AGRICULTURAL INCOME AND FINANCE -- SUMMARY December 17, 1998 December 1998, AIS-70 Approved by the World Agricultural Outlook Board --------------------------------------------------------------------------- This SUMMARY is published by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. The complete text of the report will be available 3-4 weeks following this summary release. ---------------------------------------------------------------------------- Farm Sector Enters 1999 in Generally Good Financial Shape With slow rises for many commodity prices, net farm income is forecast at $44.6 billion in 1999, lower than the revised estimate of $48.0 billion for 1998, but near the longer term decade average. Net cash income in 1999 is forecast at $55.5 billion, an amount above the average annual earnings for the decade. For 1998, net cash income is now estimated at $59.1 billion, the second highest on record. In large part, the viability of the farm economy is derived from the financial soundness of the balance sheet. Assets will continue to increase in value, though at a slower rate than in recent years. Growth in farm debt is expected to level off or decline a modest amount, ending 6 years of increases. Farmers' equity in agricultural assets is projected to increase for the tenth straight year, to more than $900 billion at yearend 1999. Thus, the agricultural sector will remain financially strong in 1999. Net farm income is benefiting in 1998 and 1999 from the approximately $5.6 billion in additional government support already received or forthcoming as part of the 1999 Appropriations Act. These additional payments, coupled with stable to declining production expenses and improved receipts for some commodities (notably livestock, cotton, fruit, and nursery and greenhouse products), will reduce the adverse impact of low grain prices on 1999 net farm income. Placing net farm income projections for 1998 and 1999 into a longer term perspective shows that the $48.0 billion expected in 1998 will be the third or fourth highest on record, trailing only the 1996 and 1997 incomes by any significant amount. Also, the $44.6 billion forecast for 1999 will be only slightly below the decade's average of $45.5 billion. The forecast for farm debt, at $169.1 billion for 1999, reflects the likelihood of fewer new capital investments financed by debt and a relatively low incidence of farms borrowing their way out of cash-flow problems. Adequate levels of working capital and the additional government support are helping to hold down borrowing. While a modest decline from 1998, farm debt remains about $24 billion below its 1984 peak. Farm real estate, which represents the largest component of farm assets, is expected to increase in value in 1999, partly due to favorable returns to assets and relatively low inflation and borrowing costs. Although the increase will be relatively small compared with previous years, the higher value of farm real estate should reflect the counterbalancing of lower prices in areas where agricultural uses dominate transactions and those areas where land values are increasing due to urban pressure and other factors. Together, lower net income, lower debt, and lower interest rates will lead farmers to use more of their debt repayment capacity in 1999 than in 1998. Debt repayment capacity use in 1999 is now forecast at 57 percent. Though higher than the decade average of 52 percent, it remains well below levels of the early to mid-1980's. Although concerned about potential repayment problems, agricultural lenders are financially strong with high levels of capital, relatively low incidences of non-performing loans, and adequate funds to meet demand from qualifying borrowers. Most, but not all, financial problems faced by producers in 1999 will be cash-flow related. These cash-flow difficulties, however, will reflect different conditions than in the early 1980's. At that time, falling asset values and excessive debt in the farm sector together with high inflation and interest rates in a fragile general economy triggered a widespread financial crisis. In 1998, many farms struggled with cash flow due to the combination of poor weather and low commodity prices. These farms may not get much relief in the form of higher commodity prices in 1999. Overall, prospects for the sector are fairly good, but there will be pockets of farm stress due to the varying impacts of low commodity prices and the inevitable occurrences of unfavorable weather on farm businesses. Producers concentrating on grain and soybeans will likely see net income reductions of 20 percent or more in 1999. Regionally, net income reductions from 1998 will be largest in the Northern Plains, Corn Belt, and Lake States. Since the early 1990's, producers who specialize in grain and soybeans have experienced the most difficult financial problems. They tend to be relatively small farms (with gross sales between $100,000 and $250,000) that have much tighter cost-revenue margins than their larger counterparts and much less reliance on off-farm income than do smaller sized farms. Many of these farmers will begin 1999 by evaluating their risk management strategies, eliminating or reducing unnecessary expenditures, subsidizing farm losses with off-farm income, liquidating inventories and other assets, and tapping into savings. When these measures fall short, those producers with current debt obligations will visit with their lenders to formulate some restructuring of existing loans. Others may consider taking on new debt. On the other hand, many farms will enter 1999 with an optimistic outlook. Beef cattle farms and ranches should see increased earnings based on higher prices and prospects for lower expenses. Hog producers that have endured the current low prices and significant industry restructuring should see some income recovery. The economic outlook is also favorable for other commodity subsectors such as vegetables, fruits, and cotton. In recent years, prosperity in the nonfarm economy has been an important factor in maintaining average farm household incomes. There will be no exception to this trend in 1999. With expected lower income from farming, average farm household income should increase with a significant contribution from off-farm earnings. Printed copies of Agricultural Income & Finance should be available in about 2 weeks. For more information, contact Mitch Morehart (202) 694-5581. Text of the full report will also be available via the ERS Website at www.econ.ag.gov. END_OF_FILE