively high inventory and production levels. This expansion made them vulnerable to record-high grain and soybean prices in the last quarter of 1995 and most of 1996, when the USDA's National Agricultural Statistics Service (NASS) feed price index rose nearly 24 percent. Although beef producers accelerated reduction of the herd size during the current cattle cycle's liquidation phase which began in late-1995, and hog producers continued a reduction in numbers that also began in 1995, ERS' estimate of grains and processed feed consumed was down only 4.2 percent for calendar year 1996. The large animal stock, already in place when feed price increases hit, forced animal producers to continue to expend large amounts for purchased feed, despite the direction toward reducing cattle and hog numbers. Furthermore, unfavorable weather conditions in early 1996 reduced forage supplies in the Southern Plains, forcing supplemental feeding of hay. Heavier demand for forage and hay and reduced hay production in 1996 drove supplies to extremely low levels in the second half of 1996, bidding up the price of existing stocks. Livestock and Poultry Purchases Fall With Lower Feeder Cattle Prices Total livestock and poultry purchases fell $1.2 billion (9.6 percent) in 1996 to $11.1 billion. The value of interstate sales of cattle and calves 2/, ---------- 2/ Interfarm sales of cattle and calves within the same State are counted as neither receipts nor expenses. ---------- which constitutes 75 percent of all livestock and poultry purchases, fell $1.4 billion (14.4 percent). This is the third straight year that interstate sales of cattle and calves have fallen more than $1 billion. Expenditures for cattle and calves in 1996 were down $3.9 billion (32 percent) from their previous peak in 1993. As in 1994, both total liveweight and average value per cwt were down in 1996. In 1995, total liveweight rose 5 percent, but the average value fell 14 percent. In 1996, the average value fell another 9.4 percent in response to record high prices for grain and continuing low beef prices (consistent with increased beef production due to unusually high slaughter rates). The value of interstate sales of breeding hogs and feeder pigs increased 37 percent in response to a 17-percent increase in liveweight and an 18-percent jump in the average price. Total chick and poult purchases rose 3 percent as the poultry sector continued to expand. Crop Production Expenses Rise With Larger Acreage Increases in crop acreage, particularly the 11.6-percent expansion in corn acreage, was the dominant factor in increased crop input expenses in 1996. Seed expenses were $6.1 billion, up 11.9 percent from 1995. The National Agricultural Statistics Service (NASS) seed prices paid index (primarily hybrid corn) rose 5 percent. The remainder of the increase in seed costs was attributable to increased acreage. Estimated fertilizer and soil conditioner expenditures were $10.9 billion in 1996, up 9.0 percent from 1995. This is the third consecutive year that the increase in fertilizer expenses has exceeded 9 percent. Significant price increases in 1994 and 1995 raised the NASS fertilizer prices paid index (aggregate of all fertilizer) 25 percent and accounted for much of the increase in fertilizer expenses. The price index rose only 3.3 percent in 1996, so the principal cause of the 1996 increase was acreage increases, in particular, corn acreage. At 1995 application rates (1996 are not available), the increase in fertilizer use on corn would account for more than 60 percent of the increase in quantities applied. Fertilizer expenses have now risen each year since 1992. Expenditures for pesticides were estimated at $8.5 billion, 10.3 percent higher than 1995's $7.7 billion. This is the largest increase since the 17.8-percent jump in 1991. NASS' pesticide prices paid index rose 3.5 percent. Expanded acreage accounted for the rest. Herbicides constitute between 65 and 70 percent of pesticides applied and is the principal pesticide used on corn. The combination of expanded acreage and the rise in NASS' herbicide subcomponent prices paid index would have indicated a 10.5-percent increase in herbicide expenditures. Pesticide expenses have been climbing steadily since 1988. The estimate of expenditures for petroleum fuel and oils was $5.7 billion, up 5.3 percent from the revised 1995 estimate of $5.4 billion. Gasoline and diesel fuel prices rose sharply beginning in April due to shortages that occurred after particularly harsh winter weather. Contract labor expenses were $2.1 billion in 1996, a rise of 8.1 percent, approximately the same increase as in 1995. Wage rates for agricultural service workers in California, which employs more than 30 percent of such workers, rose 2.5 percent. Contract labor is treated differently from hired labor because employment is through an intermediary that makes the arrangements and handles the administrative functions, which qualifies the activity as a separate business--providing services to the employing business. Under the Department of Commerce's National Income Accounts, contract labor is classified as being part of the service sector as distinct from the agricultural sector. Other intermediate product expenses presented a mixed picture. Repair and maintenance of farm business assets increased 6.7 percent, led by an 8.0-percent rise in motor vehicle and machinery repair and maintenance. Machine hire and custom work expenses, based on survey results, were estimated at $4.7 billion, down 2.1 percent from 1995. Both machinery and equipment leasing and crop-related custom work outlays were lower. Marketing, storage, and transportation expenses fell 5.0 percent to $6.8 billion. Transportation rates for agricultural products were down. Rail and truck rates were up slightly, but barge rates for farm products on the Mississippi River fell 25 percent from abnormally high 1995 rates. The volume of grain and fresh fruit and vegetable shipments was down around 12 percent. Bureau of Labor Statistics index of farm product warehousing and storage costs fell 1.5 percent and the volume of commodities stored was less, given the smaller 1995 harvest which would be reflected in the 1996 expenses. The price index for packaging and containers in the general economy was almost 4 percent lower, so the cost to the agricultural sector was probably less as well. Miscellaneous expenses totaled $18.0 billion, a 1.6-percent decrease from a revised 1995 estimate of $18.3 billion. The only significant increases were in estimated outlays for custom feeding (12.1 percent) and general management expenses (1.5 percent), where a 9.6-percent rise in gross insurance expenses offset an 8.5-percent decrease in other management expenses. Estimated expenditures for livestock services and supplies, tools and shop equipment purchases, and irrigation water were all down. Expenditure To Acquire Services of Factors of Production Rose 9 Percent in 1997 Employee compensation for hired labor was $15.2 billion in 1996, $872 million higher than in 1995. The 6.1-percent increase in 1996 was similar to the 6.2-percent increase in 1995. A large jump in perquisites (noncash benefits) was reflected in the 1995 increase in total labor expenses. The National Agricultural Statistics Service's wages index rose 3.6 percent as the average hourly wage earned by all types of hired workers went from $6.54 to $6.78. The 1996 increase in the wages index was the largest since 1992, and there are signs that wage rates are increasing faster. October 1996 wage rates were 5.9 percent above October 1995, and increases in the first three quarters of 1997 over the same quarters in 1996 are all greater than 4 percent. Net rent to nonoperator landlords in 1996 was $14.3 billion, up 19.3 percent from 1995. An important part of the increase was due to a $2.7-billion (33 percent) increase in share rents corresponding with the sector's higher value of production. About $1.9 billion of the increase was in corn for grain. Total landlord gross income, excluding forest products to nonoperators, was $20.6 billion, an increase of 16 percent. Cash rent was $7.7 billion, up 3.3 percent, as cash rent rates and acres rented both rose. Direct government payments received by landlords were $1.3 billion, the same as in 1995. Expenses paid by all landlords, including capital consumption, were $7.2 billion, up 6 percent. Crop inputs financed by landlords rose 26 percent to $1.7 billion. Property taxes paid by landlords were $2.4 billion, up 3 percent from 1995. Nonoperator landlords netted $12.1 billion, a rise of 24 percent from 1995. Forest product receipts credited to other nonoperator landlords added another $2.2 billion. Total interest expenses were $13.2 billion, up 3.9 percent from $12.7 billion in 1995. Interest costs incurred on nonreal estate debt was $6.9 billion, up 2.6 percent from $6.7 billion in 1995. However, nonreal estate interest excluding interest on Commodity Credit Corporation(CCC) loans rose 4.6 percent. Repayment of CCC loans returned to normal levels after a particularly heavy retirement of CCC debt in 1995. Operators paid $109 million in interest on CCC debt in 1996, down from $232 million in 1995. Interest on real estate debt was $6.4 billion, up 5.2 percent from $6.0 billion in 1995. Interest expenses have risen in each of the last 3 years after a long string of decreases from 1983 to 1993. However, the $492 million increase in 1996 is about half the dollar increases in 1994 and 1995. The 3.9-percent rate of growth in interest expenses in 1996 was less than half the 8.4-percent rate of increase in the previous 2 years. The smaller increase in interest expenses last year is primarily attributable to a slower rise in interest rates between 1995 and 1996. Nonreal estate interest rates rose less than one-half percent, after increasing around 7 percent in the previous 2 years, and real estate interest rates rose 1.6 percent, resulting in a weighted-average increase of 1.1 percent. The 1996 rise in average farm business debt is the sixth increase since a small decrease in 1990. In each year during this period, average debt has risen slightly more. Average nonreal estate debt, excluding CCC loans, increased $2.7 billion (3.9 percent) in 1996. This was the third straight rise of $2.7 billion in average nonreal estate debt. Average nonreal estate debt has risen every year since 1989 but at varying rates. From 1994 to 1996, average nonreal estate debt has risen $8.3 billion, after rising $3.0 billion between 1989 and 1993. Average real estate debt increased $2.1 billion (2.5 percent) in 1996. Average real estate debt has also been rising at an increasing rate since 1991. Property Taxes and Capital Consumption Were Little Changed in 1996 Property taxes paid continued their pattern of slow, steady growth in 1996, increasing 1.6 percent to $6.8 billion. Real estate tax payments were estimated up 4.3 percent to $6.3 billion. In each of the last 2 years, personal property taxes have fallen. 