Net Farm Income Forecast To Decline by 6.3 Percent in 2012
Net farm income is forecast to be $91.7 billion in 2012, down $6.3 billion (6.5 percent) from the 2011 forecast. Net cash income, at $96.3 billion, is forecast down $12.5 billion (11.5 percent) from 2011, but would remain $15.9 billion above the 10-year average (2002-2011) of $80.3 billion.
Net farm income reflects income from production in the current year, whether or not sold within the calendar year; net cash income reflects only the cash transactions occurring within the calendar year. Net farm income is a measure of the increase in wealth from production, whereas net cash income is a measure of solvency, or the ability to pay bills and make payments on debt.
Net value added is expected to decrease by almost $4.2 billion in 2012 to $145.1 billion. While farm income can vary widely from year to year, the declines in each of these three farm income measures are the smallest decreases recorded since 2000. The 2012 inflation-adjusted forecasts of both net value added and net farm income are the third highest values recorded since 1980. Net value added is only 4.7 percent below the peak value reached during this period in 2011.
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Highlights 2012
- All three measures of farm income are expected to decline this year, but remain above 2010 levels. Net cash income is forecast at $96.3 billion, a decline of $12.5 billion from 2011.
- Crop receipts are expected to experience a slight increase in 2012. A marginal decline is anticipated for 2012 U.S. livestock sales.
- Increases in sales of corn, most other feed grains, and peanuts are predicted to offset declines in wheat, hay, vegetables/melons, and fruits/tree nuts.
- Drought in the U.S. in 2011 is expected to depress 2012 sales of many crops.
- Sales of red meats are anticipated to remain high, while a price-led decline in milk sales is forecast.
- Total production expenses are forecast to rise $12.5 billion (3.9 percent) in 2012 to $333.8 billion.
- The major 2012 crop-related expenses (seeds, fertilizer, pesticides) are projected to increase moderately (around 1.0 percent) as a group while the key livestock-related expenses (feed, livestock/poultry purchases) are forecast to rise 2.1 percent.
- Government payments paid directly to producers are expected to total $11.0 billion in 2012, a 4-percent increase from the preliminary estimate of $10.6 billion paid out in 2011.
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Amounts in this article are in nominal dollars. Estimates and forecasts in constant (2005=100) dollars are available.
Slight Increase Expected in Crop Cash Receipts for 2012
Crop receipts are expected to increase slightly in 2012, as increases in corn, most other feed grains, and peanuts offset declines in wheat, hay, vegetables/melons, and fruits/tree nuts. Drought in the U.S. in 2011 is expected to depress sales of many crops through its negative impact on production.
Sales of wheat are expected to decline substantially in 2012, reflecting especially large declines in 2011 production of hard red winter, hard red spring, and durum wheat. While the quantity of wheat sold in 2012 is expected to increase, the price of wheat received by U.S. farmers is forecast to trend downward throughout 2012, resulting in a substantial fall from the 2011 average price.
U.S. rice production in 2011 was the lowest since 1998. U.S. farm operation rice receipts are expected to increase slightly in 2012, as an expected slight decline in the quantity of rice sold is offset by a rise in the average price received.
U.S. corn receipts are expected to continue their strong, upward trend in 2012. Ethanol exports are strengthening as high sugar prices and tight Brazilian supplies provide export opportunities. A forecast decline in the average price received in 2012 is anticipated to be more than offset by an increase in the 2012 quantity of corn sold as yields return to normal levels. Hay production in 2011 is estimated to be the lowest since 1988. Hay receipts are expected to decline, reflecting an anticipated decline in its annual average price despite a slight increase in annual sales. Increased sales for barley and sorghum are forecast to more than offset a decline in sales of oats.
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Soybean sales are expected to experience a slight gain in 2012. A lower domestic supply combined with stronger foreign competition has curbed U.S. soybean exports. A lower predicted annual price is more than offset by a forecast increase in quantity sold. The soybean meal price for 2012 is also expected to fall from the previous year, reflecting sluggish domestic demand and exports. U.S. exports of soybean oil have also been sharply reduced.
