Income

Production expenses up, net farm income down

The most recent USDA farm income forecast, released Feb. 4, projects a slight decline in net farm income for 2022. Net farm income in the United States, a broad measure of farm profitability, is currently forecast to $113.7 billion, down 4.5%, or $5.4 billion. , from $119.1 billion in 2021. If realized, it would represent the first decline in net farm income after two consecutive years of gains. However, projected net farm income for 2022 would be 82% above the decade low of $62 billion in 2016 and 15.2% above the 2001-2020 average of $98.7 billion when adjusted for function of inflation.

Enlarge image

Distribution of net farm income

A significant portion of the drop in net farm income is tied to an expected dramatic decrease in federal producer support assuming much less pandemic disaster assistance. Direct government payments are projected to decrease by $15.5 billion, or a whopping 57%, between 2021 and 2022. As shown in Figure 2, the decrease corresponds to reductions in pandemic assistance from the USDA, which includes payments for coronavirus food assistance programs and other pandemic relief programs. producer assistance and non-USDA pandemic relief programs, such as the Small Business Administration’s Paycheck Protection Program funds.

From 2021 to 2022, federal payments through USDA’s pandemic relief initiatives are projected to fall by $4.4 billion, from $7.8 billion to $3.4 billion, or 56%, and non-USDA pandemic aid is expected to disappear altogether, a difference of $8.73 billion from 2021 In addition to the reduction in pandemic-related payments, the Market Facilitation Program, which offered a series of direct payments to farmers and ranchers affected by trade retaliation, ended in 2021 and will no longer be part of net farm income going forward. The “other additional and ad hoc disaster relief” category includes payments from the Wildfire and Hurricane Indemnity Program (WHIP+), Quality Loss Adjustment Program, and other disaster protection designated by agricultural bills. These programs are expected to remain stable going forward as they are separate from the COVID-19 pandemic. In Figure 2, total commodity insurance payouts, which are triggered in the event of revenue or yield loss for producers who have purchased crop insurance, are not direct government payments, but are included in comparison purposes. Cargo insurance claims are expected to increase in 2022 by 49%, or $5.5 billion, from $11.3 billion to $16.8 billion. This increase may be the result of increased crop insurance enrollment of those who received a WHIP+ payment who are required to purchase crop insurance or Disaster Assistance Program coverage from uninsured crop (where crop insurance is not available) for the next two available crop years as required by the program.

Enlarge image

An analysis of additional items in the Statement of Net Farm Income reveals that cash receipts for sales of agricultural commodities such as crops and livestock are expected to increase by $29.3 billion, a 6.8% increase from compared to 2021, to reach $461.9 billion in 2022. billion, or 5.1%, an increase in additional cash income for crops and an additional $17.4 billion, or 8.9%, for livestock products. On the cost side, production expenses, including operator housing expenses, are expected to increase by $20.1 billion, or 5.1%, to $411.6 billion in 2022, costs highest production rates ever experienced by farmers. This includes cost increases like cumulative power, which is expected to increase by nearly $4 billion, or 6.1%, to $68.9 billion. Fertilizer, lime and soil amendment costs are expected to increase by $3.4 billion, or 12%, from $28.5 billion to $31.9 billion. Typically, fertilizers represent around 15% of a farmer’s costs and an increase of this magnitude could be overwhelming for some growers without the substantial increases in income. Other increased production costs in the manufactured inputs category include pesticides, which are expected to increase by $308 million, or 2%, from $16.9 billion to $17.2 billion, and fuels and oils are also expected to increase by 2%, or $329 million, from $15.9 billion to $16.2 billion. . Farmers and ranchers face the same challenges other Americans face with the rising cost of electricity, which is expected to rise $433 million, or 5.4%, for producers from 6, $1 billion to nearly $6.6 billion. Other agriculture-related income, which includes items such as contract labor income, machinery rental, cargo insurance allowances and rent received by owner-operators, is expected to increase by 6.2 billion, or 18%, from $32.7 billion to $38.9 billion in 2022. When all of these factors are considered, the resulting decrease in expected net farm income becomes more apparent, as illustrated in Figure 3.

Enlarge image

Other agricultural financial indicators

The USDA Farm Sector Income Forecast also provides forecasts of farm financial indicators that can provide insight into the overall financial health of the farm economy. In 2022, U.S. agricultural sector debt is expected to increase by $13.05 billion, or nearly 3%, to a record high of $467.4 billion. Nearly 67% of farm debt is in the form of mortgage debt, such as land to farm and raise livestock. Real estate debt is expected to rise by $10.2 billion to a record high of $311.9 billion, largely due to rising land values ​​across the country. Non-real estate debt, or debt for the purchase of equipment, machinery, feed and livestock, is expected to increase only slightly to $155.4 billion. The value of farm assets purchased through farm debt, including farmland, animals, machinery and vehicles and crops in stock, is expected to reach $3.31 trillion, or $42.2 billion. more than in 2021. Most of this increase, $26.8 billion, is also attributed to higher farmland values. The important thing here is that the value of assets purchased with debt increases and it will continue to be important for farmers and ranchers to pay down debt and cover interest to maintain a healthy balance sheet.

Based on 2022 debt and asset levels, the USDA expects the debt-to-asset ratio to be above 14% for 2022, which would be the highest since 2002, meaning that farmers increased their borrowing. Every year since 2012, with the exception of 2021, in which they have fallen slightly, debt levels have increased.

Working capital, which takes into account current assets and liabilities, is the amount of cash and assets convertible into cash less amounts due to creditors within 12 months. In 2022, working capital is expected to fall $3.1 billion, or 3.3%, to $93 billion, the first decline since 2016, and remains 30% below 2014 levels , when farmers and ranchers held $121 billion in working capital. Lower levels of working capital suggest that many U.S. farmers have just enough capital to service their short-term debt, as long as interest rates remain stagnant.

Another metric that highlights concern about farmer profitability in 2022 is the rate of return on assets. For 2022, the rate of return on assets is projected at less than 3.5%. The rate of return to agriculture has been below 6% for eight consecutive years and contrasts sharply with the 10% to 16% returns recorded from 2010 to 2012. This essentially means that farmers and herders are seeing their income or their yields decrease. for investments made in the cost of production and in the assets used to produce an agricultural product. Figure 4 highlights US farm sector debt, debt-to-asset ratio, and rate of return on farm assets.

Enlarge image

Summary

The USDA has released the most recent estimates of net farm income for 2022, providing a very early estimate of the financial state of agriculture. For 2022, the USDA forecasts a slight decline in net farm income from $119.1 billion in 2021 to $113.7 billion, a decline of 4.5%. While the majority of 2022 net farm income is expected to come from crop and livestock cash receipts, an increase in production costs and a decrease in one-time government support results in an overall reduction in projected net farm income. Farmers and herders are most concerned about rising production costs, especially fertilizer and other inputs, the cost of which will test their ability to break even. This is evident from the USDA estimate for agricultural financial indicators, which shows a decline in working capital and an increase in farm debt. Much of the concern across the farm country now turns to having enough working capital to cover short-term debt as interest rates remain low, but rapid increases in interest rates interest could place indebted farmers with a larger amount of debt in a more difficult financial situation. Managing financial risk by reducing production costs and diversifying income, or even supplementing income with off-farm income, are some of the solutions considered by farmers. The anticipation of a weaker end-of-year balance sheet, despite an above-average net farm income, is a powerful reminder of the challenges facing farmers and herders.