AGRICULTURAL INCOME AND FINANCE December 28, 1999 December 1999, ERS-AIS-73 Approved by the World Agricultural Outlook Board ------------------------------------------------------------------------------------ AGRICULTURAL INCOME AND FINANCE Situation and Outlook is published three times a year by the Economic Research Service, U.S. Department of Agriculture, Washington, DC 20036-5831. 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 #SUB-AIS-4038, $30/year. ERS-NASS accepts MasterCard and Visa. ------------------------------------------------------------------------------------- Contents Highlights Farm Income Outlook With Low Commodity Prices, Loan Deficiency Payments Support Farm Income Household Income Outlook Household Income Forecast Down in 2000 Farm Debt Debt Repayment Problems Expected To Intensify in 2000 Farm Sector Assets and Financial Ratios Farm Assets and Equity Values Continue Rising Through 2000 Crop Costs of Production Outlook Outlook for 2000: Crop Production Costs To Rise Modestly Situation Coordinator Robert McElroy (202) 694-5578 Principal Contributors: Farm Income: Roger Strickland (202) 694-5592 Government Payments: David Peacock (202) 694-5582 Farm Debt and Balance Sheet: Jim Ryan (202) 694-5586 Costs of Production: Robert McElroy (202) 694-5578 Chief, Farm Structure and Performance Branch: James Johnson (202) 694-5570 Approved by the World Agricultural Outlook Board. Summary released December 21, 1999. The next summary of Agricultural Income and Finance Situation and Outlook is scheduled for release on February 28, 1999. Summaries and full text of Situation and Outlook reports may be accessed electronically via the ERS website at www.econ.ag.gov/. The Agricultural Income and Finance Situation and Outlook is published three times a year. To order, call 1-800-999-6779 in the U.S. or Canada. Other areas please call (703) 605-6220. Or write ERS-NASS, 5285 Port Royal Road, Springfield, VA 22161. Highlights Abundant supplies, low commodity prices, and government assistance figure prominently in the first calendar year 2000 income forecasts. Net farm income is forecast at $40.4 billion in 2000, down $7.6 billion from the preliminary estimate of $48.1 billion for 1999. Net cash income is forecast at $49.7 billion, $9.4 billion less than the preliminary estimate for 1999 of $59.1 billion. From a longer term perspective, net farm income is forecast to be 88 percent of the 1990-99 average, with net cash income at 90 percent of the 1990-99 average. The impact of low commodity prices is reflected in the $1.7- billion drop in total crop receipts from 1999 to $93.3 billion, the lowest since 1994. Year 2000 receipts are forecast down $2.1 billion for major field crops, but up $1.2 billion for fruits, vegetables, and greenhouse/nursery products. Livestock receipts will increase for the second consecutive year based on continued growth in the poultry sector and modest improvement in cattle and hogs. Dairy receipts are expected to fall nearly $2 billion from 1999 to their lowest level since 1997. Government assistance has played an important role in stabilizing gross and net income for the U.S. farm sector. For 2000, government payments are forecast at $17.2 billion, contributing 7.8 percent of gross cash income. This is $5.5 billion below 1999's estimated record of $22.7 billion. Continued low prices for major crops generated a substantial increase in 1999 loan deficiency payments (LDPs) from 1998 and will continue to do so in 2000. LDPs compensate farmers for the difference between posted county prices and Commodity Credit Corporation loan rates, and are forecast at $7.9 billion for 2000. LDPs are estimated at $6.9 billion in 1999, compared with $1.8 billion in 1998. The forecast for direct government payments in 2000 also includes $2.8 billion in emergency assistance compensation from the Fiscal Year 2000 Agricultural Appropriations legislation, as well as payments from production flexibility contracts and conservation and other programs. Forecast at $192.3 billion for 2000, total production expenses will have risen less than 1 percent for the third straight year after rising more than 4 percent each year from 1993 to 1997. A large part of this leveling-off has been due to the fall in cash grain prices, which led to lower feed costs to livestock producers. Total production expenses in 2000 will equal 84 percent of gross receipts and exceed 90 percent of gross receipts less government payments. These would be the tightest operating margins since 1980-84. Despite an increase in debt in recent years, farm business balance sheets have improved steadily throughout the 1990s, especially since 1992. Equity positions have generally improved, and debt-to-asset ratios have declined as the increase in farm business debt has been more than offset by a rise in the value of farm assets. Farm debt is anticipated to stand at $172.5 billion by the end of 2000, down slightly from 1999. With farm assets forecast at $1,073.5 billion for 2000, farm equity should reach $901 billion by the end of 2000. At this level, farm equity would be $7.2 billion above 1999 and over $332.2 billion greater than in 1996. In 2000, a relatively large decline in income from farming will be partially offset by increasing off-farm income, leaving average farm household income forecast at $59,350. This is down from the $61,363 estimated for 1999, but remains similar to the 1998 average of $59,734. Earnings of the operator's household from off-farm sources have been steadily increasing, while the earnings from farming activities have been volatile over time. The persistence of low commodity prices in 2000 will aggravate cash-flow problems for farm businesses in several regions. Relative to 1998, the largest declines in average net cash income are expected in the Mississippi Portal, Eastern Uplands, Southern Seaboard, and the Heartland. These areas will be hard hit by dramatic declines in prices for rice and tobacco as well as continued low prices for corn and soybeans. Higher cattle prices and relatively cheap feed should boost average net cash income in the Northern Great Plains and Prairie Gateway regions relative to the 1994-98 average. For most regions, at least one in four farm businesses will not cover cash expenses. The exceptions are the Heartland and the Northern Crescent. The story for net cash income is basically the same for all commodity specialties. A stable or, at best, a very modest increase in livestock receipts will not offset the continued erosion of crop receipts, a reduction in government payments from their historic highs of 1999, and a continued modest rise in production expenses. While row-crop farms will sustain the largest drops in net income, specialty crop and livestock farms will also experience reductions from 1999. When compared with the average income earned during 1994-98, a slightly altered picture emerges. Income for major row-crop farms is less than the previous 5-year average, but farms with the largest reductions include tobacco, cotton and peanut farms, general crop farms, and soybean farms. Specialty crop and livestock farms (apart from hog operations) are expected to have incomes in 2000 that exceed their 1994-98 average. Livestock farms will have the largest increase of any farm type. Reduced income in 2000 will require farmers to manage tighter cash flows. A higher proportion of debt