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 estate and other property because they are set by legislation and reassessments of property values are periodic. However, the steady rise in tax payments corresponds to the overall improvement in the real estate values and reflects the capacity of operations to pay assessed taxes in a timely manner. Total capital consumption, including operator dwellings, was estimated at $18.9 billion, an increase of $15 million over 1995. Capital consumption for farm business items only, excluding operator dwelling, was down 0.8 percent at $16.2 billion. However, operator dwelling capital consumption rose more than 5.4 percent due to rising operator dwelling values. Interestingly, the ratio of capital consumption to net cash income, which measures the portion of net income that should be reserved for capital replacement, has been fairly stable since 1987 at the level of 1955-70, while capital expenditures as a percent of net cash income have been slowly rising since 1986. Despite an improved farm economy and lower interest rates, a number of factors have worked to hold new capital expenditures down. Farmers are continuing the trend of maintaining and repairing machinery and equipment and keeping items in service longer that began in the early 1980's when capital expenditures began to fall off dramatically. The percent of total production expenses for repair and maintenance has been fairly constant since then. More farmers are leasing equipment or contracting with others for custom work. Adoption of conservation tillage has reduced demand for tillage equipment and lowered the horsepower requirement per acre planted for farms using these technologies. Capital consumption of service buildings has decreased steadily since 1981, except for a small increase in 1995, as new expenditures fell as low as one-third of their 1979 peak during the 1985-92 period. In 1996, service building construction rose nearly $600 million to $2.3 billion, to about the same level as in 1982. Tractor and farm machinery capital consumption in 1996 was estimated at $10.7 billion, down 1.2 percent from $10.9 billion in 1995. After reaching a low point in 1987, tractor and farm machinery capital consumption climbed a little more than $1 billion in 1990. Since then, it has been essentially level, varying less than $250 million per year. Almost all of the increase from 1987 to 1990 was due to increases in tractor capital consumption, which has continued upward at a very slow rate. The overall increase in tractor capital consumption is due to both the climb in the average price of tractors, which elevates their replacement value, and increased purchases. Capital consumption of farm machinery and equipment was flat from 1987 to 1995, but fell more than $200 million in 1996 due to the smallest increase in the prices paid for machinery and equipment since 1987. Estimated investment in machinery and equipment in 1996 reached its highest point since 1990 at $5.5 billion, an increase of $450 million (8.8 percent) over 1995. Machinery and equipment purchases have stayed between $5.1 and $5.5 billion each year since 1991, after large increases in 1989 and 1990. A Look at Farm Sector Cash Income by Size Class Gives Insights Into Farm Diversity Farms With Sales Over $1,000,000 Focus on Livestock and Speciality Crops Examining the net cash income from farming and its various components by farm size provides insight into the diversity of the farm sector. Very large commercial farms (those that produced and sold more than $1,000,000 during the year), while less than 1 percent of the Nation's farm businesses, represent almost one-third of U.S. farm commodity sales. These very large farms tend to specialize in the production of fruits, vegetables, greenhouse, and nursery products, or in cattle, dairy, and poultry. Because of the commodity mix emphasized on these very large farms, government payments make up a smaller percentage of their gross cash income than typical of smaller size farms. The biggest cash expense for the very large commercial farms is feed, followed by labor, with the sum accounting for more than 40 percent of their total cash expenses. The importance of feed and labor expenses is likely due to the predominant types of farm enterprises--big feeding operations that require large quantities of purchased feed, or producers of high-valued crops which are relatively labor intensive. The very large commercial farms had a lower percentage of total expenditures for manufactured inputs, interest, and repairs and maintenance. (Manufactured inputs include fertilizer, lime, pesticides, fuel, oil, and electricity.) This suggests that the production expenses of many of these very large commercial farms are more heavily influenced by changes in the feed prices and labor wage rates than by price changes in manufactured inputs. Large- and Medium-Sized Commercial Operations Likely To Be Cash Grain Farms As farm size decreases, government payments and farm-related income become a larger share of farm receipts. Cash grain farms are concentrated in the large, upper medium, and lower medium commercial size classes. (These farms have gross annual sales of $100,000 to $999,999). Farms in these size categories spend a lower percentage of their total cash expenses on farm-origin inputs and cash labor, and higher percentages for manufactured inputs and rent to nonoperator landlords than the very large commercial farms. These farms are likely to see significant impacts on their expenses and returns from price changes in manufactured inputs and cash grains. Changes in cash grain prices also influence the amount they pay for farmland rental. Small Farms Likely To Have Negative Net Returns Small farms, those with sales less than $50,000 per year, receive a larger proportion of their cash receipts from farm-related income and government payments than larger farms. Sixty percent of the Nation's farms are in this group. About one-third of the small farms' commodity sales are derived from cattle and calves. Forest products are the second largest source of cash income. Government payments are an important source of cash receipts among the smallest farms. Turning to expenditures, small noncommercial farms use larger shares of their cash expenses on miscellaneous farm expenses, interest, and feed than all other expense items. The major miscellaneous expenses include insurance, other management items, tools and shop equipment, custom feeding fees, and health and breeding services and supplies. The aggregate net cash income for the smallest farms within this category (sales less than $20,000) is negative, implying that many of the smallest farms fail to make a profit. Debt Repayment Ability Improves, With Higher Income Levels and Favorable Interest Rates Offsetting Larger Debt Total farm business debt rose by almost $6 billion during 1996, reaching nearly $157 billion, its highest level since 1986 (USDA). The 1996 rise in debt was the largest in absolute terms since 1982, and the largest percentage gain since 1981. It follows increases of $4 billion in 1995, almost $5 billion in 1994, and about $3 billion in 1993. Though farm debt has risen almost $17.5 billion since 1992, a generally favorable interest rate environment has kept interest payments reasonable, and relatively high income levels have provided farmers with the cash to meet debt payments. Despite added borrowings, farm operations' ability to service their debt obligations improved in 1996, as higher net cash income and modestly declining interest rates lessened the impact of the increase in farm debt. Operators with debt are, in effect, using a portion of their credit capacity. Debt repayment capacity utilization, the ratio of actual debt to the maximum amount of debt supportable by net cash income available for loan payments, measures the extent to which farmers are using their potential credit repayment ability. (See AIS-58 for a description of this measure). 