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Estimating Calendar-Year Cash Receipts with
Crop Marketing Year Data
Annual USDA income and value-added estimates, such as cash receipts, are measured in calendar years (January 1 through December 31). Crop marketing years are 12-month periods capturing farm operations’ economic activity from the beginning of a new harvest through when the crop is typically sold. The U.S. has a marketing year for each crop, but different marketing years can exist for the same crop grown in different States. For example, the corn for grain crop marketing year for the U.S., Iowa, and Illinois is September 1 through August 31, whereas for Florida and Georgia it is August 1 through July 31, and for certain other States it is October 1 through September 30. Livestock and some crop marketing years coincide with calendar years.
For crops that are marketed across two calendar years (say 2009 and 2010), ERS uses the share marketed in 2009 in its estimate of 2009 cash receipts, while the remainder is used in the estimate for cash receipts for 2010. For example, suppose 30 percent of Illinois corn harvested in 2009 is sold in the open market from September through December of 2009 with the remaining 70 percent sold from January through August of 2010. Cash receipts from open-market sales in 2009 would include the share of Illinois’ harvest that was sold in 2009. The share of the 2009 harvest sold in 2010 would be added to the share of the 2010 harvest sold in 2010 to arrive at Illinois’ 2010 cash receipts from open-market sales of corn. To the amount received from open-market sales, ERS adds cash received from “sales” to the CCC to obtain the calendar-year estimate for cash receipts. |
Peanut prices are expected to experience a large price bump beginning in the 4th quarter of 2011 and continuing through the 3rd quarter of 2012. Extreme drought and intense competition for acreage from other crops kept peanut production low in 2011, but peanut sales in 2012 are expected to experience a sharp rise, reflecting larger quantities sold at substantially higher prices, especially through the first three quarters of 2012.
Cotton receipts for both lint and seed sales in 2012 are forecast to decline slightly. World cotton consumption is expected to decrease as the global economy remains sluggish. Drought conditions in 2011 reduced the U.S. cotton crop despite a 34-percent increase in cotton acreage. In 2012, U.S. cotton producers are expected to receive a few cents less on their lint sales and about $19.12 per ton (7.7 percent) less on their sales of cottonseed.
Declines are expected in sales of fruits and tree nuts and vegetables/melons in 2012. The drop in fruit and nut sales reflects an expected decline in average price, combined with large declines in quantities sold for tree nuts, cranberries, and strawberries. Drought is reducing the size of the pecan harvest and production of pistachios is also expected to decline. However, exports of pistachios and walnuts are strong. Anticipated declines in potato receipts reflect lower prices and a slight reduction in 2012 acreage, while 2012 sweet potato acreage is expected to remain unchanged. The forecast for increased dry edible bean sales reflects higher prices and a substantial expansion in U.S. dry bean planted area. Declining sales for other vegetables reflect a slight decline in quantities of fresh vegetables sold at a lower overall average annual price.
Livestock Receipts Expected To Decline Marginally in 2012
U.S. livestock sales are expected to decrease marginally in 2012 with tighter production levels. Cattle receipts are forecast to edge higher in anticipation of higher fed cattle prices and strong export demand in Asian markets. Driven primarily by lower forecast milk prices, dairy receipts are expected to decrease. Sales are anticipated to remain at historically high levels for red meats, despite an expected 3.8 percent decline in sheep and lamb sales in 2012. Broiler receipts are expected to increase in 2012 even with lower broiler meat production. Reduced egg production is expected to bring egg receipts down. Hog and turkey sales are projected to be largely unchanged in 2012.
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Production Expenses To Rise More Slowly in 2012
Total production expenses in 2012 are forecast to rise $12.5 billion (3.9 percent) to $333.8 billion. While not as large as the increase in 2011, this forecast is the second consecutive increase of over $10 billion. In 6 of the last 8 years, the increase in expenses has been double-digit, with another nearly so. As in 2011, the 2012 figure will set both nominal and inflation-adjusted records.