service capability will be used, eliminating credit reserves and exposing a larger share of farms to potential debt repayment problems. Lower incomes rather than substantially rising debt levels or falling asset values will be the key factor that may contribute to rising debt service problems. The greatest increase in use of debt service capacity will be for major row-crop farms, especially those that specialize in wheat and corn. Regionally, a relatively high incidence of debt repayment problems is expected in the Mississippi Portal, Prairie Gateway, and Northern Great Plains, where debt repayment difficulty has persisted over the last several years. Farm Income Outlook With Low Commodity Prices, Loan Deficiency Payments Support Farm Income Supplies of agricultural commodities are large and prices are low. Net farm income for 2000 is forecast at $40.4 billion, down $7.6 billion from the current 1999 estimate. The key factor driving the initial income forecast for the year 2000 is the cumulative effects of 4 consecutive years of large harvests in the world's major agricultural producing countries. By historical standards, this period has been unusually favorable for crop production. Not only has there has been little adverse weather, but rainfall has been generally abundant and timely. In late 1997 and 1998, rising world commodity supplies in the face of weak international demand reduced farm prices and the value of U.S. farm exports (figure 1). At the end of 1999, supplies of most agricultural commodities remain large, both from stocks carried over from 1998 and from large crop harvests around the world. The outlook for farm product demand suggests little or no growth in the near term. Without a change in demand or supply, prices will likely remain unchanged. In 1998 and 1999, the U.S. government enacted legislation that increased assistance to farmers, thereby helping to maintain farm income and temper financial hardship for many producers. Large supplies, relatively low commodity prices, and increased government assistance in the past 2 years provide a context in which to consider the first calendar year 2000 income forecasts. Net farm income is forecast at $40.4 billion in 2000, down $7.6 billion from the preliminary estimate of $48.1 billion for 1999 (table 1). The drop is due to diminished expectations for near- term increases in many commodity prices and a retreat in government payments from the historic high expected in 1999. Net cash income in 2000 is forecast at $49.7 billion, $9.4 billion less than the preliminary 1999 estimate of $59.1 billion. Prices for major crops will likely remain low, but expenses should remain stable and perhaps decline as farmers adjust production practices to reduce costs and achieve operational efficiencies. Total crop receipts for 2000 are forecast at $93.3 billion, $1.7 billion below 1999, and the lowest since 1994 (table 2). The reduction stems largely from low commodity prices. Receipts will be down $2.1 billion for major field crops--food grains, feed grains, cotton, oil crops, and tobacco -- but up $1.2 billion for fruits, vegetables, and greenhouse/nursery crops. Due to continued soft prices, loan deficiency payments (LDPs) to producers of major field crops, such as corn and soybeans, are forecast at $7.9 billion for 2000. In 1999, about $6.9 billion of direct payments were for loan deficiency payments. LDPs, which help compensate farmers for the difference between posted county prices and Commodity Credit Corporation loan rates, increase as posted county prices decline. Placing the 2000 income forecast into a longer-term perspective, net farm income is forecast to be 88 percent of its 1990-99 average, with net cash income at 90 percent of its decade average. Under current legislation without additional supplemental funding, government payments are expected to decline $5.5 billion in 2000, which is nearly the difference between the current 2000 forecast and the decade average. The value of "final crop output" (table 3) is a key barometer for tracking the causes of the below-average income forecast for the U.S. farm sector in 2000. The value of crops harvested is forecast down about 2 percent in 2000, following a decline of 7 percent in 1999 and 9 percent in 1998, resulting in a 3-year decline of $19 billion. In 1998 and 1999, government payments, with additional emergency assistance, were sufficient to maintain net farm income at, and even above, the decade average. The majority of the payments came from three government programs: production flexibility contract payments (sometimes referred to as Agricultural Market Transition Act, or AMTA payments), loan deficiency payments (LDPs), and emergency supplemental appropriations enacted in October 1998 and October 1999. The forecast for 2000 includes modestly declining production flexibility payments and rising LDP payments. Therefore, the markedly smaller forecast for government payments for 2000 is due to reduced emergency supplemental appropriations. The year 1996 has often been used as a benchmark in evaluating the current income situation. However, the decade average is a more meaningful comparison, because historical crop yields and market prices have exhibited substantial volatility and the inclusion of conditions over a longer time frame smooths that volatility. In addition, 1996 saw record high prices for a number of commodities. As can be seen in table 1, the 2000 forecast for the value of crop production is 2 percent below the decade average and the value of livestock production is 6 percent above the decade average. The value of the sector's final output, which includes forestry and other farm-related income, exceeds its decade average by 4.1 percent. Commodity prices have declined since 1996, but have been partially offset by higher production, giving farms more to sell, albeit at lower prices. Expanding World Production of Agricultural Commodities The world's major agricultural production regions have not endured substantial drought conditions for several years, which is atypical. As consequence, supplies of most crops and livestock commodities have been abundant worldwide since 1996. Increased competition for export markets has depressed prices of not only grains and oilseeds, but also fruits, with apples being a prime example. Brazil is a large producer of soybeans and Argentina is a major producer of soybeans, wheat, and corn. Both compete with the United States for export markets. Australia competes with the United States as a wheat exporter. All three countries lie in the Southern Hemisphere, which for several years has had favorable weather for agricultural production. With the 6-month difference in the farming cycles between the two hemispheres, large harvests of feed crops, food grains, and oilseeds have been coming to world markets on a nearly continuous basis for at least 4 years. China has made major advances in its crop production. It has shifted from an importer to an exporter of corn. China also has become a major exporter of apples and is providing serious competition in Asian markets for apple exporters on the U.S. West Coast. The resulting excess U.S. supply is putting pressure on apple prices nationwide. Livestock producers have benefited from low grain prices, which translate directly into lower feed costs. In addition, the continuing shift to specialized livestock production