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. The 1996 net cash income gain of nearly $9 billion was not materially reduced by the interest expense rise of about $0.5 billion. Although rising in the middle of the year, average annual interest rates on new bank loans decreased from 9.5 percent in 1995 to 8.4 percent in 1996. Despite the substantial rise in debt, farmers did not borrow as much as they could have with the additional cash available to service debt. Debt repayment capacity utilization fell from about 56 percent in 1995 to less than 49 percent in 1996, as the relatively high 1996 net income more than compensated for rising debt and interest expense. For the first time since 1993, farmers ended 1996 owing less than half of the amount that they apparently could repay from their current incomes. Expanding Operations Using More Cash Than Debt Farm mortgage debt rose about 3 percent in 1996, a relatively modest increase given 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. Anecdotal evidence suggests that the price of land has been bid up by farmers seeking economies of size through expansion. However, these purchases of adjacent acreages by existing operations have been predominantly cash transactions. Land prices have risen in response to improved outlook for the sector, rather than as a result of rapid credit-financed expansion. While farm debt is rising, it does not appear to be increasing as rapidly as land values. Traditional lenders are competing effectively for new mortgage loans. Banks' real estate loan balances were up 5 percent in 1996. While this growth rate was relatively low compared with banks' gains in recent years, it remained the highest reported by any lender. Life insurance mortgages rose over 4 percent in 1996, and Farm Credit System (FCS) real estate debt increased about 3.5 percent. Life insurance companies and FCS experienced the first substantial increases in demand for their credit products in recent years. Nonreal Estate Debt Rising More Rapidly Than Mortgage Debt Farm business nonreal estate debt increased over 4.5 percent in 1996, and has risen over 17 percent from the beginning of 1993 through the end of 1996. During this same period, farm mortgage debt increased about 8 percent. This is due partially to the growing use of favorable credit terms offered by machinery manufacturers and input suppliers. While supplier credit originated as a means of increasing sales, the finance units providing this service have now developed into significant profit centers for their companies. The relative shift from real estate credit also reflects a rise in cash sales of farmland, which has reduced the demand for mortgages. Simultaneously, farmers' improved financial condition means that lenders are no longer requiring maximum securitization of short- and intermediate-term loans. Farm Credit System Reports Solid Growth The growth rate of FCS total farm loans outstanding increased from 1 percent in 1994 to 6.5 percent in 1996. 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 both 1995 and 1996. FCS now accounts for almost 19 percent of all nonreal estate loans, its largest share of this market since 1984. 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 modest gain in 1995, and a 3.5-percent rise in 1996. 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 Outlook for 1997 Total debt is projected to rise another $5 billion in 1997. Modestly higher interest rates may add to the negative impact of this continuing increase in debt on farm incomes. Reduced income levels will be further pressured by rising interest expenses. Taken together, these factors indicate that indebted farm operators will face a slightly less favorable financial climate in 1997. While lower commodity prices will translate into reduced receipts for many farm operations, most will have adequate income available to meet principal and interest payments on their loans. Reduced incomes and less favorable interest rates in 1997 suggest that some farmers may find it more difficult to service higher debt levels, as evidenced by the rise in debt repayment capacity utilization from 49 percent in 1996 to a projected 55 percent in 1997. However, there is little evidence that growing debt levels in 1997 will precipitate a recurrence of widespread financial stress in the sector. Farmers may face reductions in government support levels once the transition payment period ends. Recent price declines for grains and other commodities have reminded farmers' that farm product prices may not maintain lofty levels indefinitely. Therefore, farmers appear to have taken advantage of recent 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 over 3 percent in 1997, banks' reported early season demand for nonreal estate credit was up less than 2 percent. Farmers who benefitted from favorable conditions in 1996 may have adequate cash available to begin the 1997 season without drawing on operating credit lines. Although Input Expenses Rose in 1996, Strong Market Prices Led to Higher Net Returns Acreage and Prices Generally Up for 1996 Crops Acres planted to major U.S. crops in 1996 were up 5.1 percent over 1995 and were at the highest in 10 years. Harvested acreage also rose (4.2 percent) and was also at its highest in 10 years. Farmers planted 11.6 percent more corn, 9.4 percent more wheat, and 2.6 percent more soybeans. At the same time, acres planted to cotton, rice, sorghum, and sugarbeets fell. Despite production increases for many crops, prices generally remained high. The overall prices received index for crops was up 12.5 percent for 1996 over 1995. Input Prices Also Up The 1996 prices paid index for general inputs was up an average 5.5 percent, with wide variation among individual inputs. Fertilizer prices rose only 3 percent, as did chemical prices. Fuel prices, however, jumped nearly 12 percent over the relatively steady prices of the previous 4 years. How these input prices affected individual crop and livestock commodities depended on each enterprise's input mix. Feed prices were up an average 25 percent; exacerbating the trend toward lower cattle prices meant lower net returns to cattle producers. The same higher feed prices meant higher net returns to feed-grain producers. New Survey Data New survey data for grain sorghum, peanuts, and burley tobacco underlie the 1995 and 1996 estimates for those crops. In addition to the new data, the accounting framework and methodology for burley tobacco has been changed to reflect that of other field crops. Next year, the last two commodities, flue-cured tobacco and cow-calf production, will be brought into methodological consistency with the other Cost-of-Production commodities. New analyses are also available electronically for oats, sorghum, and peanuts. These short reports (titled Farm Business Economics Indicators Updates) provide preliminary analyses of the production systems used in growing these crops. The reports can be found on ERS' Internet website at http://www.econ.ag.gov/briefing/fbe in the publications section. Cost and Return Highlights by Commodity, 1996 Corn -- Unique market conditions in 1996 resulted in record returns to corn production. The average corn yield improved in 1996 to about 5 percent above the previous 5-year average. Despite higher yields, corn prices remained near $3.00 per bushel at harvest. This combination of relatively high prices and yields pushed the value of corn at harvest to a record high of $389 per acre. Average returns above cash costs, at $166 per acre, were also the highest reported by USDA since the costs and returns series began in 1975. Residual returns to management and risk ($22 per acre) were positive for the first time since 1980. Record returns to corn production in 1996, coupled with only a modest rise in costs, provided incentives for expanded acreage in 1997, but lower prices late in 1996 dampened expectations for 1997. Soybeans -- Both prices and yields of soybeans moved higher in 1996, resulting in record returns. Soybean prices rose above $8 per bushel in 1996 and settled near $7 at harvest, up about 10 percent from 1995. Yields were up slightly, somewhat above the previous 5-year average. Higher prices and yields sent the value of soybeans at harvest above $250 per acre, a record high. Likewise, average returns above cash costs, at $130 per acre, were the highest reported since 1975. Residual returns to management and risk were the highest reported since 1979. While costs showed only a modest increase, the record returns to soybean production in 1996 suggested incentives for expanded 1997 acreage that were spurred by rising prices in early 1997. Wheat -- U.S. farmers planted wheat on 75.6 million acres and produced about 2,282 million bushels, up 4.5 percent from 1995. However, harvested area and production of winter wheat dropped because of a harsh winter over major winter wheat growing areas, followed by drought conditions, especially in the Central and Southwest States. The area and production of spring wheat (including durum) increased because of mostly good to fair growing conditions and then dry weather at harvest time. Total cash costs of producing wheat rose 2.3 percent in 1996, while economic costs rose 6.2 percent. Total economic costs averaged $5.94 on a per-bushel basis, up 11.6 percent from 1995, primarily due to higher production costs and lower yields. Cotton -- U.S. farmers planted an estimated 14.4 million acres of upland cotton in 1996 (down 14 percent from 1995) and harvested 12.6 million acres (down 20 percent). However, higher yields led to about a 6-percent increase in 1996 cotton lint production. In addition, continued strong worldwide demand for cotton has resulted in continued higher market prices. The Southern Plains (particularly Texas) have continued to have weather-related problems which resulted in the abandonment of about 30 percent of the 1996 planted acreage but only a 2-percent reduction in production. The Southeast is continuing to be a strong force in U.S. cotton production. Total 1996 variable cash production expenses for the United States remained relatively unchanged from 1995. Overall, the prices that cotton producers paid for their purchased inputs were relatively stable from 1995 to 1996. Regional land costs, which were influenced by the higher value of cotton, were slightly higher. Rice -- Rice plantings were down in 1996, but yields were record or near-record highs across the Southern producing States. California yields were down slightly due to disease, weed, and weather problems. Production was only slightly above 1995, and lower beginning stocks kept supplies from growing. Continued tight stocks, especially for high-quality long-grain rice, helped boost prices and improve net returns. Increased returns substantially exceeded increased production costs in most areas. Costs were up mainly due to higher seed, fertilizer, and fuel prices. Sorghum -- Area planted to sorghum rose almost 40 percent, or 13 million acres, from 1995 to 1996. Production rose 75 percent to just over 800 million bushels. This was slightly higher acreage and slightly lower production than the previous high in 1992. As a result of higher production, the average harvest month price fell from $2.75 to $2.70 per bushel from 1995 to 1996. On average yields rose about 23 percent, and both gross value and returns rose as well. Variable cash expenses rose somewhat from 1995 to 1996, but fixed cash and economic costs were relatively unchanged during the period. Although residual returns to management and risk remained negative, they were considerably improved over previous years. Barley -- U.S. farmers planted barley on 7.17 million acres and produced about 397 million bushels in 1996. Area planted and production were 7 and 10 percent above 1995, respectively. At the national level, both yields and prices were higher in 1996. Rising input prices increased 1996 total economic costs 8.2 percent. With an average 1996 yield of 54.5 bushels per planted acre, barley growers would have covered all cash costs at $2.14 per bushel, and total economic costs at $3.72 per bushel. At the average 1996 harvest period price of $2.97 per bushel, only those growers with yields of 68.2 bushels or more and costs near the national average would have covered total economic costs. Oats -- Oat production continued to slide in 1996 as seeded area fell 26 percent and yields per planted acre increased just 6 percent. As a result, oat prices were up substantially in 1996. Higher values for both oat grain and oat straw boosted total value of production. With value of production strongly exceeding a rise in costs, net returns more than tripled and residual returns to management and risk moved from negative to positive on a national level. Much of the increase in costs was due to higher prices for seed and fuel. Sugarbeets -- U.S. farmers planted beets on about 1.37 million acres and produced 26.57 million tons in 1996, 5.3 percent below 1995's production. Yields per planted acre were very similar to those of last year. However, the influence of weather on yields varied among the beet producing regions. Beet yields were slightly higher in all regions except the Great Lakes, where cool summer weather conditions slowed beet development. Rising input prices resulted in a 2.3-percent rise in total variable cash costs. Hired labor, chemicals, and fertilizers were the major cash expenses, accounting for about 60 percent of total variable costs. In 1996, expenses for these three inputs rose an average 3.5 percent over 1995. Costs of processing the 1996 beet crop rose 2-3 percent from 1995. Total processing costs are estimated at 12.498 cents per pound, an increase of about 0.3 cent over the previous year. Sugarcane -- Total cash expenses for growing an acre of sugarcane in 1996 fell by 1.1 percent. Hired labor is the largest single cost component for growing sugarcane, and lower 1996 wage rates caused labor expenses to fall. Fertilizer expenses also fell due to Florida's growers using more potash than nitrogen. Potash prices fell in 1996 while nitrogen prices rose. The higher nitrogen prices caused USDA's fertilizer prices paid index to rise but had minimal effect on sugarcane growers. Also, beginning in 1995, the Everglades Restoration Tax has been added to Florida costs, raising U.S. fixed costs. Cane yields were essentially unchanged at the national level. However, lower 1996 sugar recovery rates were responsible for a 3-percent rise in variable cash growing expenses at the cents-per-pound-of-sugar level. Processing the 1996 crop cost about 2 percent more per pound of sugar than in 1995. Most of this was due to the lower sugar recovery rates. Peanuts -- Area planted to peanuts continued falling--down 8 percent from 1995 to 1.4 million acres in 1996. Production was up 5 percent from 1995 levels at 3.6 billion pounds, but still below 1994 levels. Although the quota price was unchanged at $678 per ton for the 1995 and 1996 crops, the average harvest month price fell from 29 cents per pound in 1995 to 26 cents per pound in 1996. On average, yields rose 13 percent to 2,443 pounds per planted acre, and returns rose as well. Residual returns to management and risk were positive in 1996--higher gross value combined with lower fixed costs more than offset higher variable cash expenses. Flue-cured tobacco -- Adverse weather conditions in the Southeast at harvest time, which prompted concern about shortfalls in supply, boosted early market prices for 1996 flue-cured tobacco. By the end of harvest, however, production was up about 22 percent from 1995. As a consequence, farmers sold flue-cured tobacco at higher prices than in 1995. Variable costs of producing an acre of flue-cured tobacco in 1996 averaged $2,026, up almost 7 percent from 1995. Among the cost components, selling costs (includes warehouse fees, no-net-cost, marketing assessments, and inspection and grading fees) increased the most (17 percent). The next largest expense item change was in fuel-related costs (up 15 percent), followed by chemical costs (up 4 percent). Total 1996 ownership costs per acre declined by about 1 percent ($564 to $559). Of the ownership costs, taxes and insurance costs decreased the most (4 percent). Both general farm overhead and land and quota costs increased by 14 and 12 percent, respectively, reflecting the effects of an increase in yield of 218 pounds per acre. Burley tobacco -- Burley tobacco production was 29 percent above 1995. The variable costs of producing and selling burley tobacco increased from $1,249 per acre in 1995 to $1,343 in 1996. Total fixed costs decreased from 1995 to 1996 by almost $61 per acre. Selling costs (marketing fees, no-net-cost and marketing assessments, and inspection and grading fees) rose by $28 in 1996. The largest changes among all individual cost items per acre between 1995 and 1996 were general farm overhead (down 21 percent), and labor (up 15 percent), followed by selling expenses (up 13 percent). General farm overhead was lower, as were all allocated costs, as a result of burley tobacco's lower contribution to the overall value of production of the farm. While the gross value of production for burley tobacco was higher in 1996 than in 1995, all other farm enterprises together were higher. Land and quota charges increased from $955 per acre in 1995 to $1,008, because of both higher yields and market prices. Milk -- Cash and economic costs of producing 100 pounds (cwt) of milk in the United States in 1996 were up 6 and 3 percent, respectively, from 1995. Most of the increase in costs was due to higher feed costs. Obtaining enough quality forage for the existing herd was a challenge over much of the country. Even concentrate availability became a factor. Very low grain stocks meant no guarantee of a steady flow of concentrate ration of a reasonably constant composition. Supplies of high quality alfalfa were also very tight. Although 1995 alfalfa production was large, a relatively small share was dairy quality. By the spring of 1996, stocks of good forage were largely exhausted. Cool, wet weather over much of the country delayed hay and pasture development and slashed quality. Later cuttings also had widespread quality problems. High concentrate prices magnified the forage quality problems. Nevertheless, higher milk prices in 1996 outpaced the increase in costs of grain and other concentrates. Higher milk prices helped boost 1996 returns to dairy farms, particularly for producers who grew their own feed grains or who priced their feed ahead. The U.S. gross value of production less cash expenses rose more than $1 from 1995. While residual returns to management and risk remained negative, they also posted an improvement of more than $1 from 1995. Hogs -- Higher hog prices during 1996 were mostly offset by higher feed costs. Market hog prices varied in the $50-$60 per cwt range during much of 1996, up from $40 to $50 in 1995. Feeder pig prices were also up sharply from 1995, mostly in the $70-$80 range. However, the higher corn and soybean prices that benefited crop producers offset much of the additional income from higher hog prices. Feed costs rose about 30 percent among all producer types. Average returns above cash costs improved for market hog producers, but changed little for feeder pig operations. Residual returns