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With respect to factors affecting total expenses, the Production Items, Interest, Taxes, and Wage Rates (PITW) prices paid index (PPI) is expected to go up 2.4 percent. Output is expected to rise 4.9 percent as the result of an 8.8-percent increase in crop output coupled with a 0.4-percent decrease in livestock output. Projected 2012 expenses would comprise 78 percent of gross farm income, 1.8 percent more than in 2011, as gross farm income is expected to rise much less than expenses.
Every expense other than livestock/poultry purchases, fertilizer, and net rent to nonoperators is expected to increase in 2012. The four expense categories that are expected to increase more than $1 billion are (1) feed, (2) labor, (3) marketing, storage, and transportation, and (4) miscellaneous expenses. Some expenses that rose significantly in 2011 will rise more slowly or even decrease slightly in 2012. Among them are livestock and poultry purchases, seeds, fertilizer, and fuels/oils.
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In terms of their effect on crop versus livestock farms, the major 2012 crop-related expenses (seeds, fertilizer, pesticides) are expected to rise around 1.0 percent ($560 million) while the major livestock-related expenses (feed, livestock and poultry purchases) are forecast to rise 2.4 percent ($1.9 billion). These increases are small compared to the $8.1-billion (16.8-percent) rise in the major crop-related expenses and the $15.4-billion (23.8-percent) rise in the major livestock-related expenses in 2011. Crop farms will be able to absorb the increases in expenses more easily as the value of crop production rises 3.1 percent while the value of livestock production rises only 0.6 percent.
Following an expected $11.5-billion (25-percent) jump in 2011, feed expenses are expected to rise another $2.0 billion (3.5 percent) in 2012. The forecast is a product of a 4.1-percent rise in the feed prices-paid index and a 0.4-percent drop in livestock output. The rise in the PPI should occur despite a 2.7-percent drop in the average annual price of corn, which constitutes over 90 percent of feed grains used for feed, and a 12.5-percent fall in the annual average price of soymeal, the principal oilseed feedstock. The reason that the PPI will increase in 2012 despite these price declines is that complete feeds, which have the heaviest weight in the calculation of the index, will be produced using grain and oilseeds purchased in 2011 at a higher cost. On the quantity side, the number of grain-consuming animal units is expected to increase marginally but net placements of cattle on feed should be down 7.3 percent. Milk production will likely be slightly more than 1 percent higher. Feed and residual use of feed grains is projected to be down 5 percent and disappearance of soymeal should be down slightly.
Livestock and poultry purchases in 2012 are forecast to be nearly identical to the 2011 forecast. Since cattle account for 75 percent of this expense, conditions in the cattle market are the main driver of these purchases. Beef packer margins have turned negative and beef production is forecast down around 5 percent in 2012.
Despite these conditions and the high cost of feed, prices for fed cattle and feeder steers remain relatively high. In both cases, tight supplies are propping up prices. The inventory of cattle and calves is at historically low levels and calf crops remain small. Adding to the pressure on supplies is the growth in beef exports, which were up 21 percent in 2011. On the other hand, prices for feeders are being constrained by the push of low-weight feeders into feedlots because of continued drought in some areas and the high cost of feed. In the pork sector, farm prices are being buoyed by strong exports and low supplies of other meats, which elevate their retail prices and make pork prices more competitive.
The slowdown in the rise in crop-related expenses is dramatic. These expenses have been rising rapidly since 2002, with a downturn only in 2009. The increases have been driven by increases in input prices. The rise in prices in 2012 is projected to be small. The other factor determining crop expenses—the number of planted acres—is expected to be down 1.3 percent in 2012. Further, acreage of heavy users of these inputs will be constant (corn) or down (soybeans, cotton). Wheat is the only major crop that shows a significant projected increase in acreage, and it does not use these inputs as heavily as other crops.
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Two major seed producers have already stated that seed prices will rise 5 to 10 percent in 2012. They justify this increase by citing improved yields and stronger disease and pest resistance, which they believe will help producers to optimize returns. Availability should not be a problem. The annual average prices paid index for fertilizer rose nearly 30 percent in 2011, and some prices rose to historically high levels. In 2012, the prices-paid index is forecast to rise only 1.5 percent. To the extent that fertilizer prices are tied in part to commodity prices, they are both likely to abate in 2012. Availability of nitrogen-based fertilizers might be a problem, however, which could lead to a greater rise in prices for these products. At present, agricultural chemical prices are projected to increase by roughly 6 percent in 2012. Agricultural economists at Purdue University forecast a rise of 12 to 16 percent in total variable costs for producing corn, soybeans, and wheat.