characterized by larger operations within increasingly confined environments has accelerated. In particular, the evolution of the technology for hog and dairy production is following the lead of the poultry industry and is driven by the same economic forces. Under highly automated operating conditions, feed, nutrients, and medicines are brought to the animals. This requires less effort (calories consumed) by the animals, all of which contributes to a rise in pounds of gain to a pound of feed. Labor requirements are also reduced. Government Payments Become an Important Component of Revenues For 2000, government payments are forecast to drop to $17.2 billion, 7.8 percent of gross cash income (table 4 and figure 2). The preliminary estimate of total government payments for calendar year 1999 equals $22.7 billion, which would be the highest amount ever, exceeding the previous record of $16.7 billion in calendar 1987. In 1987, government payments were equivalent to 10 percent of gross cash income, falling to 5.5 percent in 1998. As forecast for 1999, government payments are almost 9.9 percent of gross cash income. The government's assistance programs play an important role in stabilizing gross and net incomes for the U.S. farm sector and particularly for grain, soybean, and cotton farms affected the most by U.S. and world production events. As described earlier, the Loan Deficiency Program essentially helps establish a minimum price for the applicable commodities. Once the market price falls below the loan rate, the rise in LDP payments closely approximates the decline in cash receipts (sales). Production flexibility payments and the market loss component of emergency aid, which is generally paid as a proportion of the production flexibility payments and to the same recipients, serve to stabilize revenues for those farmers with production flexibility contracts. Conservation and other programs provide rental income to certain farmers who have contracts under those programs (figure 3). In addition, there are disaster payments in the form of crop insurance indemnities (to those persons with contracts) and for 1999 there was a buy-down of the premiums charged farmers. The premium buy-down continues in 2000. Continued low prices for major commodities generated a notable increase in 1999 loan deficiency payments from 1998 and will continue to do so in 2000 given the unrelenting pressure on prices. Loan deficiency payments for 1999 are estimated at $6.9 billion, compared with $1.8 billion in 1998. ERS forecasts, based on current price expectations, indicate loan deficiency payments will rise further in 2000 to $7.9 billion. Except for small payments for rice and cotton, loan deficiency payments were virtually nonexistent in the 1990s prior to 1998, but lower prices in 1998 and 1999 have made them a significant component of direct government payments to the farm sector. Loan deficiency payments for grains and oilseeds are based upon posted county prices compared with the loan rate for each area. Farmers may request loan deficiency payments equivalent to the difference between the posted county price and the loan rate for the quantity they have produced. In any given calendar year, some areas may be eligible for loan deficiency payments and others may not. For the 1998 corn crop, the average payment was 18 cents per bushel and payments were made on 58 percent of production. Both a higher average payment due to lower market prices and a greater share of production covered in 1999 gave a significant boost to loan deficiency payments for corn and other major commodities and will push the 2000 payments even higher. Some portion of the 2000 LDP forecast could be taken by farmers as marketing loan gains, which are treated as cash receipts. Production flexibility payments set forth in the 1996 Farm Act continue to trend downward in 1999 and 2000, as specified in the legislation. Production flexibility payments are authorized by fiscal years, which begin on October 1. Farmers now have the option of taking up to 100 percent of the total payment prior to December 31, or taking all or the unclaimed portion of their payment in the forthcoming calendar year. Consequently, the forecast of $5.1 billion in production flexibility payments for 1999 comes from amounts budgeted for fiscal years 1999 and 2000. Based on historical data, the forecast presumes that about 20 percent of fiscal year 2000's appropriated funds will be taken by December 31, 1999, and the remainder will fall within the next calendar year. The "Omnibus Consolidated and Emergency Supplemental Appropriations for Fiscal Year 1999 Act" of October 1998 included about $5.6 billion in direct government payments for the farm sector. About half of that amount was intended as supplemental payments that helped offset the drop in cash receipts. An amount of $2.8 billion was disbursed in one-time supplemental production flexibility contract payments by the end of calendar 1998. The remainder was appropriated as disaster payments and disbursed during calendar 1999 to assist farmers who had suffered crop losses due to severe climatic conditions in 1998 and prior years. A similar emergency supplemental appropriation for fiscal year 2000 included $8.7 billion to aid farmers adversely affected by market and weather conditions. Of that amount, $8.4 billion will be in the form of direct payments to farmers during fiscal 2000. It is estimated that $5.9 billion, mainly in the form of supplemental production flexibility contract payments, will be paid to farmers in calendar year 1999. The remainder was appropriated as disaster payments to assist farmers who had suffered losses due to severe climatic conditions in 1999 and is likely to be disbursed during calendar 2000. According to USDA's 1998 Agricultural Resource Management Study, 36 percent of all farms received, on average, $11,864 in government payments (table 6). About 70 percent of farming occupation/high sales, large family, and nonfamily farms received government payments. The larger payments went to the large and very large family farms. (See box on page XXX for farm size descriptions.) By program, 36 percent of all farms received, on average, $9,121 in production flexibility contract payments, 24 percent received an average $6,207 in loan deficiency payments, and 10 percent received an average $5,832 in Conservation Reserve Program (CRP) payments. Farming occupation/high sales, large family, and nonfamily farms had the highest participation rates in the production flexibility contract and loan deficiency programs. However, participation in the CRP was more uniform across farm typology. Nonfamily and retirement farms used CRP more than the other types of farms. Looking at the composition of payments, half of the payments to all farms were production flexibility contract payments (figure 4). This was the case for farming occupation/lower sales, farming occupation/higher sales, large family, very large family, and nonfamily farms. For retirement farms, nearly 80 percent of government payments were CRP payments. For limited resource farms, nearly 60 percent of government payments were CRP payments. Total Production Expenses Up Slightly in 2000 Total production expenses are forecast at $192.3 billion in 2000 (table 7). The 0.7-percent increase in 2000 from the revised forecast of $190.9 billion for 1999 is slightly less than the