September 28, 2020
7 Overlooked Insights from the USDA’s Farm Income Estimates
By David Widmar
Earlier this month, the USDA released its latest farm income and financial data. The update captured significant attention given the uptick in farm income and direct farm payments. Moving beyond the hot-takes, headlines, and Twitter threads, we’ve spent considerable time breaking down the latest data and pulling out key insights (here, here, and here). In this week’s post, we are sharing seven mostly overlooked insights from the USDA’s latest farm income estimates.
#1 Lower Net Farm Income in 2019
While net farm income for 2020 was estimated significantly higher than 2019 levels, the estimate of 2019 income significantly fell. In February, the USDA estimated $95.3 billion in net farm income for 2019, with the latest estimate at 84.4 billion, or 11% lower (Figure 1).
How did this happen? The latest update includes data from the USDA’s ARMS database, which provided a much better idea of 2019 conditions. The implications for this adjustment are twofold. First, if you add 2019 and 2020 sector profits in February and compared to the latest estimate, you’d find the farm sector has less combined profits than previously thought. While 2020 is – overall – improved, 2019 was weaker than initially anticipated. Second, we are a long way from 2020 estimates being “locked-in” and can expect adjustments and revisions over the next 12-16 months.
Figure 1. Sources of Change in 2019 Net Farm Income from February 2020 to August 2020 estimates. Data Source: USDA’s ERS (September 2020) and aei.ag calculations (data as of September 2, 2020).
#2 Underlying Farm Economy Mostly Unchanged
A lot of attention has been made about the uptick in farm income and direct government payments. Figure 2 plots total net farm income but highlights the portion of the sector profits attributable to direct payments (in orange).
What is important to note is that the underlying farm economy – net farm income less direct payments – has been mostly unchanged since 2017.
Figure 2. Real Net Farm Income and Real Direct Payments, 1990-2020F (2020 = 100). Data Source: USDA’s ERS (September 2020) and aei.ag calculations (data as of September 2, 2020).
#3 Ad Hoc Programs Dominate Direct Payments
We are not particularly interested in debating the pros and cons of government support in agriculture, or what level of support might be important. However, we believe it is important to consider the relevant data and facts of the situation carefully. Using inflation-adjusted dollars, all signs point to a record-level of direct farm payments made in 2020 (something we raised the possibility of back in the Spring). That said, very large ad hoc payments are driving the current situation.
Figure 3 breaks down direct farm payments over the last decade into seven categories. For 2020, notice how large the MFP (from the 2019 program) and “supplemental and ad hoc disaster assistance” programs are. Those two categories – which we consider ad hoc spending – have accounted for a large share of recent payments in recent years.
- 2017: 6%
- 2018: 44%
- 2019: 70%
- 2020: 73%
This brings us to the traditional Farm Bill programs. In 2020, non-ad hoc programs will account for $10 billion of direct payments. Without the ad hoc programs in recent years, the farm economy would have a much bleaker outlook. For example, the net farm income in 2020 would be roughly $75 billion without ad hoc programs ($102b less $27b in ad hoc programs).
One final note, the direct payments data used in this post do not include the recently announced CFAP2 program, and whatever portion of program funds are new.
Figure 3. Real Direct Payments by Category, 2010- 2020F (2020=100). Data Source: USDA’s ERS and aei.ag calculations (data as of September 2, 2020).
#4 More Producers Receiving Direct Payments
A key source of ad hoc payments in 2020 has been the CFAP programs. Funded by a combination of Congressional authorization (via the CAREs Act) and USDA CCC funds, funds available through the CFAP program have, by design, been available to a broader base of producers and commodities.
For example, cattle producers are not included in traditional Farm Bill programs, and the last round of large cattle payments was made through a disaster bill back in 2014. In 2020, the CFAP1 program paid nearly $4.3 billion to cattle producers, accounting for about 42% of CFAP1 payments made to date.
