NOTE: This was first published on Financial News Express on December 26, 2009.
For today's commentary, I've reviewed the 73-page December 2009 USDA "Agriculture Income and Finance Outlook" and have selected some key points from the publication. The balance sheets of producers in America look quite strong as compared to the 1980's difficult farm crisis time-period. Averages within the report contain many fluctuations in sectors, locales, regions, farm sizes, and diverse individual situations.
This report has deflation written all over it. The natural response to lower commodity prices from the food producers will be decreased production next year. Last week, I heard NYSE floor broker, Art Cashin, say that he worries 2010 could be a year of food scarcity, as the Phillipines and India will be importing rice. The prevailing logic of, "more people equals more food demand, production, and higher prices" just isn't true. It all comes down to global economics. The producers will choose to decrease production if financial incentives don't exist.
- All three measures of U.S. farm income are projected to decline in 2009—net farm income is projected to decline by 34.5 percent, net cash income by 28.4 percent, and net value added by 20 percent.
- Farm financial ratios monitoring liquidity, efficiency, solvency, and profitability show that the sector’s financial performance in 2008-09, while slightly worse than in 2007, is quite favorable overall when compared to the 1980s and 1990s.
- Average net cash income for farm businesses (intermediate and commercial operations, including non-family farms) is projected to be $61,578 in 2009. This would be 10.6 percent below the 2008 estimate of $68,876.
- Farm-operator household income is forecast to be $76,065, down 3.5 percent from 2008.
- The U.S. farm sector is more intertwined with the world economy than ever.
- Demand arising from both the growing populations and rising incomes in other countries has expanded markets for farm commodities and increased competition for critical production inputs such as feed, fertilizer, and fuel.
- In 2009, the largest declines in farm-business income are forecast for livestock farms, particularly dairy.
- 2009 has the potential to be a devastating year for hog and dairy producers (with average net cash income expected to be 52 and 82 percent below 2008, respectively).
- While inching up in 2009, debt-to-asset and debt-to-equity ratios are still well below the high levels experienced during the 1981-86 farm financial crisis.
- Corn production is projected to total about 12.9 billion bushels in 2009, which if realized, would be the second-highest level on record. Even with the prospect for a large harvest, higher domestic use, particularly in ethanol production, has prevented dramatic price declines, with the annual average price forecast to be 17 percent below 2008’s $4.08 per bushel.
- Soybean production is projected to be about 3.3 billion bushels, which would be the highest on record. Strong exports have helped to maintain soybean prices. The U.S. season-average soybean price is expected to be 10 percent below the 2008 level.
- The value of crop production is projected to decline by 10 percent in 2009.
- U.S. cash receipts are forecast to decline by 20 percent for corn and increase by 2 percent for soybeans.
- Overall, the value of livestock production is projected down by 16 percent in 2009.
- While commercial farms accounted for about 12 percent of U.S. farm operations in 2008, they are expected to create over 80 percent of U.S. agriculture’s 2009 net value added and net farm income. About 45 percent of U.S. agriculture’s net value added in 2009 is expected to come from farm operations with at least $1 million in sales.
- Fruit and tree nut cash receipts are expected to decline over 10 percent as prices are expected to decline almost 5.5 percent overall.
- Dairy receipts are expected to decline by almost one-third in 2009 as milk prices received by dairy farmers are expected to decline by almost $6 per cwt from 2008.
- Double-digit declines in cash receipts also are expected for meat animals.
- Broiler receipts are expected to decline over 5 percent, mostly due to a decline in quantity sold as broiler prices are expected to remain relatively stable.
- Egg receipts are expected to decline by almost 25 percent in 2009 reflecting an annual price decline of about 28 cents per dozen.
- Direct Government payments are expected to total $12.5 billion in 2009, a 2-percent increase above the level of payments made in 2008.
- Average household income from farm sources is forecast to decline by 24.4 percent between 2008 and 2009, from $10,302 to $8,770; in contrast, household income from off-farm income sources is forecast to decrease by about 1 percent to $69,440. The average share of farm household income from farm sources is forecast to decline from 11 percent in 2008 to 8.7 percent in 2009. Approximately 60 percent of farm operator households have either an operator or the operator’s spouse working off-farm. Only for the households that operate the largest farms (those with sales of $250,000 or more) is average farm income greater than off-farm income in a typical year....The 2008-09 decline in off-farm income is the result of the economy-wide recession, affecting rural as well as urban areas.
