2006 Farm Net Cash Income Expected to Decline Slightly
Mitch
Morehart and Jim
Johnson
Since about 1990, U.S. farm net cash income
(earnings generated by production activities, which
are available to pay debts and household living
expenses) has been less volatile than in earlier
decades. Strong demand for U.S. agricultural commodities
is partly the result of rising populations and improving
standards of living in many developing countries.
In addition, technological advances have contributed
to higher crop yields and helped tailor livestock
products to better meet changing consumer tastes.
The combination of rising U.S.
farm productivity and increasing demand for U.S.
agricultural products has resulted in consistently
higher net cash income over the last two decades.
Farm net cash income has generally exceeded its
10-year moving average over the last 20 years. Between
2003 and 2005, farm earnings spiked well above the
trend line for the first time since 1993, but they
are expected to return to more recent historical
levels in 2006.
Although down from the unprecedented
2004-05 period, farmers’ income prospects
still look strong in the context of the past decade.
The downward shift in 2006 income from 2005 will
be hardest felt by dairy and hog producers. Both
industries must contend with cost increases from
energy-related inputs and rising feed costs at a
time when high production levels are depressing
market prices for their products. The lower farm
earnings will have less impact on most households
that operate residential and intermediate-sized
farms because their incomes are derived mostly from
off-farm sources. Incomes for households that run
commercial-sized operations will be lower in 2006,
but their average incomes will remain well above
average incomes of other farm households.
Even more unusual than the sector’s
income performance has been the continued increase
in farm sector equity and the record-low debt-to-asset
ratio. The two largest increases in equity in the
last 20 years occurred during 2004 and 2005 (17
percent and 15 percent, respectively). Farm equity
has increased in real terms for 15 consecutive years.
Nearly $600 billion has been added to farm equity
since 2002. The debt-to-asset ratio measures the
relationship between claims of creditors on a business
(debt capital) and assets of the business. In 2006,
the debt-to-asset ratio is estimated to be 11.4,
the lowest value since annual measurements began
in 1960. The driving factor in the reduction in
farm sector leverage has been the rise in farm asset
values, principally real estate, which have grown
by nearly 150 percent since 1989.
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