percentage increase in 1999. Total production expenses in 2000 will equal 84 percent of gross receipts and around 91 percent of gross receipts less Government payments. These levels are the highest since the 1980-84 period. With the slight increase in 2000, total production expenses will have changed less than 1 percent for 3 straight years after rising more than 4 percent each year from 1993 to 1997. A large part of this leveling-off has been due to the fall in cash grain prices, which has helped livestock producers through lower feed expenses. However, the absence of large increases in expenses other than fuel is also helping cash grain producers manage the fall in their income. The movement in expenses in 2000 is decidedly different from 1999. Purchased livestock expenses are forecast up $1.2 billion in 1999 but should fall around $400 million in 2000. After rising around $750 million in 1999, net rent to nonoperators will fall by about the same amount in 2000. Operating expenses other than labor are forecast down around $500 million in 1999 but will likely rise around $1 billion in 2000. The expected change in input prices is the biggest factor in the movement of production expenses in 2000. The price of imported oil recently has risen substantially, although it will probably fall over the course of the year. On average, fuel costs for 2000 will probably be up at least 15 percent. Feed prices will again fall, but not as much as during each of the last 3 years. Feeder cattle prices will rise more slowly in 2000 than in 1999. The cost of goods and services that comprise other operating expenses will rise as the increase in fuel prices works its way through the economy. Prices for crop inputs will be about the same or down somewhat. The major quantity factors affecting production expenses in 2000 are the slower contraction of the cattle inventory, the continued expansion of poultry production, and slightly lower acreage anticipated for major crops. Livestock-Related Expenses Will Decrease Again in 2000 Feed costs are forecast to fall 1.2 percent in 2000, one-third the rate of decline in 1999. The 2000 prices paid index for feed is forecast down slightly from 1999 as prices for feed grains level off. The decrease in expenses will be due primarily to the continued contraction of the cattle herd and a fall-off in milk production, which will overcome increases in hog and poultry production. Purchased livestock expenses are forecast to fall in 2000 after rising 9.2 percent in 1999. They will remain 6.4 percent above the 1998 expense, however. The decrease in 2000 will stem from a slower increase in feeder cattle prices and reduced purchases due to fewer cattle on feed and expectations of increased heifer retention later in the year. Crop-Related Expenses Nearly the Same Crop-related expenses are currently forecast to be nearly the same in 2000 as in 1999. Planted acreage will again be down a little, but the forecast drop is less than in 1998 and 1999. Seed and pesticide prices will be level or lower. For example, one major seed supplier has announced that its seed prices will be lower or unchanged in 2000 and another announced that it will provide a rebate on technology fees for genetically modified seed. A major supplier of pesticides has announced discounts on one of its major products. Nitrogen prices are at 10-year lows, but will be affected by increases in natural gas prices, which are currently forecast to rise around 8 percent during 2000. Nitrogen prices normally lag behind natural gas prices, so all the increase may not be translated into higher nitrogen prices in 2000. Phosphate and potash prices have fallen since summer and currently stand around 12 percent lower than last year. The potential increase in nitrogen prices and the low level of phosphate and potash prices could move operators to use just- received government payments to purchase fertilizer products before the end of 1999. Current acreage expectations point to less than 1-percent decreases in fertilizer and pesticide applications, unless operators alter production practices to realize input cost savings. Other Expenses Will Rise Significantly The increase in fuel prices is forecast to cause fuel expenses to increase $1.2 billion (18.4 percent) in 2000. At $7.5 billion, the nominal expenditure for fuels and oil would be the highest since 1982. Deflated by the National Agricultural Statistics Service's fuel index, the real expenditure would be around the 1986-87 level. Several factors will interact to determine the final level of fuel prices during 2000. The primary factors will be winter weather and stocks held by organizations not in the oil business. Capital consumption, which represents the cost of capital used in the production of commodities, is forecast to fall in 1999 and 2000 for the first time since 1987. Since capital consumption is calculated at replacement cost, the primary factor driving this expense is prices paid for vehicles, machinery, and building construction. While new tractor and machinery prices rose slightly in 1999 and may rise again in 2000, a large inventory of used equipment has lowered prices for used tractors and machinery on dealers' lots and in auctions. The decreases in capital consumption in these two asset categories will be larger than for other components. Labor and Interest Expenses To Fall in 2000 The expense for hired farm labor is forecast to rise modestly in 2000. Farm wage rates for the most part will follow rates in the general economy. However, with low unemployment rates, off-farm employment opportunities could create competition for hired farm laborers that puts greater upward pressure on farm wage rates than usual. Certain segments of the construction industry, which competes with agriculture, are booming, including houses and commercial structures and the upgrading of communications and transportation infrastructure. After falling around $150 million in 1999, interest expenses will increase by about the same amount in 2000. Real estate interest increased in 1999 and will increase in 2000. After dropping $280 million in 1999, nonreal estate interest will be level in 2000 as a drop in outstanding debt for the second straight year offsets a rise in interest rates. Net rent to nonoperator landlords is forecast to fall $760 million in 2000, almost exactly the amount it is forecast to rise in 1999. Without record-high government payments in 1999, net rent would have fallen as the value of share rent decreased. Regional Outlook for U.S. Farm Businesses The persistence of low commodity prices in 2000 will aggravate cash-flow problems for farm businesses in several regions. Relative to 1998, the largest declines in average net cash income are expected in the Mississippi Portal, Eastern Uplands, Southern Seaboard, and the Heartland regions (figure 5 and table 8). Southern areas of the country will be hard hit by dramatic declines in tobacco production and by lower prices for rice, corn, and soybeans. Higher cattle prices and relatively cheap feed should boost average net cash income in the Northern Great Plains and Prairie Gateway regions relative to the 1994-98 average. For most regions, at least one in four farm businesses will not cover cash expenses. The exceptions are the Heartland and the Northern Crescent. The largest increases relative to 1998 in the share of farms with negative net