Earlier this fall, the USDA released the latest estimates of farm income and financial data. The September data dump included updated production and prices data for 2021 but also improved the cost of production data for 2020.
This week’s post shares four key insights from the latest data that have been mostly overlooked.
1) Farm Incomes Approach Historically Higher Levels in 2021
Figure 1 shows real, or inflation-adjusted, net farm income since 1929. For 2021, net farm income is estimated at $113 billion, the highest since 2014. Furthermore, the 2021 estimate would also be the eighth highest observation since 1960. Overall, 2021 is shaping up to be a good year for the farm sector.
While not widely covered, the 2020 estimate of net farm income faced a significant revision. The previous estimates pegged 2020 net farm income estimates at $123 billion – the fourth highest since 1960. Farm income approaching those highs led to debate last winter about direct payments shattering historical records with income approaching records highs. The current estimate for 2020 is now $98 billion, a 26% reduction. A combination of lower value of crop production and higher production expenses changed the narrative in 2020 and highlighted the challenges of administering ad hoc policy programs.
2) Higher Production Values, Higher Production Expense in 2021
Farm income is expected to be nearly $15 billion higher in 2021 than in 2020. Figure 2 shows the source of change between the two years. First, the value of crop production and livestock production are both higher. Second, production costs are expected to be $11 billion higher, along with a nearly $20 billion decrease in direct payments.
3) Things Aren’t Better for All Enterprises
Figure 3 shows the change in annual cash receipts for select commodities, which provides more granularity of commodity-level conditions. First, cash receipts for corn, soybeans, and hogs have surged higher in 2021, nearly 40% higher than in 2020. This probably doesn’t come as a surprise as these commodities have been popular exports to China over the last year. Also posting an upturn are wheat, cattle and calves, and broilers.
Figure 3 also points to a difficult economic outlook for producers of cotton, fruits & nuts, vegetables & melons, and dairy. For these commodities, the USDA is anticipating a decline in cash receipts. While this isn’t a measure of overall profitability, it does provide some context about the overall financial activity. Further to that point, some commodities have posted consecutive year-over-year declines and, when combined with higher production expenses (Figure 2), could reflect significant challenges. In short, not every commodity or producer has experienced an improved outlook in 2021.
4) Farm Debt Surges to Record Level, Expected to Retreat
The estimate for inflation-adjusted farm debt by the USDA reached an all-time high of $461 billion in 2020. This edged out the previous inflation-adjusted higher of $453 billion reached in 1981.
There are many differences between the debt situation of the early 1980s and today. First, interest rates are considerably lower, and second, the overall debt service environment is much easier. Additionally, the allocation of debt is different. Non-real estate debt exceeded $200 billion in the early 1980s but has averaged only $160 billion over the last five years. This means a large share of debt today is real estate and is likely termed out over a longer repayment period.
The USDA now anticipates that total farm debt (in real and nominal terms) will decline in 2021. While not shown, the underlying data anticipate more real estate debt (+1.5%) but less non-real estate debt (-3.5%).
Wrapping it Up
It’s always difficult to summarize the state of the farm economy in a single chart, or even four. However, we believe these four charts provide many insights. While farm sector incomes have turned higher in 2021 – due largely to higher values of production – those improved fortunes haven’t been observed across every commodity.
Second, the higher costs of production and government payments were big factors in 2020 and 2021. These two issues will likely linger into 2022 as well.
Finally, while net farm income summarizes activity for a single year, the balance sheet often provides a better picture of overall financial performance. After reaching all-time highs in 2020, it will be important to monitor if total debt actually does turn lower as forecasted. Keep in mind that total debt level can be deceiving as it’s often the inability to service the debt that gets producers in trouble.
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