The slowdown in the rise in fuel and oil prices is as striking as that in the major crop-related expenses. The annual average prices-paid index for fuels and oils registered eight double-digit percentage increases starting in 2003, with only one precipitous drop in 2009. In 2012, that index is projected to rise 2.5 percent, mainly as a result of a 2-percent hike in the Refiner Acquisition Cost (RAC). Prices for diesel and gasoline are projected to be flat during the year. This market is volatile, however, so it is difficult to pinpoint where prices will go during the year.
The 3 manufactured inputs—fertilizer, pesticides, and fuels and oils—together are forecast to be $56.0 billion in 2012, putting them $655 million (1.2 percent) higher than their level in 2011. This increase is miniscule compared to the $10.5 billion (23.4 percent) rise in 2011. In 2012, these expenses will constitute 16.8 percent of total expenses, slightly less than in 2011.
Payments to Stakeholders Rise
Payments to stakeholders, a claimant of net value added, do not generally track movements in net farm income. The year-to-year consistency in payments to stakeholders follows from the fact that they do not share the risk of equity holders. In 2012, payments to stakeholders are forecast to rise $2.1 billion (4.1 percent), while net farm income falls. Payments to stakeholders are expected to constitute nearly 37 percent of net value added, up 2.5 percent from 2011. Their share of total production expenses would be 16 percent, identical to 2011. The predicted rise in payments to stakeholders is driven by increases in hired labor and interest expenses, with a marginal decline in net rent to nonoperator landlords.
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Total labor expenses are forecast to rise $1.5 billion (5.3 percent) as a result of a small change in wage rates and an expected 4.8-percent increase in total output. Employee compensation for hired labor accounts for nearly all the projected increase. Output of the commodities that employ the most labor is mixed. Vegetable and fruit/nut output is slated to fall less than 1 percent, while greenhouse and nursery output is expected to rise less than 1 percent. Milk production is expected to be up a little more than 1 percent. Cash receipts are forecast to decline around 6 percent for vegetables, fruits and nuts, and milk, and increase 1 percent for greenhouse and nursery products.
Net rent to nonoperators in 2012 is forecast to be nearly identical to 2011, decreasing $15 million (0.1 percent). Cash rent is forecast up 1.6 percent based on expected increases in the value of crop output and government payments. Real estate values are predicted up 5.9 percent in 2012, but the amount of planted acreage is expected to decline. Share rent is forecast up 3.0 percent in line with the expected increase in crop output. Government payments to landlords are also forecast to rise a small amount. These factors alone would yield a 2012 net rent forecast 2.2 percent higher than in 2011. What drives the final expense downward is a 34-percent drop in FCIC indemnities from their extraordinarily high level in 2011.
Interest expenses in 2012 are forecast to rise nearly $700 million (4.9 percent). Real estate interest expenses are forecast up 7.9 percent and nonreal estate interest is predicted to increase 1.0 percent. Debt is discussed in the balance sheet chapter.
Government Payments Forecast at $11.0 Billion
Government payments paid directly to producers are expected to total $11.0 billion in 2012, a 4-percent increase from the projected estimate of $10.6 billion paid out in 2011. Direct payments under the Direct and Countercyclical Program (DCP) and the Average Crop Revenue Election Program (ACRE) are forecast at $4.96 billion for 2012. This 5.3 percent increase in direct payments over 2011 is largely due to the fact that the percentage of base acres on which direct payments are made increased from 83.3 percent for the 2011 crop year to 85.0 percent for the 2012 crop year. Direct payment rates are fixed in legislation and are not affected by the level of program crop prices. Authorized under the Food, Conservation, and Energy Act of 2008, ACRE provides revenue-based payments to producers in exchange for a 20-percent reduction in their annual direct payment allotments beginning with the 2009 crop year.