cash income occur for the Southern Seaboard and Mississippi Portal (7 percentage points each). The Eastern Uplands and Heartland regions could also experience relatively large increases of 6 percentage points each (figure 6). Unexpected declines in farm business earnings can lead to debt repayment problems. Relatively high percentages of farm businesses in the Northern Great Plains and Prairie Gateway regions have had persistent debt repayment problems. Even though the Northern Great Plains region has had the highest incidence of debt repayment difficulty, its situation should improve in 2000. In the Prairie Gateway, 18 percent of farm businesses are expected to have debt repayment problems, a slight increase over 1998, but well below 1997 (figure 7). Farm businesses with debt repayment difficulties are expected to increase substantially in the Mississippi Portal region, where the projected share of 20 percent would be the highest of any region in 2000. Commodity Specialization Outlook for U.S. Farm Businesses Average net cash incomes for all farm types are expected to be less in calendar year 2000 than in 1999. The story for net cash income is basically the same for all commodity specialties. A stable or, at best, a very modest increase in livestock receipts will not offset the continued erosion of crop receipts, a reduction in government payments from 1999 levels, and a continued modest rise in production expenses. While reductions in net income will be larger for major row-crop farms, specialty crop and livestock farms will also experience reductions from 1999. When compared with the average income earned during 1994-98, a slightly altered picture emerges. Income for major row-crop farms will be less than the previous 5- year average. Farms with the largest deviation from the 5-year mean will include tobacco, cotton, and peanut farms, general crop farms, and soybean farms. Specialty crop and livestock farms, apart from hog operations, are expected to have incomes in 2000 that exceed their 1994-98 average. Livestock farms will have the largest increase of any farm type. The reduction in income in 2000 will require farmers to manage tighter cash flows. A higher proportion of debt service capability will be used, eliminating some farmers' credit reserves and exposing a larger share of farms to potential debt repayment problems. Lower incomes rather than substantially rising debt levels or falling asset values will be the key factor that may contribute to rising debt service problems. The greatest increase in use of debt service capacity will be for major cash grain farms, especially those that specialize in wheat and corn. Household Income Outlook Household Income Forecast Down in 2000 With the fall in farm income, farm households should see their total income drop slightly in 2000. Total household income will continue to be heavily influenced by off-farm earnings. Farm operators= household income averaged $59,734 in 1998 and is forecast to rise slightly in 1999 at $61,363 but fall in 2000 to $59,350 (appendix table 1). A large decline in 2000 income from the farm will be partially offset by an increase in off-farm income. Farm operators= household income has averaged about the same as average U.S. household income during the past three decades (figure 8). Earnings of operators= households from off- farm sources have been steadily increasing, while operator earnings from farming activities have been volatile over time. In 1998, off-farm earnings constituted 88 percent of operators= household income for all family farms. Most classes of small family farms (limited-resource, retirement, residential/lifestyle, and farming occupation/lower sales) received negative returns from farming activities (figure 9). Operators of limited-resource and retirement small family farms rely heavily on Social Security and other public programs for most of their income. In contrast, residential/lifestyle and farming occupation/low sales small family farms rely primarily on off-farm wages and self-employment income. Although income from farming activities ia expected to decline in 2000, little change is anticipated in the total household income of operators of these small family farms. Households operating the remaining farms rely more heavily on farm earnings. Farming occupation/higher sales farms received 43 percent of operator household income from farm sources, large family farms received 56 percent and very large family farms received 84 percent. Since households operating these larger farms are affected more by changes in income from the farm sector, the household income for the operators of these farms is expected to be largely down. BEGIN BOX Defining the Farm Typology Small Family Farms (salesless than $250,000)* Limited-resource. Any small farm with gross sales less than $100,000, total farm assets less than $150,000, and total operator household income less than $20,000. Limited-resource farmers may report farming, a nonfarm occupation, or retirement as their major occupation. Retirement. Small farms whose operators report they are retired (excludes limited-resource farms operated by retired farmers). Residential/lifestyle. Small farms whose operators report a major occupation other than farming (excludes limited- resource farms with operators reporting a nonfarm major occupation). Farming occupation/lower-sales. Small farms with sales less than $100,000 whose operators report farming as their major occupation (excludes limited-resource farms whose operators report farming as their major occupation). Farming occupation/higher-sales. Small farms with sales between $100,000 and $249,999 whose operators report farming as their major occupation. Other Farms Large family. Farms with sales between $250,000 and $499,999. Very large family. Farms with sales of $500,000 or more. Nonfamily. Farms organized as nonfamily corporations or cooperatives, as well as farms operated by hired managers. *The $250,000 cutoff for small farms was suggested by the National Commission on Small Farms. END BOX Farm Operator Household Income by Farm Specialization Farm households'dependence on farm income varies by farm specialization (figure 10). A farm is considered to be specialized when better than 50 percent of its value of production may be attributed to a specific commodity or commodity group. In 1998, farm households on specialty crop farms (vegetables, fruits, nuts, nursery, and greenhouse) averaged the highest farm operators= household income at $82,274. Income from farming activities provided 25 percent of this income. Farm operators on cash grain farms also received 25 percent of their household income from farming activities. Although operator household income of cash grain farms is estimated be up in 1999, it is expected to drop below 1998 levels in 2000. Operator household income on specialty crop farms is expected to change little over the next 2 years. Farm households on dairy farms rely most heavily on the farm sector, with about 70 percent of the household income coming from farm earnings. A large decline in operator household income on dairy farms is expected through 2000, due primarily to lower milk prices. Farm households on farms specializing in poultry production receive 46 percent of household income from farming sources. Most poultry production is under contract, stabilizing earnings from the farm. If farm income