to management and risk changed little among hog producers and remained negative as it has since 1992. Negative average farm returns to resources used in the hog sector helps to explain the continually declining number of hog operations. Cow-Calf -- Cash and economic costs for U.S. cow-calf operations increased in 1996. Producers operated under the pressures of high grain prices, large cattle supplies, bad weather conditions, and poor feedlot returns. While much of the Central Plains and southwestern United States dealt with drought conditions, the northern States experienced unusually wet conditions. Hay supplies were tight due to supplemental drought feeding during the summer. Accumulated pasture growth for grazing last winter largely ended in most areas by early November. Cool, wet weather resulted in disappointing wheat pasture growth, although planted acreage was up sharply and emergence was above average. While 1996 grain prices held down feeder cattle price gains, tight forage supplies and relatively low feeder cattle prices resulted in continued large cow slaughter. As more beef moved through the market, cattle prices declined. The total gross value of production in 1996 was down 13 percent from the previous year. General Economy Strong in 1997, Speedup from Moderate 1996 Low inflation, moderate interest rates, and strong GDP growth in 1997 are providing good support for the agricultural sector. International events pose the major short-run risks to the domestic macroeconomy. Despite moderate GDP growth and rising oil prices in 1996, macroeconomic events were very favorable to agriculture--as they have been throughout the nineties. Strong 1997 Gross Domestic Production (GDP) growth and continued low inflation are helping to keep farm income high. Slowing Asian growth and financial instability in the region, together with the appreciation of the dollar, may affect trade in 1998 and beyond. U.S. economic growth for 1997 will be about 3.8 percent, stronger than in 1996. Despite faster growth, inflation is modestly lower than last year and interest rates are similar to 1996. Pressures on farm costs coming from the nonfarm sector are even less than in 1996. The low general and wage inflation and flat to declining energy prices will help keep farm expenses steady. Nonfarm inputs price gains will be small. Economy-wide producer prices dropped sharply in the first half of 1997, and are unlikely to show much of an increase for the year as a whole. In particular, energy and fertilizer prices should be flat or declining relative to 1996. One source of cost pressure in nonfarm-based inputs is coming from labor. Minimum wage increases and tight labor markets in rural areas will mean modest increases in farm labor costs and labor-intensive services. Tight labor markets are a two-edged sword for farm households, pushing up farm labor costs but also improving off-farm employment and earnings prospects for farm families. Recent job reports suggest that nonmetro jobs have grown about as fast as jobs in metropolitan areas. This has been the trend since 1991. If it continues, this will be the first economic recovery in the last 25 years where nonmetro job growth has been as fast as metro job growth. This will aid farm families in adjusting to lower government support payments. As many farm households are substantially dependent on off-farm income, the good rural economy will partly offset a mild decline in farm income relative to 1996. Total farm household income from all sources should be very strong in 1997. Strong import growth, a result of good income growth and a strengthening dollar, will mean a larger U.S. trade deficit in 1997. This will support growth with our major trading partners. The dollar is expected to average 10 percent higher for 1997 than 1996, as measured by the Federal Reserve Board's trade-weighted exchange rate. Weak economic performance in Japan, the end of dollar pegging in Southeast Asia (Thailand and Malaysia), and slower income growth in Asia, including China, are a potential drag on farm exports. However, many of the 1997 farm sales to Japan are already in the pipeline. Further, as a developed country, the income elasticity for food imports is low in Japan. High-valued product sales to South Asia will be weak in 1997, but this is a relatively small market for these products. Feed and food grain sales to the region will be only modestly affected. The net impact of the recent Asian macroeconomic events on agriculture will be small in 1997. Commodity market conditions, not global macroeconomic developments, are behind the decline in the value of U.S. agricultural exports in 1997. Looking beyond 1997, it is hard to find anything in the domestic outlook situation that suggests recession or a significant rise in inflation in 1998. The biggest questions are international, and many of those focus on the adjustment to currency devaluation and somewhat slower growth this year in Southeast Asia and the uncertain path of the Japanese economy in coming months. Moderate GDP and jobs growth, low producer price inflation, and the continued weak dollar supported a strong gain in 1996 farm income. U.S. GDP in 1996 grew by 2.8 percent, somewhat faster than in 1995. Job growth was rapid--payroll employment rose almost 2.0 percent as about 2.3 million jobs were added to the economy. Economic growth in late 1995 and early 1996 was weak enough that the Federal Reserve, apprehensive about a possible recession, lowered the Federal Funds rate (the rate at which banks lend each other money to meet reserve requirements) in January 1996. This cut in short-term rates contributed to accelerating growth late in 1996 and into 1997. For 1996, the average 3-month T-bill yield fell from 5.5 percent in 1995 to 5.0 percent in 1996. The bank prime rate moved in lock-step with the short-term rates. Fed policy has its largest impact on short-term rates. The average 10-year Treasury bond yield, a measure of longer term interest rates, averaged 6.4 percent, essentially unchanged from 1995. Crude oil prices at the end of 1996 were up almost 30 percent from the end of 1995. While some analysts had expected higher energy prices to lead to a general price rise, inflation actually slowed from 1995's rate. The interest rate and inflation environment supported farm income by holding down the increase in farm production costs during 1996. Higher energy prices were the largest cause of cost increases coming from outside agriculture. The large boost in energy costs kept fertilizer prices high and caused fuel prices to rise sharply. However, much of the fuel was purchased in the first half of the year before fuel prices rose. Electricity prices rose as utilities passed on their higher energy costs. Largely because of higher energy prices, manufactured inputs expenses rose 8.5 percent in 1996. General inflationary pressures had much less of an impact on the prices of other nonfarm inputs. Wages rose less than 3 percent, and marketing, storage, and transportation costs fell by 5 percent. The dollar, while appreciating about 3.4 percent, was still relatively low compared with the 1980's. The weak dollar and improving world growth in 1996 helped boost farm exports and supported crop prices. Strong foreign GDP growth boosted demand from key foreign markets during 1996. Asian growth continued to lead world economic growth, led by China's growth of nearly 10 percent. Mexico recovered from the peso crisis with GDP growing 5.1 percent. This economic growth, particularly in the developing economies, is an important factor in the growth in U.S. exports of feed grains, soybeans, meat, and other high-valued products. Agriculture Likely To Produce Strong 1997 Income -- Though Earnings Not Expected to Equal 1996 Record The Economic Research Service (ERS) forecasts 1997 farm net cash income will be close to the 1990-96 average of $54 billion, down from the nearly $60 billion record level now estimated for 1996. Net cash income does not consider changes in farm inventories of crops and livestock. Net farm income, which does include changes in farm inventories, is also forecast close to its 1990-96 average of $44 billion following a record $52 billion for 1996. The September update of the 1997 forecasts of both net cash and net farm income remain near June's forecast. Crop Receipts To Decline From 1996, But Should Remain Near Record ERS forecasts that farmers will earn slightly less from 1997 crop sales than the record $109 billion for 1996. Lower feed grain prices due to expanding grain supplies explain most of the expected decline. Thus far in the 1990's, farmers have earned an average $91 billion per year from crop sales, which provided 46 percent of their gross cash income. Lower corn receipts are expected for 1997. Before the 1996 harvest, U.S. corn stocks had dipped to just 5 percent of annual use for feed, seed, and exports, compared with an average 17 percent before the 1990-95 harvests. Production in 1996, although not a record, was well above average, allowing stocks to rebuild to 11 percent of annual use. With the 1997 corn harvest expected to be as large as 1996, stocks should remain around 10 percent of annual use. Corn prices for the first quarters of 1997 were already considerably lower than the same period for 1996, and despite the good crop this year, farmers are expected to earn less from corn in 1997 than the record $21.5 billion earned in 1996. Even so, farmers' 1997 earnings from corn should be well above their average annual $16 billion during 1990-95. Following corn, wheat is forecast to be the