In February, the USDA released its first estimate of net farm income for the upcoming year. While subject to several updates and revisions, these early estimates help size up conditions as producers plan and budget for the upcoming year. This week’s post highlights five key takeaways from the latest data.
1. Another Strong Year of Farm Income
Many headlines pointed to farm incomes in 2021 falling 10%. This, however, misses the big picture overview that 2021 is positioned to be another strong income year. Figure 1 plots 92 years of inflation-adjusted net farm income estimates and provides a great deal of context. At $111 billion, the USDA’s early estimate for 2021 is well above the long-run average of $88 billion (in orange).
Furthermore, 2020 and 2021 estimates are among the highest observed throughout history. For example, net farm income in 2020 was an estimated $123 billion, which is the third-highest inflation-adjust observation since 1970.
Perhaps more importantly, conditions in 2020 and 2021 are considerably improved relative to recent years. Incomes tumbled to $68 billion in 2016 and were around $85 billion in 2018 and 2019.
Figure 1. Real Net Farm Income, 1929-2021 (2021=100). Data Source: USDA ERS and aei.ag calculations.
2. Government Payments Will Remain High
While farm payments are likely to tumble in 2021, they will remain historically high. At nearly $25 billion, ad hoc payments from the December 2020 stimulus bill Congress passed will count toward 2021 totals. Additionally, the USDA estimates more than $5 billion in PLC payments will be made in fall 2021 (for 2020 production). Of course, commodity prices over the next several months will determine the magnitude of those final payments.
Prior to MFP and the 2020 stimulus efforts, direct payments were typically between $10 and $15 billion.
Figure 2. Direct Farm Payments by Category, 2010-2021F. Data Source: USDA ERS.
3. Struggles for Livestock Producers
The farm economy is an aggregation of every acre produced and animal raised. As such, discussion about trends in the farm economy risks missing the key nuances of commodity or geographic variations.
One difference we can observe in the USDA data is the struggles of livestock producers in 2020 (Figure 3). While the value of crop production increased 9% in 2020, the value of animal production fell 6%. More broadly, the value of animal production in 2020 was also the lowest level since 2010.
Looking ahead, early estimates are for improvements for both crops and livestock. While heading in a favorable direction, livestock production will remain near decade lows as crops approach the highest levels since 2014.
Figure 3. Real Value of Production, Crops, Animals, and Products (2021 = 100). Data Source: USDA ERS.
4. Production Expenses Remain Low
While many have noted corn and soybean prices have jumped to the highest levels in many years, it’s not just commodity prices that are contributing to the improved income outlook. Overall, production expenses are at considerably lower levels than just 5-10 years ago. While production expenses across the entire farm sector are expected to increase slightly into 2021, they will remain 19% below the 2014 highs.
All that said, keep an eye on production expenses as they have a way of quickly ratcheting up during periods of strong profitability.
Figure 4. Real Farm Production Expenses (excluding operator dwellings; 2021 = 100). Data Source: USDA ERS.
5. It’s Still Early
As noted earlier, these estimates will be subject to several revisions.
Figure 5 shows the range of historic adjustment in net farm income estimates, along with the final estimate (black circle). Since 2000, the average range of estimates is $19 billion.
The implications for 2021 net farm income are that conditions will certainly change, and it’s not clear which way those changes might occur.
Looking ahead, the next USDA update will be in August and include improved estimates of farm expenses in 2020. Don’t be surprised if the 2020 estimates adjust significantly as a result of these data. Furthermore, keep in mind the 2021 data will be updated and revised for the next 18+ months.
Figure 5. Range of USDA Net Farm Income Estimates, 2000-2021.
Wrapping it Up
Like every USDA farm income estimate, there are a lot of moving pieces. While the current estimate of 2021 net farm income is lower than in 2020, those estimates are still historically strong.
However, government payments are still largely propping up the farm economy and remain well-above historical levels. The reality of large payments needs to be considered when evaluating the state of the farm economy. In the long-run, one shouldn’t expect +$20 billion in annual payments to continue.
Looking ahead, readers should be cautious of commodity and geographic variations. Conditions aren’t going to be favorable and strong for every commodity and every region of the country. Additionally, if profits continue, we’d expect upward pressure on input expenses. Finally, remember this is the first of many estimates for 2021, and we’ll be revisiting these estimates over the next 18+ months.