on beef farms recovers as expected, operator household income on those farms is expected to increase in 1999 and 2000. Farm Operator Household Income by Region Farm households' dependence on farm income also varies geographically (figure 11). In 1998, the region with the greatest farming dependence was the Northern Great Plains, where about 30 percent of household income came from farm earnings. These households also averaged the lowest household income at $42,777. Farm households in the Heartland region received 20 percent of their income from farm sources. The highest average household incomes were received by farm operator households in the Fruitful Rim and Basin and Range regions. In 2000, household income for farm operators in the Northern Great Plains and Heartland regions is expected to be below 1998 levels as prices of cash grains continue to weaken. On the other hand, household income for farm operators in the Eastern Uplands and Basin and Range regions, who rely more on off-farm income, is expected to be above 1998 levels. BEGIN BOX Operator Household Income: What It Does and Does Not Measure Operator household income is measured according to the definition of income used in the Current Population Survey (CPS), conducted by the Bureau of the Census. The CPS is the source of official U.S. household income statistics. Calculating an estimate of farm household income that is consistent with CPS methodology allows comparisons between the income of farm households and all U.S. households. The CPS defines income to include any receipts of cash. The CPS definition departs from a strictly cash concept by deducting depreciation, a noncash business expense, from the income of self- employed people. The derivation of operator household income from the 1998 Agricultural Resource Management Study is outlined in table 9 (see appendix table 1 for more details). Net cash farm business income presented above differs from sector net cash income. Net cash farm business income is a component of farm sector income. It excludes the income of contractors, landlords, farms organized as nonfamily corporations or cooperatives, and farms run by a hired manager. Earnings of the operator household from farming activities are not a complete measure of economic well-being provided by the farm. They leave out some resources the farm business makes available to the household. For example, depreciation is an expense deducted from income that may not actually be spent during the current year. Household income also excludes non- money income, or the imputed rental value of the farm dwelling plus the value of farm products consumed on the farm, largely food and firewood. Finally, earnings of the operator household from farming activities do not reflect the large net worth of many farm operator households. Most of this net worth is illiquid and not readily available for household spending, since it is largely based on assets necessary for farming. However, some current assets are liquid. Farms may have inventories of crops, livestock, and production inputs that could be sold in emergencies. They may also have accounts receivable that will likely yield cash in a short time. END BOX Farm Debt Debt Repayment Problems Expected To Intensify in 2000 Farm debt is expected to stabilize in both 1999 and 2000 after growing rapidly through 1998. Farm business debt is anticipated to stand at about $172.5 billion by the end of 2000, down slightly from 1999 (table 11), which is projected to be slightly below 1998. Given anticipated 2000 price and income levels, and uncertainty concerning the timing of price improvements in cash markets for many agricultural commodities, lenders are expected to encourage their farmer clients to improve their balance sheets by applying some of their additional government payments to existing debt. Actual changes in farm business debt in both 1999 and 2000 will depend heavily on the timing and the extent to which farmers use these payments to improve future financial risk positions by reducing outstanding loan balances. Some farmers may choose to retain a substantial portion of the payments they receive under the recent emergency assistance package, anticipating more limited credit availability in the spring. While institutional lenders report ample funds available for lending to creditworthy borrowers, some current borrowers may have difficulty showing that they can cash flow their production loans, given the commodity prices that are likely to be used in projecting 2000 cash receipts. Any funding gaps may be filled by the increasing number of machinery, seed, and chemicals suppliers who are expanding their traditional use of financing as a means to boost product sales, and are offering financing to meet the farmer=s full production credit needs. Income Changes Not Evenly Distributed Sector-wide net cash income in 2000 is expected to be almost 16 percent below its 1999 level. The impacts of this decline will not be evenly distributed across all U.S. farm operations, and producers specializing in wheat, corn, and soybeans will likely experience additional financial stress in 2000. The income that farmers have available to service debt can be estimated by adding farm operator interest expenses to net cash income. Farm business interest expense is anticipated to rise about 2 percent in 2000, as a projected rise in average interest rates offsets the slight decline in farm debt. Given the projected decline in net cash income, it appears that, as a group, farm operators will have less income available to meet 2000 principal and interest payments on their loans. Furthermore, those operators experiencing substantially reduced income may experience difficulty in meeting their debt service requirements. Debt Expected To Stabilize in 1999 and 2000, After Growing Rapidly Through 1998 The expected debt stabilization in 1999 will follow 6 consecutive years of rising farm debt (figure 12). From the beginning of 1993 through the end of 1998, farm debt rose almost $34 billion, or 24 percent. Almost half of the gain, about $16 billion, occurred in 1997 and 1998. Farmers use credit as a source of capital to purchase land, technology, and equipment, which, when appropriately combined, can lead to improved productivity and higher profits. The current Farm Act allows farmers greater flexibility in determining which combination of commodities to produce to maximize profit on their individual operations. The rise in loan balances in 1997 and 1998 can be at least partially attributed to farmers' positive views about the future of U.S. production agriculture, given its assumed comparative advantage in liberalized global markets. The continuing relative strength in farmland markets and rental rates also supports this optimism. Balance Sheets Have Improved Despite the increase in debt in recent years, farm business balance sheets have shown steady improvement throughout the 1990s, especially since 1992. Equity positions have generally improved, and debt-to-asset ratios have declined, as the increase in farm business debt has been more than offset by the rise in the value of farm business assets. The value of farm real estate has risen more than 30 percent from 1992 through the end of 1999, while farm mortgage balances have increased less than 20 percent. As a result, the degree of U.S. farmland leverage has declined substantially, providing