Last week the USDA released the latest estimates of U.S. net farm income. This report was popular and widely reported upon as it provided a rare, positive story about the U.S. farm economy. For the first time in four years, net farm income was estimated to turn higher in 2017. The upturn, not projected in the USDA’s February estimate, left many hoping and wondering if this signaled a bottom in the current downturn in the Ag Economy.
Net Farm Income
Currently, net farm income is estimated at $63.4 billion, 3% higher than 2016. While this is an upturn, it is important to note the current estimates are not a clear signal of good times for agriculture in 2017.
In figure 1, real, or inflation-adjusted, net farm income from 1929 to 2017 is shown (2017 USD). This chart provides some perspective on the current situation. First, net farm income from 2014 to 2017 declined 52%. The downward adjustment in net farm income since 2014 has been significant and quick.
Second, net farm income remains well below its long-run average. In figure 1, the orange line illustrates the 89-year average for real net farm income of $81 billion. The current estimate for net farm income is 70% of this long-run average. Historically speaking, the U.S. agricultural economy has spent several years, such as 1990 to early 2000’s, very near this long-run average. Thinking about a “return to normal” in the agricultural economy, we would expect net farm income to be closer to $80 billion.
The black lines in figure 1 represent one standard deviation above and below the mean. Broadly speaking, net farm income above the top-black line signals good-times in agriculture, while income below the bottom-black line marks generally tough times. While the 2016 and 2017 estimates are near the lower black line, they have remained above this threshold. Net farm income dipped below $55.1 billion in 2002 and for several years in the early 1980s.
Comparing the 1980’s
Most measuring sticks for the U.S. farm economy go back to the Farm Financial Crisis of the 1980s. In figure 2, real net farm income from 1980 to 2017 is shown (these are the same data from figure 1, just a truncated period). While today’s farm financial outlook is difficult and shouldn’t be understated, when compared inflation-adjusted net farm income, today is far from the 1980’s in two key ways. First, farm income was persistently low in the 1980s. Inflation-adjusted, net farm income was below 2017 levels ($62 billion) for seven consecutive years (1980 to 1986).
Second, net farm income bottomed-out well below current levels. At the worst, net farm income reached $30 billion (2017 dollars) in 1983. Today, farm income is more than double those levels.
Livestock Saves the Day?
A critical driver of changes in net farm income is the overall value production. This is especially the case when commodity prices and farm revenues are declining. The two major components agriculture’s value of production are shown in figure 3; the value of crop and livestock (or ‘animal and product’) production. In 2017, the value of crop and livestock production is expected to be $180.5 and $177.5 billion, respectively. From 2016, however, the value of crop production decreased $11.5 billion (down 6%) while the value of livestock production increased $9.4 billion (6%).
In recent years, the value of livestock production has declined less than crop production. From their peak, the value of production has decreased 27% for crops and 20% for livestock.
For 2017, the increase in the value of livestock production is a major source of the increase in net farm income.
Before jumping to the conclusion that the “bottom is in” for the downturn in the ag economy, we must offer a caveat. Closely following these USDA net farm income estimates, you will realize that these can -and frequently do- change significantly.
Take the estimates for 2015 and 2016 as an example. Net farm income for 2016 is currently estimated at $61.5 billion but has ranged from a low of $54.8 billion to a high of $71.5 billion. The 2015 estimate, currently estimated at $80.9 billion, has ranged from a low of $58.3 million to a high of $81.0 billion.
Why so much variation? These estimates are extremely difficult to make. Any significant change in commodity prices is the most direct way these estimates might change. Other variations can arise from production levels or production expenses.
Underscoring the difficulty of estimating net farm income, the USDA refers to the current 2017 values as “forecasts” and will release more finalized “estimates” of 2017 net farm income in August and November 2018.
All this is to say 1) there will be several updates and revisions to the current estimates and 2) this story, especially given 2017 is estimated only slightly higher than 2016 levels (3% higher), could change as 2017 concludes, and estimates are finalized. In fact, the change from the August ‘forecast’ to following year’s November “estimate” has adjusted by a minimum of $8 billion since 2011.
Perhaps the best way to describe the current 2017 net farm income estimate is to qualify it: Net farm income in 2017 is currently estimated at $63.4 billion, plus or minus several billion.
Net farm income for 2017 is currently estimated to be 3% higher than in 2016. While the upturn is welcome news, it is important to note farm sector income remains historically low. The declines in net farm income since its peak has been substantial an income remains well below the long-run sector average.
Benchmarking the recent downturn to the Farm Financial Crisis of the 1980’s, it is worth noting average, sector-level conditions remain are less severe in recent years. First, net farm income in the 1980’s fell to an inflation-adjusted low of $30 billion, half of recent levels. Second, (real) net farm income in the 1980’s was persistently low, below 2017 levels for seven consecutive years.
It is frankly difficult to imagine a return to 1980’s conditions in which net farm income would 1) collapse an additional 50%, reaching $30 billion and 2) remain at or below current levels for an additional five years, until 2022.
Finally, changes in net farm income estimate can vary quite significantly over time. While the estimates for 2017 are currently higher than 2016-levels, these estimates will be adjusted for more than a year.