Net farm income could fall for the fourth straight year in 2017, and the farm debt-to-asset ratio is rising. Even with a modest recovery in farm income in 2018 and beyond, pressure on farm finances is expected to continue, according to the latest baseline outlook the University of Missouri's Food & Agricultural Policy Research Institute (FAPRI) presented to the House and Senate agriculture committees Monday and Tuesday.
These baseline projections for agricultural and biofuel markets were prepared using market information available in January 2017. Macroeconomic assumptions are based primarily on forecasts by IHS Global Insight that suggest moderate growth in U.S. and global economies. The baseline incorporates 2014 farm bill provisions and assumes a continuation of current agricultural and biofuel policies.
The world is an uncertain place, and commodity markets will continue to be volatile. FAPRI uses its models to develop a range of projected market outcomes that takes into account some major sources of uncertainty about future supply and demand conditions.
FAPRI director Pat Westhoff said widespread concern about the state of the farm economy remains. “On the negative side, we're looking at a continuation of price levels from farm income that are far below recent peaks, with projected declines in farm asset values and a corresponding increase in debt-to-asset ratios for the farm sector as a whole,” he said. “On a slightly more positive note, we are not projecting further declines in farm income, and there is at least a modest projected increase in grain prices and some other indicators.”
The FAPRI model projects corn prices to average $3.60/bu. for the 2017-18 marketing year, up slightly from 2016-17. Corn prices are expected to average $3.71/bu. for the baseline period from 2018 to 2026.
Strong export demand has supported soybean and cotton prices in 2016-17. Soybean prices are projected to average $9.57/bu. in 2017-18 and remain near that level in later years.
Cattle and hog prices are projected to decrease due to large domestic supplies. Cattle, hog and poultry prices all have declined sharply since 2014, partly because of increased production but also as a result of a strong dollar, which constrains export sales. Although milk prices also have dipped since 2014, stronger international markets are projected to buoy prices in 2017.
Net farm income has declined 48% since its 2013 peak. FAPRI projects that it will increase in 2018 and later years, but in real terms, projected net farm income will remain below the 2015 level. “Lower farm income and rising interest rates result in lower projected land prices and farm asset values. The debt-to-asset ratio increases from 11% in 2012 to nearly 14% in 2017 and 16% in 2026,” FAPRI projects.
Agricultural Risk Coverage (ARC) payments are expected to decline rapidly, largely because of reduced guarantees tied to moving averages of past market prices. Westhoff noted recently that more farmers are expected to choose Price Loss Coverage (PLC) in 2019 if current program rules are extended by a new farm bill and producers are allowed to make a new election.
Crop insurance net outlays are projected to average about $8 billion per year for fiscal years 2018-26. Major commodity program outlays should average about $7 billion per year over the same period.
Food price inflation was just 0.3% in 2016 and is expected to reach 1.7% in 2017, but in later years, it should be similar to the overall rate of inflation in the U.S. economy.
Westhoff said some main themes are emerging from his discussions with those on Capitol Hill as they begin to formulate the new farm bill.
Specifically, the question is whether policy changes are needed to address low income for the farm sector as a whole. Cotton and dairy programs offer areas where current programs do not provide an adequate safety net. In recent weeks, House Agriculture Committee ranking member Collin Peterson (D., Minn.) has repeatedly called for an expansion of the Conservation Reserve Program, which Westhoff said is another policy scenario being examined.