most producers with an added equity cushion to lessen the impact of short-term declines in income. Farmers' Use of Repayment Capacity To Rise in 2000 The anticipated decline in net cash income in 2000 will likely push farmers to use available credit lines more fully. Lenders generally require that no more than 80 percent of a loan applicant's available income be used for repayment of principal and interest on loans. For farm operators, this income available for debt service (measured as net cash income plus interest) effectively limits the maximum loan payment the farmer could make. Given current market interest rates and an established repayment period, the maximum debt that the farmer could carry with this loan payment can be determined. Using current bank interest rates and a 7-year repayment period, maximum feasible debt conceptually measures the line of credit that could be available to farmers. Farm debt repayment capacity use (DRCU--actual debt expressed as a percentage of maximum feasible debt) effectively measures the extent to which farmers are using their available lines of credit. This ratio indicates that, in 2000, farmers are expected to use more than 66 percent of the debt that could be supported by their current incomes (figure 13). Farmers used about 59 percent of this hypothetical credit capacity in 1998. The infusion of government payments in 1999 boosted net cash income, increasing the level of debt that farmers could service and reducing the measure of debt repayment capacity use to 56 percent. The effects of expected relatively favorable interest rates and reduced debt in 2000 will not offset the effect of lower net cash income, which is why the use of debt repayment capacity is expected to rise to 66 percent. While this measure remains relatively low compared with the levels it attained in 1977 through 1985, its projected 2000 value will be the highest since 1985. Repayment Difficulties Vary by Region Farmers usually do not begin to experience repayment problems until their operation carries a debt level that is substantially higher than they can service with current income. Typically, farm operators meet debt service requirements through the planned sale of commodities produced within the year or production cycle. In times of low income, farmers can meet short term shortfalls by reducing working capital, selling additional inventories, and liquidating financial assets. Meeting debt service obligations does not typically become problematic until DRCU approaches around 120 percent, or the farm operation's debt is 1.2 times the estimated maximum level of debt that it could service using only current income. Data collected in the 1998 Agricultural Resource Management Study allow regional comparisons of farm financial conditions. Applying 1999 and anticipated 2000 prices for inputs and farm products to ARMS respondents who reported 1998 agricultural sales greater than $50,000, pro forma financial statements allow regional comparisons of likely financial performance under projected conditions. As evidenced by the declining share of farms with DRCU above 120 percent, the 1999 infusion of government payments helped farm operators in most regions (figure 14). Nationwide, about 20 percent of farms have projected DRCU greater than 1.2 in 1999, down from 22 percent in 1998. With 2000 income assumptions, over 25 percent of farms will report DRCU greater than 1.2. Only the Heartland and Southern Seaboard showed an annual increase in the share of farms facing potential repayment problems in 1999. This situation is likely to change dramatically in 2000, as anticipated declines in net cash income are likely to generate a rising percentage of farms with DRCU above 120 percent in all regions. However, in the Northern Great Plains, Prairie Gateway, and Basin and Range, the share of such operations in 2000 is expected to be lower than in 1998 Concurrently with the rise in share of high DRCU farms, the share of farm business debt owed by these operations is expected to rise in 2000. While 22 percent of farms reported DRCU above 1.2 in 1998, these operations owed about 43 percent of all reported debt outstanding at yearend (figure 15). The share of debt owed by high DRCU farms is expected to fall below 40 percent in 1999, then rise above 48 percent in 2000. This pattern--improvement in 1999, worsening in 2000--holds for most regions. Operators in the Eastern Uplands report the largest share of debt owed by high DRCU farms in each year, with the percentage surpassing 70 in 2000, while Northern Crescent farms report the lowest share, less than 25 percent. Farm Sector Assets and Financial Ratios Farm Assets and Equity Values Continue Rising Through 2000 Farm business equity is expected to continue rising as farm asset values rise more rapidly than farm debt. Growth in Farm Real Estate Values Moderates The value of farm real estate, which represents the largest component of farm assets, is expected to rise one-half percent in 2000, partly due to favorable returns to assets and relatively low inflation and borrowing costs. Although the increase will be smaller than in previous years, the higher value of farm real estate should reflect the counterbalancing of lower farm commodity prices in areas where agricultural uses dominate transactions and those areas where land values are increasing due to urban pressure and other factors. Farm income and returns to farm assets are still high enough across the country to maintain growth in farmland prices (table 11). The value of U.S. farm business assets and equity is expected to continue upward through 2000. Although commodity prices in 2000 have generally fallen from 1999 levels, government payments have helped support returns to farm assets. The December 1999 estimates of farm business assets, debt, and equity for years 1993-98 incorporate new data from the 1997 Census of Agriculture since September 1999. Farm business equity is expected to continue rising as farm asset values rise more rapidly than farm debt. Equity by the end of 2000 is expected to be $901.0 billion, $7.2 billion above 1999, and over $333.2 billion greater than in 1986 ($567.8 billion) (figure 16). The long-term farm equity comparison is a little different if the numbers are adjusted for inflation. Real farm equity in 2000 deflated by the GDP chain-weighted price deflator, is forecast at $770.1 billion. In 1986, by comparison, farm equity had an inflation-adjusted value of $705 billion, compared with an estimated peak of almost $1,352 billion in 1980. Consequently, farm sector wealth in 2000 is still $582 billion below its inflation-adjusted value in 1980. Farm Financial Ratios Remain Favorable U.S.-level financial ratios that track trends in farm sector profitability, solvency, liquidity, and efficiency generally remain favorable in 2000 relative to 1999 (Appendix tables 7 and 8). This reflects modest growth in farm assets and farm equity, a slight decline in returns to farm assets, and relatively low borrowing costs and inflation. Debt-to-Asset Ratio Continues Downward Trend Indicators measuring the solvency of the farm sector remain favorable for 1999 and 2000. 