This is to say that while total direct payments have significantly increased in 2020, there are also more claims on the payments; the pie is bigger, but more slices are being made.
#5 Working Capital Slips, Overall Stable
The balance sheet is important to consider as the effects of year-to-year financial performance accumulate here. One balance sheet measure of importance has been working capital. or the difference between current assets and current liabilities.
Figure 4 shows real working capital in the U.S. farm sector since 2009 (2020=100). After peaking at more than $180 billion in 2010 and 2012, working capital rapidly deteriorated through 2016. In 2020, working capital is expected to slip to $68.2 billion, down 14% from 2019. Furthermore, working capital in 2020 is expected to slip below the previous lows of $69.8 billion in 2016. While conditions in 2020 are among the lowest in recent years, working capital has been, overall, stable in recent years. Since 2016, sector-wide working capital has averaged $72.4 billion.
The implications are that even with a strong net farm income estimate for 2020, producers will be tapping into their balance sheet liquidity to meet all their financial needs. Furthermore, the uptick in direct payments in recent years has largely stabilized liquidity measures.
Figure 4. Real Working Capital (2020=100), U.S. Farm Sector, 2009-2020. Data Source: USDA ERS (data as of September 2, 2020).
#6 Farm Debt Continues Higher
A second balance sheet consideration is total farm debt. Figure 5 shows the total real farm sector debt, and its two components – non-real estate and real estate debt. Overall, farm debt has continued higher in recent years, approaching levels last observed in the 1980s. The recent uptick has been primarily driven by real estate debt, as non-real estate debt has been mostly stable.
Figure 5. Real Total Debt (2020=100), Non-Real Estate and Real Estate, U.S. Farm Sector, 1960-2020. Data Source: USDA ERS (data as of September 2, 2020).
#7 Significant Commodity and Regional Variations
Finally, it is important to acknowledge that sector-wide estimates are not representative of any specific farm. This is especially true in recent years as the trade war and pandemic have influenced commodities differently.
Figure 6 shows (nominal) cash receipts for several commodities in recent years. Most of these are expected to be slightly lower in 2020, but this is not the case for all. Cash receipts for “Fruit and Nuts” is expected to be 17% higher, while livestock will be hard hit; cattle and calves: -8%; broilers: -23%; hogs: -16%.
This is also evident in the USDA’s map of average changes in net cash farm income by region (Figure 7). The Fruitful Rim (+14%) and Mississippi Portal (+21%) are forecasted to have a large uptick in net cash farm income, while the Prairie Gateway (-1%) and Heartland Region (-2%) are expected to see contractions. Across the country, the average change is 5%.
The commodity and regional variations highlight the challenges of 1) administrating ad hoc programs in recent years and 2) reconciling the national trends – higher net farm income and direct payment – with farm-level conditions.
Figure 6. Cash Receipts (nominal) 2016-2020F (2020 = 100). Data Source: USDA’s ERS (data as of September 2, 2020).
Figure 7. Change in Average Net Cash Farm Income by Region, 2020 Compared to 2019. Image Source: USDA ERS (data as of September 2, 2020).
Wrapping it Up
Many have noted the uptick in farm income in 2020 and the trend towards record-levels of direct payments. However, these are just two considerations. Farm income in 2019 slipped considerably from earlier estimates. The uptick in direct payments is from ad hoc programs, leaving many questions about 2021 and beyond. And finally, balance sheet metrics have been mostly stable.
In our minds, there are two significant factors worth considering. First is the commodity and regional variations. Livestock producers have been hard hit, while other commodities have faired better-than-average. This can make it hard to consider national, sector-wide data and draw conclusions about any specific farm. Second, much attention should be made about how the farm economy begins to transition off ad hoc payments.
Finally, this post is based on earlier articles posted on the Premium side of the site. More specifically, Part 1: Farm Income, Part 2: Direct Payments, and Part 3: The Balance Sheet. If you are not subscribed, you can get started with a free trial here (no credit card required).
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