- The debt-to asset ratio of farm operator households in 2008 was 11 percent, with average assets of $987,955 and average debt of $112,696.
- Average cash expenses are forecast to drop by 13 percent—led by a 32-percent reduction in fuel costs and a 28-percent decline in fertilizer costs. Average net cash income is forecast to increase by 12 percent, with the reduction in expenses more than offsetting the reduction in crop receipts. (grain producers)
- FARMLAND VALUES
Declines in farm asset and equity values affect the overall solvency of the sector. If they continue, these declines can affect the ability of farmers and other investors to finance purchases of farmland and other assets.
- Overall, farm real estate asset values are projected to be down by nearly 7 percent from their 2007 peak in 2009.
- Nearly one-third of U.S. farmland is operated under some form of lease.
- The most important factor affecting real estate values is “location, location, location,” and this is accurate for farmland as well. Farm owners in the Northeast see their land values greatly influenced by urban development. In other regions (e.g., Midwest, Plains States) land values are buoyed by Government payments. And in the Rocky Mountain region, people pay extra for the amenity values associated with mountain properties.
- Many factors affect farm investors’ returns on their portfolios across regions and over time, including: (1) the productivity of land when in agricultural production, (2) urban influence, (3) policy effects (such as Government payments, conservation programs, and credit policy), (4) amenity effects, (5) capital gains taxation, and (6) inflation. To this list, one might add two additional factors: the globalization of world input and commodity markets, and increased market volatility.
- Cash rent leases are becoming increasing popular relative to share rent leases.
- The highest average cash rents in 2008 were reported for irrigated land in California, at $360 per acre. The highest rents for nonirrigated cropland in 2008 were $180 per acre in Iowa and $170 per acre in Illinois.
- Only about 1-2 percent of acres turn over each year.
- Worldwide demand for farmland is growing and returns to land are subject to the upswings and downturns in commodity markets, in world financial markets, and to exchange rate adjustments.
- According to the most recent Ag Census data, the number of young people entering farming continues to decline, but the number of new farmers and ranchers over the age of 35 is rising, as is the number of smaller farms and ranches nationwide.
- Thirty percent of U.S. farms held debt in 2008, compared to 60 percent in 1986.
- Debt is concentrated in larger farms, and in dairy, poultry, and hog farms.
- The Northern Plains, Corn Belt, and Lake States have the highest percentage of farms with debt.
- The farm-level debt-to-asset ratio was estimated to be 0.22 in 1986, but stood at 0.08 in 2008, a drop of nearly two-thirds.
- In 1991, 50 percent of farm business debt was held by 23 percent of farm operators. By 2008, this proportion of debt was held by 15 percent of farm operators, which was the same as in 2007.
- Agricultural economists generally agree that financial stress is composed of an income problem, a debt problem, or a combination of the two.
- On December 31, 2008, the overall measure of financial performance indication classified 3.6 percent of farms as being in a vulnerable position, having both negative net cash income and a debt-to-asset ratio over 0.40
- More farms are also classified as being in a marginal income position as a result of having negative net cash incomes, but relatively low debt levels.
- Even with the more than 6 percent reduction, on average, in net cash income across all farms between 2007 and 2008 the share of farms classified as vulnerable remained relatively stable at slightly more that 3 percent of farms.
- About 59 percent of farms were in a favorable financial position entering 2009. These farms had both positive income and relatively low farm debt. For comparative purposes, 48 percent of farms were classified as favorable in 1986.
- Of the nearly 69,000 farms classified as vulnerable in early 2008, 67 percent were rural residence farms while 15 percent were commercial-size farm businesses.
- Only 4 percent of all farm households had both low net worth and low income in 2008.
- In 2007, the share of persons in farm operator households without health insurance coverage was 12.6 percent (compared to 15.3 percent of the U.S. population). That percent increased in 2008 for farm household members to 17.7 percent (compared to 15.4 percent of the U.S.). About half of farm household members had health insurance coverage from an employment-based plan.
In unfinished business, the reports show that 2% of Iowa's corn harvest, 7% of Nebraska's, and 7% of Minnesota's was not in at the time of this severe and wide-spread winter Christmas snow-storm.
Apologies for the lengthiness of today's post. Happy holidays and warm wishes to each of my readers!