second largest negative year-to-year influence among crops on changes in 1997 from the prior year's levels of farm income. Farmers have produced the biggest wheat crop in 1997 since 1990, increasing stocks for the second year from the low levels reached before the 1996 harvest. Wheat prices are likely to fall to well under 1996 levels, pushing wheat receipts well below 1996. Still, wheat receipts for 1997 are likely to be more than the $7.8 billion annual average for 1990-96. Soybeans will be the crop with the largest positive year-to-year influence on 1997 farm income. Acreage increased substantially in 1997 and is forecast to produce a record soybean crop. In contrast to corn, strong export demand by countries such as China, is expected to prevent large price declines. If soybean prices continue to be strong, in combination with abundant production, 1997 soybean receipts will be well above its $12.5 billion 1990-96 average, possibly even a new record. Livestock Receipts Forecast Higher Than in 1996 Livestock receipts in 1997 should increase from the $93 billion attained in 1996. Higher beef cattle prices -- a product of reductions in the beef herd -- will be the most important influence. This should be the turnaround point from the 3 years of steady decline in cattle and calf receipts. Yet, the expected value of cattle sales will not reach the average of $36 billion for the 1990's. Receipts for hogs are forecast up, but dairy receipts are forecast down. With hog production expected to be at least as high as in 1996, hog receipts in 1997 will exceed the $12.6- billion achieved in 1996 and possibly set a record. For perspective, hog receipts averaged $11 billion in 1990-96. Dairy could have the largest negative influence on changes in 1997 farm income for 1996 of any type of livestock. Consumer demand for cheese and other dairy products was strong in 1996, partly due to the robust economy, while dairy production dipped slightly. This led to the highest dairy prices in the 1990's. Dairy prices are forecast to decline in 1997 as milk production increases slightly, causing dairy receipts to dip below the $23 billion reached in 1996. They should remain, however, above the $19 billion 1990-96 average. Propelled in part by growing export sales to the countries of the Newly Independent States and China, poultry receipts have increased each year since 1992. In 1997, poultry receipts could be slightly higher than the record $22 billion in 1996, and possibly exceed dairy receipts for the first time. Poultry receipts averaged $17.5 billion a year during the 1990's. Government Payments Will Change Little in 1997 Government payments to farmers in 1997 will be close to the $7.3 billion of 1996. During 1990-96, farmers received 5 percent of their cash income from government payments, which averaged about $9 billion per year. For the second year, the 1996 Federal Agriculture Improvement and Reform Act will largely determine how much payments farmers receive, though transactions still pending from the previous farm legislation will have some influence. Total Production Expense Forecast Moderately Higher in 1997 Total farm production expense, used to calculate net farm income, could increase less in 1997 than the 4-percent increase in 1996. Lower feed prices is the major factor dampening production expenses. Higher prices for labor and feeder livestock are forecast to be among the strongest upward pressures on farm expenses. Feed is the largest single farm production expense, averaging $22 billion in 1990-96. Lower corn prices should reduce 1997 feed expenses from the record high of 1996. Farmers devote 15 percent of their feed dollars to shelled corn, and corn is also an important ingredient in mixed feeds. Feeder livestock, young livestock to feed for later resale, are among the largest farm input expenses, averaging $13 billion during 1990-96. Young beef cattle account for about 80 percent of the total. The higher beef prices that are expected to increase cattle producers' receipts in 1997 will also drive up feeder cattle prices, resulting in higher 1997 feeder livestock expenses than in 1996 when beef cattle prices were lower. Farm labor expense, averaging $15 billion per year during 1990-95, is forecast to increase for the sixth consecutive year in 1997. The increase will come largely from higher wages rather than from a higher number of people employed on farms. The strong national economy is creating increased competition for workers in 1997, and farmers may have to pay higher wages to compete. Farm Assets, Debt, and Equity Keep Rising as Farm Income Grows The value of farm sector business assets rose 6.2 percent in 1996 to $1 trillion. Farm asset values are expected to grow another 4.5 percent in 1997, supported by growth in returns to farm assets. Farm Real Estate Values Rising Expectations for continued strength in farm income and agricultural exports and stable interest rates are key factors supporting strong demand for farmland, machinery and equipment, and other farm assets. Farm real estate asset values are expected to increase 5.3 percent in 1997. This is slightly less than the projected 7.4 percent increase in 1996. Nonreal estate assets are expected to rise about $34 billion (1.5 percent) in 1997. The value of machinery and equipment, inventories of crops and purchased inputs, and financial assets are all expected to rise slightly. However, the value of livestock and poultry inventories is expected to decline. Farm Debt To Expand by $5 Billion in 1997 Total debt is forecast to rise another $5 billion in 1997. Total farm business debt rose by almost $6 billion during 1996, reaching nearly $157 billion, its highest level since 1986. The 1996 rise in debt was the largest in absolute terms since 1982, and the largest percentage gain since 1981. It follows increases of $4 billion in 1995, almost $5 billion in 1994, and about $3 billion in 1993. Farm Sector Equity Growth Continues The nominal value of farm business equity has risen for more than a decade. Significant gains are expected in 1997 as farm asset values rise faster than farm debt. Farm sector equity in 1997 is expected to be almost $100 billion more than in 1995, and over $300 billion greater than in 1985. If the farm equity estimates are adjusted for inflation, the real value of farm sector wealth in 1997 is still $519 billion below the inflation-adjusted value of farm equity in 1980. Dividing the dollar value of farm equity by the 1992 Gross Domestic Product (GDP) deflator for each year yields an estimate of "real" farm equity in constant 1992 dollars. Accordingly, real farm equity in 1997 is forecast to be $832.1 billion. Real farm equity peaked at $1.4 trillion in 1980. Debt-to-Asset Ratio Continues Downward Solvency indicators remain favorable for 1996 and 1997. The debt-to-asset ratio indicates the relative dependence of farm businesses on debt and their ability to use additional credit without impairing their risk-bearing ability. The debt-to-asset ratio is forecast to be 14.9 percent in 1997, compared with 15.0 percent in 1996. The debt-to-asset ratio has changed markedly from 1985 when the debt-to-asset ratio was 23 percent. The debt-to-equity ratio is forecast at 17.5 percent in 1997, compared with 17.7 percent in 1996. Farm Sector Investments Remain Profitable Rates of return on farm assets and equity are indicators of the profitability of farm investments. Rates of return on assets and equity from current income (excluding capital gains) rose in 1996. Total rates of return on farm business assets (current income plus real capital gains) are estimated at 5.9 percent in 1996 (4.2 percent growth in current income and 1.7 percent growth in real capital gains). However, the lower farm income forecast, and the continued rise in farm sector assets and equity values, suggest slightly lower rates of return in 1997. Total returns on farm business assets are forecast at 5.2 percent in 1997 (3.5 percent growth in current income and 1.7 percent growth in real capital gains). Debt-to-Net Cash Flow Improves Net cash flow measures the net cash resources available to farm businesses for investment in the sector, and to meet current debt obligations. Net cash flow, unlike net cash income, accounts for both internal and external sources of funds. ***Begin box : Net cash flow (after interest expenses) is defined as: Net cash income + change in farm business debt + 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.... 