Farm Income Steadies After Rapid Drop

(AgriNews) – The U.S. Department of Agriculture’s chief economist looks for farm income to remain flat for 2017 as production outpaces demand, yet debt-to-asset ratios remain near historically low levels.

Robert Johansson kicked off the USDA Agricultural Outlook Forum Feb. 25 with a look toward the future that included both good and bad news.

When Congress debated the 2014 farm bill, the U.S. was recovering from the Great Recession and just coming off the highest levels of federal deficits since World War II. At the same time, farm income also was reaching historic levels, peaking in 2013 at more than $120 billion.

“Today, many producers are in a different situation. Farm income has fallen dramatically since 2013, falling almost 30 percent in real terms. This is the largest four-year drop in farm income in 40 years when real farm income fell more than 45 percent between 1973 and 1977,” Johansson said.

Net farm income in 2016 is forecast at $68.3 billion and expected to remain flat in 2017 at $62.3 billion. Baseline projections show flat farm income through the 10-year forecast period.

“In our outlook, over the next 10 years, crude oil prices are assumed to stay below $70 in real terms, interest rates on the 10-year treasury bond reach 3.6 percent and gross domestic product growth and inflation are assumed to remain around 2.1 percent,” Johansson said.

Farmland Steady

While the farm income forecast is down by almost 50 percent in nominal terms since the peak in 2013, farmland values remain relatively strong.

“While farmland values have come down off their highs from two years ago, those values continue to underlie a relatively strong debt-to-asset ratio, which is now expected to be 13.9 percent in 2017, up from the low point in 2012 of 11.3 percent, but well below the peak of more than 22.2 percent in 1985. To reach that point today would take a dramatic increase in debt payments or a loss in farmland value of more than 50 percent,” Johansson said.

Demand for USDA’s Farm Service Agency loans increased markedly last year, reaching record high obligations of $6.3 billion, including record assistance to beginning and historically underserved farmers and ranchers.

However, the latest Kansas City Federal Reserve report indicates that the volume of new farm loans was down significantly in the fourth quarter of 2016, falling by 40 percent from the same period in 2015.

Some of that decline is a result of record yields last year. Another reason appears to be input costs, as prices for seeds, fertilizer and feeder cattle declined more than expected between 2015 and 2016.

“But some is likely due to tighter lending in the face of continuing low commodity prices and some of the effect of lower demand from reduced expenditures on machinery and other expenses that can be delayed,” Johansson said.

“While loan volume may be down, current levels of real debt are approaching the record levels from the early 1980s or more than $350 billion, with real estate debt in 2017 projected to exceed a record $210 billion.”

However, with interest rates remaining low, those high levels of debt are not associated with the high interest payments seen in the 1980s. At their peak, interest payments relative to net farm income in 1985 exceeded 60 percent; today they remain close to 20 percent.