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With respect to program payments based on price levels, strong crop prices are expected to persist through 2012, reducing all expected program payments based on price to $10 million (a decline of 72 percent from 2011 levels). ACRE revenue-based payments in 2012 are expected to remain at 2011 levels ($10 million), while producers are expected to receive no countercyclical payments or marketing loan benefits (MLBs – the sum total of loan deficiency payments, marketing loan gains, and certificate exchange gains) in 2012.
The Milk Income Loss Contract Program (MILC) compensates dairy producers when domestic milk prices fall below a specified benchmark price. For 2012, dairy producers are expected to receive $170 million in MILC payments. Based on the anticipated high prices of the feed components in the dairy feed ration, the National Average Dairy Feed Ration Adjustment (NADFR) in 2012 is expected to raise the benchmark MILC Program price, triggering payments to dairy producers.
Tobacco farmers and quota holders are expected to receive $646 million from the Tobacco Transition Payment Program (TTP) in 2012. Payments reported here include both CCC payments and lump-sum payments. Begun in 2005, this program provides annual payments over a 10-year period to eligible quota holders and producers of tobacco. However, since its inception, lump-sum payments to individuals have been made through agreements with third parties in return for the producers’ and quota owners’ rights to the 10-year TTP payment stream. As a result, actual TTP payments to farmers have steadily declined over the years.
Conservation programs include all conservation programs operated by the Farm Service Agency and the Natural Resources Conservation Service that provide direct payments to producers. Estimated conservation payments of $3.7 billion in 2012 reflect programs being brought up toward funding levels authorized by current legislation.
Supplemental and ad hoc disaster assistance payments are forecast to be $1.5 billion in 2012, a 4.7-percent decrease from 2011 levels. The 2008 Farm Act created a permanent fund for disaster assistance, the Agricultural Disaster Relief Trust Fund. Supplemental Revenue Assistance Payments from this fund and from the 2009 Recovery Act are expected to amount to $910 billion in 2012. All other disaster programs—including primarily the Emergency Conservation Program, Livestock Forage Program, Livestock Indemnity Program, and Noninsured Assistance Program—are functioning at existing statutory authority and appropriation levels. Once a county is declared eligible for disaster relief, producer participation in these programs depends on the extent to which their crop or livestock losses meet a particular program’s threshold.
Whether expressed in nominal dollars or constant dollars, government payments forecast for 2012 represent the smallest amount paid to producers since 1997. However, government payments as a percent of net cash farm income varies by ERS production region.
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Farm Income Forecasts Grow More Refined Over
19 Months
The periodic farm income forecasts and estimates published by ERS for a particular year (5 over a span of 19 months) can vary markedly from one release to the next. For example, the first forecast of 2011 income (in February 2011) has undergone painstaking refinement as new information has become available. Release dates for updated forecasts correspond with the availability of seasonal data and annual survey results. For example, the August update of annual crop values benefits from preliminary output and yield numbers as reported by producers in the field. Likewise, because the prior-year's (2010's) forecast is converted to an estimate in August, production expenses are extrapolated from these new estimates and several months of current-year input prices in future updates. Additional refinements in the August 2011 and the November 2011 releases incorporated harvest, sales, and inventory data. The final forecast of 2011 farm income is released in February 2012. Ultimately, an estimate of 2011 farm income will be published in August 2012.
Individual components of the farm income accounts adhere to different timetables and are subject to varying degrees of uncertainty. For instance, crop inventory adjustment is a residual component of total supply (production and beginning-of-year stocks) and use (domestic and exports). Farm household income is contingent on many factors (amount of off-farm work hours and wage rates) that transcend crop and livestock numbers. Government payments—which are a function of prices, production, eligibility rules, and ad hoc disaster legislation—are also hard to forecast with any certainty, and that uncertainty compounds the margin of error that measures like net cash income are subject to from first forecast to final estimate.
Crop and livestock receipt forecasts tighten significantly as additional price and output data become available during the forecast period. As a result, by harvest time, the relative error (between forecast and actual totals) is generally less than 2 percent for total cash income and less than 5 percent for net farm income. Of course, in absolute terms this can amount to as much as $4 billion across the farm sector. |
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