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 expenses) fell from as high as 6.0 to 2.3 in 1993, below the pre-boom 1970-74 average of 2.4. However, this ratio rose to nearly 3.0 percent in 1994 and 1995 as debt levels rose and growth in net cash flow moderated. The ratio of debt-to-net cash flow fell, once again, to 2.5 in 1996 as net cash flow grew faster than farm debt. A marginal rise to 2.9 is forecast for 1997, but this is still within the 2 to 3 "historic low" range. According to this measure, farm investors have ample cash resources to buy farmland and farm machinery and to meet current debt obligations. Special Article Introduction of Size Class for Value-Added Accounts By Roger Strickland and Cheryl Steele The United States Department of Agriculture (USDA) publishes its income accounts disaggregated by size-class in order to provide an additional perspective on the activities and participants in U.S. farming operations, which supplements the information in the sector accounts. This additional information enables a more complex analytical evaluation of the economics of the U.S. agricultural sector. At this time, a disaggregation of the value-added accounts into size-class accounts is being developed to complement the traditional cash income size-class information (tables 7 & 8). Value-added is a production-based measure, i.e., the creation of new income through production; while cash income is a measure of solvency, i.e., ability to meet current debt repayment and family-living obligations. Thus, important new information is made available in size-class accounting, permitting a more complete evaluation of the sector. The account component "final agricultural sector output" is the total of all production from resources controlled by farming operations. In table 7, 29 percent of final output was produced by eight-tenths of one percent of all farms, which are those with production valued at $1 million or more. At the other end of the spectrum, the smallest 61 percent of farms (less than $20,000 of production) generated 7 percent of the farm sector's output. When combined, the three largest size-classes for farms, with production in excess of $250,000, comprised 5.8 percent of farm operations and accounted for 56 percent of production. Thus, the U.S. farm sector has two distinct groups of producing operations defined as farms--the less than 10 percent of farms that create a majority of production and a majority of farms that create less than 10 percent of production. A complete interpretation of all the information generated by the size-class table is beyond the scope of this publication, but some important facts and relationships pertaining to these two bi-polar groups will be identified and discussed, which hopefully will serve as a guide to readers in mining the statistics for additional information. Distribution of production: Converting the values expressed in table 7 into percentages of the national totals, it is apparent that the shares of production of crops and livestock originating from the two groups is about the same, with the larger farms producing a majority of each. Livestock production is a little more concentrated on the larger farms, reflecting economies of size available in production of poultry, hogs, milk, and beef feedlot operations. Services and forestry production presents a contrast, but that is due primarily to the influence of "gross imputed rental value of dwellings." There is a correlation between the number of farms and the number of farm dwellings; and consequently, gross imputed rental value of dwellings comprises almost half of the "services and forestry" account. Production Production of $250,000 of less than or more $20,000 -----Percent----- Number of farms 5.8 60.6 Crop output 56.6 3.6 Livestock output 61.9 4.3 Forestry and services 31.3 32.7 Total of all output 56.5 6.7 Productivity is higher on larger farms: The larger farming operations are more efficient in production activities than the smaller operations in that they produce a larger share of the output with a smaller share of the costs, as is evidenced in the following distributions developed via conversions of the values expressed in table 7 into percentages of the national totals. Producing 56 percent of the total output, the larger operations generated 60 percent of the gross value-added, indicating that they expended proportionately less on intermediate consumption outlays. The larger operations produced 68 percent of net value-added via considerable savings on capital consumption, as the smaller operations have a disproportionate share of motor vehicles and buildings relative to their value of production. The larger operations earned 79 percent of net farm income for their operators, indicating higher productivity in the employment of factors of production: land, labor, and capital. Production Production of $250,000 of less than or more $20,000 -----Percent----- Number of farms 5.8 60.6 Total of all output 55.4 6.7 Gross value-added 60.3 3.3 Net value-added 68.3 -4.0 Net farm income 79.0 -13.9 Factor payments: Expenditures for the factors of production (hired labor, rented land, and borrowed capital) reflect significant structural differences in the large and small farming operations. The operator and family members furnish most of the labor required on the small operations; and as a group pay only 3.5 percent of the sector's total labor costs. It logically follows that the largest operations would have to incur a large share (75 percent) of the sector's labor costs, as not only is the labor input from the operator and family limited but management activities may be a more profitable use of their time. Likewise, the smaller operations pay an even smaller share of the net rental payments for land to nonoperator landlords, because the smaller operations tend to own their land and often look to alternative sources of income rather than expansion of farming activities through renting land from others. Production Production of $250,000 of less than or more $20,000 -----Percent----- Number of farms 5.8 60.6 Factor payments 55.1 8.1 Employee compensation 74.8 3.5 Net rent received nonoperator landlords 49.5 3.1 Total of all output 38.5 18.7 Negative numbers tell a story: Four negative numbers appear in the size-class accounts presented in table 7, and each is quite logical when put in perspective. Net government transactions are negative for both the $1,000,000-and-over group and $20,000-and-less group, but the causes are different. (The negative indicates that they are paying more in taxes and fees to government entities than they receive in direct payments under government programs.) Congress imposes limitations on the amounts that individual farming operations may receive under Federal programs. Many of the largest operations produce livestock or fruit and vegetable crops not covered under Federal programs. The negative in net government transactions for the smaller group reflects the relatively high property taxes paid by small producers due to the disproportionate value of total assets comprised by both farm dwellings and motor vehicles. The impact is also seen in the size of the share of capital consumption and interest on real estate incurred by the smallest operations, as they generally have considerably more than would appear to be justified if the sole objective were to maximize profitability of the farm operation. Both net value-added and net farm income are negative for the $20,000-and-less group of farms, which again reflects the rural-living aspects of these small operations, where supplemental income from off-farm sources generally is greater than the income from farming activities. Typically the value of buildings, particularly dwellings, and motor vehicles far exceeds what would appear to be justifiable for the farming activities. The implication is that the operators may be consuming elements of the rural lifestyle that are not subject to market transactions and which are not included in the agricultural sector accounts. Production Production of $1,000,000 of less than or more $20,000 -----$1,000----- Net government transactions -274,960 -566,083 Net value-added 33,912,596 -3,844,273 Net farm income 23,113,300 -7,286,828 In summary, the disaggregation of the value-added accounts into size-class accounts provides significant new information about the U.S. farming sector and supplements the previously published size-class information for the cash income accounts. The size-class accounts significantly enhance the national accounts for the agricultural sector by allowing analysts to peer inside the sector to observe the status and differences among groups of farm operations. The value-added size-class accounts complement the cash-income size-class accounts by providing a different perspective of the exact same population of farms within each size group. The Methodology Underlying the Concept of Size-Class Accounting Disaggregation of the national value-added and income accounts provides additional perspectives on the U.S. agricultural sector, which can be invaluable when conducting an analysis of the sector and its participants. The size-class accounts are a case in point. The disaggregation of the national accounts into size-classes results in a particularly useful set of statistics, which enable users to identify and assess trends and conditions related to structural and performance issues involving both farmers and the agricultural sector. Size-class accounting is an analytical method that enables the observation of the agricultural sector's farming activities in each of the several size groups. In using annual data alone, this approach cannot be a tool for a time series analysis, but nevertheless, it does provide snapshots, with each revealing attributes of the participants within the groups at a point in time. Through analysis, one can link the attributes and establish changes occurring between the snapshots; thereby identifying trends evolving within and between groups over time. Conclusions can then be drawn about underlying causal factors and expected future trends. However, in using the information, clients should understand how the data are developed so as to not make inappropriate applications nor draw erroneous conclusions in any analysis based on the data, which can easily occur if the objectives of the inquiry extends beyond the parameters for which the data have relevance. An explanation of the methods used in developing the size-class accounts is presented here for the benefit of clients who may wish to further their understanding of the data. USDA size-class accounts are determined based on a well-defined set of criterion which are