AFTER multiple years of back-to-back improvements in farm income, the U.S. Department of Agriculture forecasted net farm income for 2014 to drop 26.6% to $95.8 billion from last year's forecast of $130.5 billion (Figure).
Mitch Morehand, USDA senior agricultural economist and author of the latest forecast, explained that 2014 offers a mixed picture, with livestock farms projected to have slightly higher incomes than they did in 2013 thanks to lower feed costs, while lower returns are projected for corn and soybean producers.
"Lower crop cash receipts and, to a lesser degree, a change in the value of crop inventories and reduced government farm payments drive the expected drop in net farm income," USDA reported.
Net cash income is projected to be $101.9 billion, down almost 22% from the 2013 forecast. Net cash income is projected to decline less than net farm income primarily because it reflects the sale of more than $6 billion in carryover stocks from 2013, the USDA report explains.
The level is the lowest since 2010 but is still $8 billion above the 10-year average. Morehand noted that the swings in income forecasts are not unprecedented, with this year's level comparable to the roughly 28% drop between 2008 and 2009 and also the 29% change between 2001 and 2002.
He said the drop doesn't necessarily put the farm economy on a new trajectory of lower income but, rather, shows the income volatility within the industry.
"Every time we've had those drops, we've seen big upswings too. Recent history shows we rebound fairly well the next year," Morehand added.
The income forecast is the first for the year and actually won't be finalized until August of the following year.
Many variables will change between now and harvest, Morehand noted. The forecast assumes a certain allocation of crop acres and production levels, but those remain unknown. Weather is another big wild card that can affect the outlook in different ways, as seen in 2012, he added. The California drought was not calculated into this new income forecast, so that could also change final income levels.
Crop receipts are expected to decrease more than 12% in 2014, led by a projected $11 billion decline in corn receipts and a $6 billion decline in soybean receipts.
Increased dairy receipts are expected to more than offset forecasted declines in hog and egg receipts in 2014. Livestock receipts are expected to increase 0.7% largely due to a 7% increase in dairy receipts.
The elimination of direct payments under the 2014 farm bill and uncertainty regarding enrollment and payments in 2014 led USDA to project a 45% decline in government payments.
Total production expenses are forecasted to decline $3.9 billion in 2014, which would be only the second time expenses declined in the last 10 years. It is important to note that expenses remain well above 2012 levels and are expected to be the second highest on record nominally and the third highest in inflation-adjusted dollars.
Despite the decrease, total production expenses are expected to constitute 78% of gross farm income in 2014, up from 73% in 2013 and indicating a return to much tighter margins.
In 2014, expenses are expected to decrease $6.6 billion (11.3%) for feed, $3.1 billion (12.0%) for fertilizer and $1.7 billion (9.6%) for net rent to non-operators.
Not all expenses are expected to decline in 2014. Total labor expenses are expected to increase by $1.6 billion (4.6%), livestock and poultry purchases by $1.5 billion (6.5%), total interest by $1.3 billion (7.8%) and miscellaneous expenses (items like animal health and breeding expenses, contract production fees, irrigation water and general production and management expenses) also by $1.3 billion (3.2%).
Strong balance sheets
The rate of growth in farm assets, debt and equity is expected to slow in 2014 compared to recent years due to forecasted lower net income, higher borrowing costs and moderation in farmland value growth.
As a result, the value of farm assets is expected to rise 2.4% in 2014, while farm sector debt is expected to increase 2.3%. "This represents a noticeable reduction in the average annual growth in each of these measures compared with the last 10 years," USDA said.
However, Morehand noted that "overall balance sheets are still incredibly solvent and strong." Farmers recognize that if they have to operate with much tighter margins, they have to take measures to reduce costs, where possible, and pay more attention to financial decisions.
"Farmers are astute businesspeople," Morehand said. "Every time incomes slim down, somehow people reconfigure themselves and do well."