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 lower the debt-to-asset ratio, the greater is the farm sector's overall financial solvency. The debt-to- asset ratio is forecast to be 16.1 percent in 2000, compared with 16.2 percent expected in 1999. The share of debt to total asset value has been declining steadily in the 1990s, after peaking at 23.0 percent in 1985. Real ("Average") Cost of Debt Financing To Rise from 1999 The real net return on farm business assets is expressed below as RNROA. RNROA = (returns to farm business assets from current income + real capital gains/total farm business assets - (interest + real capital gains on debt)/total farm debt The RNROA is an average, and not a measure of the marginal cost of an additional dollar of borrowed funds at the farm sector level. It is also not a measure of the marginal cost of funds to an individual farm operator. When the RNROA is positive and debt financing for the "average" sector farm is profitable, some farm operators will have marginal returns in excess of the marginal cost of debt, while others will have marginal returns less than their marginal cost of debt. For some, additional debt financing will be profitable; for others, it will not. Although the real net return on farm assets is still near historic highs, it is expected to increase from -4.3 percent in 1998 to about -1.8 percent in 1999, and to about -2.6 percent in 2000. This suggests that debt financing in 2000 to support purchases of farmland and other farm capital assets is becoming less financially attractive than in 1999. These factors provide the foundation for continued, but slower, growth in farm real estate values in 2000. U.S. Farm Asset Values and Debt-to-Net Cash Flow Net cash flow provides an indication of the total resources available to farm businesses for investment in the farm sector, and to meet current debt obligations. Net cash flow expands upon net cash income by accounting for both internal and external sources of funds. 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) has fallen from as high as 6.1 in 1986 to 2.4 in 1993 (figure 17). The ratio rose from 3.4 in 1998 to 4.2 in 1999, and is forecast to rise to 5.1 in 2000, considerably above the historic range of 2-3. The ratio means that there was $4.20 of farm debt per $1 of cash flow in 1999, compared with a forecast of $5.10 of farm debt per $1 of cash flow in 2000. According to this measure, farm investors in 2000 have (on average) somewhat less cash resources per dollar of debt to buy farmland and farm machinery and to meet current debt obligations than the "average" farm investor in 1999. Land values tend to rise when debt-to-net cash flow is low. This is consistent with the above interpretation of the "debt-to-net cash flow" ratio, which reflects the amount of cash resources that farm investors have to buy farmland and farm machinery and to meet current debt obligations. When the ratio is relatively low, as it has been since the late 1980s, farmland values rise, reflecting the fact that farm investors have relatively more cash resources to invest in farmland. Also, interest rates (and thus interest expenses) have been low, and returns to farm assets have been relatively strong. However, the rising debt-to-net cash flow ratio for 1998 through 2000 suggests that things have tightened considerably and that farmland values will likely stabilize near current levels in the near term. Continued demand for agricultural land along the fringes of urban areas and demand for rural land for recreational purposes are also contributing to real estate values, especially in the Northeast and in some Western States. Nonreal estate values are expected to remain at $238.3 billion in 2000. The value of farm financial assets is expected to rise slightly. The value of machinery and equipment, crops stored, purchased inputs, and livestock and poultry are expected to remain near 1999 levels. Crop Costs of Production Outlook Outlook for 2000: Crop Production Costs To Rise Modestly Costs of production for major U.S. crops are expected rise at most 3.5 percent in 2000. According to USDA's most current forecasts for 2000, the average costs of production for major field crops are expected to range from no change for soybeans to an increase of 3.5 percent for cotton. The overall rise in the prices paid index for farm production inputs (crop and livestock inputs) is forecast around 3 percent. The magnitude of the increase ranges from a slight rise for seed, farm machines, and rents to a large increase for fuels, fertilizer, and farm services. The only major production input expected to see lower prices in 2000 is agricultural chemicals, down 3 percent from 1999. The mix of inputs will determine which crops are most affected by changes in input prices. Production costs will rise $16 to $17 per acre for rice and cotton, while the increase will be only $3 to $5 per acre for other crops (table 12). Intensive use of fuels, farm services, and labor explains the sizable cost increases for rice and cotton. Production costs for soybeans are forecast to remain steady or decline slightly in 2000. If 2000 yields and prices are near 1999 levels, returns would be more than enough to cover total costs excluding land and unpaid labor for corn and soybean growers, but not enough to cover costs for the other crops listed (table 13). Soybeans show the highest returns, being negative only for the lowest yield and price combination. Rice shows the lowest returns--becoming positive only at the highest yields and prices. Many factors influence costs of production. Some can be controlled by the operator while others cannot. Numerous agronomic and climatic factors such as soil fertility, input use, timeliness of field operations, weather, and management, for example, influence yield. Some farm operators are adopting new technologies such as precision agriculture that allow them to better manage timing and application of chemicals and limit the number of passes through a field. Limiting field passes reduces fuel and repair costs for machinery, as well as costs for labor and chemicals. Weed and pest control can also be reduced through cropping and tillage practices, adjusting planting dates, and timeliness and proper application of chemicals. These techniques are more management intensive and depend greatly on the management skills of the operator. Of course, returns in table 13 only represent the average. ERS research shows, for example, that about 60 percent of the corn is produced at or below the average cost (figure 18). For corn growers, regional differences in production systems become important. Most growers in the Heartland typically have a cost advantage over other growers, primarily due to higher corn yields on non-irrigated land. For U.S. soybeans, about 64 percent would be produced at or below the average cost. The lowest per acre costs for soybean growers are found in the Northern Great Plains where yields can be at or above average depending on the year's weather. Because soybeans have a shorter growing season than corn, cotton, and rice (crops frequently found in rotation with soybeans), there is frequently time to plant soybeans if planting of corn, cotton, and rice crops is delayed or abandoned. About 66 percent of wheat production should be produced at or below the average cost. Roughly 64 percent of cotton should be produced at or below the average cost. These costs-of-production forecasts are at the national level and may differ considerably for the individual farmer. They also include the costs of both the farm operator and landlord. END_OF_FILE