inclusive of all sales of crops, livestock, poultry, and livestock products; the value of product removed for all crops, livestock and poultry produced under contract; sales of all miscellaneous agricultural products; all government agricultural payments; and landlords' share of government payments and crops within a given calendar year. The size-class definition employed here is consistent with that used by the Economic Research Service and the National Agricultural Statistics Service, including the survey design and the tabulation of results from the 1995 Farm Costs and Returns Survey (FCRS). As a point of interest, beginning with 1996, the FCRS was merged with another survey and the named changed to the Agricultural Resource and Management Survey (ARMS), thus references in this article to either survey should be viewed as one and the same. In estimating size-class accounts for the U.S. agricultural sector, sufficient data are simply not available to enable a direct estimation of size-class accounts. Agricultural sector value added and income accounts are disaggregated into size-class estimates using a set of causal or same variables from the Agricultural Resource and Management Survey. Survey data are used as a basis for determining size-class distributors of national accounts. In cases where official sector estimates represent a direct use of survey data, for instance, farm origin inputs, the value is used directly as the distributor. In other cases, for example, in distributing capital consumption, the value of all assets is used as a proxy to distribute the component account capital consumption based on size class. The value of all assets was chosen as the proxy for distributing the account because the objective is to get the best possible variable that would measure the replacement cost of a capital asset in the case of irreparable damage. In the approach employed, the objective, in essence, is to develop size-class distributors using the best data available to disclose estimates of the shares of each line-item in the sector value-added and income accounts attributable to farming operations within each size class. The shares, expressed as percentages, are placed in a matrix in which the rows correspond to the national value-added accounts table (see table 1). The columns represent the size-class breakouts into which the farm operations are partitioned. (Each row sums to 100 percent, representing a complete accounting of the sector estimate for each line item.) When appropriately positioned by row (account component) and column (size-class), the multiplication of each percent times the corresponding account value (row) in the national value-added estimates' table yields a value of that component measuring the contribution of that size class. Thus, the monetary contributions of farming operations within all size classes are displayed along with the total national estimate for each line item of the value-added accounts. Again, where possible, the data series used to distribute a component item duplicates the component in definition, if not in value. When matches in definition are not available, data series used for distributing the value-added accounts are evaluated and selected for the most similarities in composition, for example, in the case of measuring electricity. For example, the all utility expense account was selected as the distributor by which to disaggregate the electricity component. In those situations where reliable data comporting to represent similar measurements are not available, alternative series are evaluated for correspondence in distributions by size of operation because they are affected by the same causal or decision variables. As previously noted, the source of the data utilized as distributors is the Agricultural Resources Management Survey. The survey design for the ARMS produces much information that is consistent in definition with the components of the national value-added and farm income accounting model. As a general rule, ARMS information is not considered for use if the coefficient of variation (cv) exceeds 50 percent; and in cases where the cv exceeds 25 percent, it must be footnoted on the table publishing the value. In the example of the 1995 sales class table presented in this publication, only one statistic employed had a cv between 25 and 50, namely contract labor in the $100,000-$249,999 size class. Statistics with a coefficient of variance above 50 must have the associated cv published with the data value from the survey. None of the statistics had cv's above 50. Some component items typically displayed in the value-added tables may be derived as the sum of subcomponents for which distributions are estimated but not published. To illustrate the methods introduced above, the selection of data series employed to distribute individual components of the national value-added and farm income accounts by size class for 1995 are identified in the next section. An explanation of each data series in the set of distributors is included for the reader's edification. The matrix of distributors used in producing the 1995 value-added accounts (see table 8) are exhibited in table 9. List of Tables Text Tables Net Farm Income Estimates, 1996 1. United States: Value added to the U.S. economy by the agricultural sector via the production of goods and services, 1992-96 2. Farm income indicators, 1992-96 3. United States: Net cash income from farming operations 4. United States: Leading commodities for cash receipts, 1996 5. Number of farms and net cash income by sales class 6. Farm debt , December 31, selected years 1984-96 Special Article Tables 7. United States: Number of farms, value added and net farm income by value of size class, 1996 8. United States: Number of farms, value added and net farm income by value of size class, 1995 9. United States: Share factors used to distribute National estimates for number of farms, net value added, and net farm income by value of size class, 1995 Appendix Tables Farm Sector Forecast 1. Farm income statements, 1992-97F 2. Deriving farm operator household income estimates from the Farm Costs and Returns Survey (FCRS) that are consistent with the Current Population Survey (CPS) methodology, 1992-97F 3. Relationship of net cash income to net farm income, 1992-97F 4. Cash receipts, 1992-97F 5. Farm production expenses, 1992-97F 6. Farm business balance sheet, 1992-97F 7. Farm sector rates of return, 1992-97F 8. Farm financial measures, 1992-97F Farm Income and Cash Receipts by States 9. Farm marketings, 1995 and 1996, government payments, 1996 and principal commodities, 1996, by State 10. Net farm income by States, 1995-96 11. State rankings for net farm income: total, per farm operation, and per acre, 1996 Cost of Production 12a. U.S. feed grains production cash costs and returns, 1995-96 12b. U.S. feed grains production economic costs and returns, 1995-96 13a. U.S. food grain and sugar crops production cash costs and returns, 1995-96 13b. U.S. food grain and sugar crops production economic costs and returns, 1995-96 14a. U.S. oilseeds and cotton production cash costs and returns, 1995-96 14b. U.S. oilseeds and cotton production economic costs and returns, 1995-96 15. U.S. tobacco flue-cured tobacco production cash costs and returns, 1995-96 16a. U.S. tobacco burley tobacco production cash costs and returns, 1995-96 16b. U.S. tobacco burley production economic costs and returns, 1995-96 17a. U.S. cow-calf production cash costs and returns, 1995-96 17b. U.S. cow-calf production economic costs and returns, 1995-96 18a. U.S. milk production cash costs and returns, 1995-96 18b. U.S. milk production economic costs and returns, 1995-96 19a. U.S. hog production cash costs and returns, 1995-96 19b. U.S. hog production economic costs and returns, 1995-96 List of Figures Net Farm Income Estimates, 1996 Figure 1 - Net Value added, net farm income and net cash income, 1992-96 Figure 2 - Net Value added by farm sector, shares to farm operator and nonoperator participants, 1992-96 Figure 3 - Final Crop and animal output, 1990-96 Figure 4 - Corn, soybeans, and wheat production, 1990-96 Figure 5 - Final agricultural sector output and intermediate Figure 6 - Direct Government payments and farm sector payments to government, 1980-96 Figure 7 - Monthly corn prices, 1994-96 Figure 8 - Monthly wheat prices, 1994-96 Figure 9 - Monthly soybean prices, 1994-96 Figure 10 - Monthly cotton prices, 1994-96 Figure 11 - Monthly beef prices, 1994-96 Figure 12 - Monthly hog prices, 1994-96 Figure 13 - Farm business debt still rising, but still below early 1980's Figure 14 - Interest expenses rising since 1994, but below the early 80's Figure 15 - Banks' share of farm business credit stable, Farm Credit System's share rising rapidly Figure 16 - Farm Operators' Actual Debt Figure 17 - Utilization of debt repayment capacity lower in 1996, remaining in acceptable range Cost of Production for Crops and Livestock, 1996 Figure 18 - Feed grain production costs Figure 19 - Food grain and sugar crop production costs Figure 20 - Oilseed and cotton production costs Figure 21 - Hog Production costs Figure 22 - Cow calf production costs Figure 23 - Milk production costs Figure 24 - Feed grain cash returns Figure 25 - Food grain and sugar crop cash returns Figure 26 - Oilseed and cotton cash returns Figure 27 - Hog cash returns Figure 28 - Cow calf cash returns Figure 29 - Milk cash returns Farm Business Outlook Figure 30 - U.S. agricultural exports and exchange rate, 1980-96 Figure 31 - Debt-to-net cash flow, 1970-96, with 1997 forecast END_OF_FILE