Farm Income and Costs: 2006 Farm Sector Income Estimates

Farm Income and Costs Briefing Room 2008 Farm Sector Income Forecast (Forecast will be updated November 25, 2008) 2007 Farm Sector Income Estimates Farm Business Income Assets, Debt, and Wealth Farms Receiving Government Payments

Net Farm Income, Value-Added, and Cash Income Decline From Near-Historic Highs (See the Official USDA 2006 Estimates)

Net Farm Income in 2006 Still Fourth Highest Ever

In 2006, farm operators earned farm income of $59 billion, a level exceeded only by the 3 preceding years (see box). Net farm income in 2006 was just above its average over the preceding 10 years of $57.4 billion. The value of production in the farm sector in 2006 was second only to 2004, but net farm income was down $18.1 billion in 2006 from the near-record $77.1 billion earned in 2005. In 2006, the value of crop production was the second highest on record and the value of livestock production was the third highest on record.

Government payments to participants in the farm sector declined $8.6 billion in 2006 due to declines in commodity-based programs, where crop prices are instrumental in determining payment levels.

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The value of crop production was up $4.4 billion, led by a $3.4-billion increase in feed grain receipts. Much of the increase in crop receipts was generated by sales from carryover crop commodities ($2 billion) from 2006.

Total cash receipts were $239.3 billion in 2006, slightly off the record $240.7 billion set in 2005. Crop receipts set a new record at $120 billion and livestock receipts were the third highest ever at $119.3 billion. The value of livestock receipts was down $5.5 billion in 2006, with sales of dairy products down $3.3 billion, poultry sales down $1.4 billion, and sales of meat animals down $1.1 billion.

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The level and timing of increases in corn and soybean prices were major factors behind the decline in farm income in 2006. Corn and soybean prices were at a high enough level to substantially reduce producers' eligibility for government payments, which declined $8.6 billion. Prices rose sharply in the last several months of 2006. Farmers who forward contracted for the sale of all or part of their production did not benefit from this sharp rise in corn and soybean prices. Producers who delivered their harvest to markets directly from the combine also missed out on much of the late rise in prices (see monthly commodity prices, 2005-07).

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Estimates of income and receipts reported here for 2006 incorporate survey data for expenses and farm-related earnings collected from farmers in early 2007 for the 2006 calendar year. The calendar-year estimates for 2006 also reflect production, price, government payment, and other data obtained from a variety of USDA reports and other sources.

Value of Production for the Farm Sector Still Strong

Most financial indicators for 2006—including net farm income and net cash income—fell below the levels reported in 2003-05, a sustained 3-year run of record earning in U.S. farming. The value of U.S. farm sector output was $275.7 billion in 2006, just above the $275.2 billion in 2005 and exceeded only by the $283 billion of production in 2004. Farms contributed $104.4 billion in net value-added to the U.S. economy in 2006, a decline from $121.4 billion in 2005. Earnings for farmers, their partners, and contractors were all lower in 2006.

Farms and ranches generated $67.9 billion in net cash income in 2006, down from 2003-05 levels but still the fourth largest amount on record. The reduction in net cash income reflects both a reduction in gross cash income and a rise in expenses. Total cash receipts were essentially flat between 2005 and 2006. The $8.6-billion decline in government payments was the primary reason for lower gross cash income in 2006.

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Cash receipts for crops were $120 billion in 2006, up from $115.9 billion in 2005. The effects of late rise in corn and soybean prices in 2006 were partially offset by a decline in output from exceptionally large harvests in 2004 and 2005. For example, the prior two years were the only ones in which corn production exceeded 11 billion bushels.

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Cash receipts for livestock declined $5.5 billion in 2006, as producers adjusted operations in anticipation of higher feed costs. Prices of cattle and hogs declined sharply in the latter half of 2006, but dairy prices began to recover from a midyear slump (see monthly commodity prices, 2005-07).

Total farm production expenses increased $10 billion (4.5 percent) in 2006. Expenses were up across the board, with feed expenses accounting for $2.5 billion of the increase. Interest expenses were up $1.7 billion as farmers took on additional debt. Expenditures for fuel were up $800 million, but higher fuel prices are reflected throughout expense categories as energy is consumed in the production and transport of most inputs.

With demand for corn rising due to ethanol, cash receipts from corn were up $3.2 billion (highest increase among all commodities). Value of livestock production, which has been rising since 2002, fell by $6.3 billion in 2006. Sales of milk and broilers were off the most.

Banner Year for Corn

Ethanol continues to be a significant force in rising corn prices and cash receipts. As recently as 2000, less than a billion bushels of corn were used annually to produce ethanol. By 2006, 2.2 billion bushels of corn was needed to fulfill ethanol demand. With rising ethanol demand, lower corn output, (5 percent lower than 2005), and substantially lower (42 percent) ending stocks, corn prices in 2006 rose by better than 30 cents a bushel. Consequently, corn receipts rose to nearly $22 billion.

Wheat prices strengthened throughout 2006, enabling wheat cash receipts to rise. Poor weather across the globe caused worldwide production to fall nearly 5 percent. Regions suffering the most include the European Union (down 5 percent due to high temperatures in July), Russia (down 6 percent due to reduced planted area), and Australia (down 58 percent due to very severe drought). Cash receipts for soybeans remained steady, even with the farm price for soybeans off a nickel per bushel from 2005. U.S. soybean producers generated record high output in 2006, but they added the entire increase to stocks.

Greenhouse/nursery sales, which have been increasing every year over the past couple of decades, leveled off in 2006 (due to the weakening housing market in 2006) at $16.9 billion. Strong demand for processing potatoes and fresh-market bulb onions (especially for export) boosted their prices. Shortened supply of fresh-market vegetables such as tomatoes, sweet corn, and snap beans (due to extreme heat) raised their prices and cash receipts. These forces enabled vegetable cash receipts to reach an all-time high of nearly $18 billion.

Sales fell in 2006 by almost $400 million for grapefruit growers (a large California grapefruit crop caused prices to fall nearly $4 per box) and for wine producers. California production of grapes for wine was down by 16 percent with no increase in price. Almond cash receipts were also down by nearly $300 million. Still, cash receipts for fruit/nut growers topped $17 billion, the second highest on record.

Beef Steady, but Dairy, Pork, and Broilers Slip

The decline in value of livestock production, $6.3 billion, reflects lower cash receipts in 2006 for almost all livestock products except turkeys and eggs. Livestock receipts are still the third highest on record. Cash receipts for beef producers are estimated to remain steady at a little less than $50 billion, even with the farm price for cattle falling almost $2 per cwt in 2006. Beef supplies rose in 2006, as pastures deteriorated due to dry weather and beef cows were sent to market for slaughter. Export demand for beef strengthened (better than 60 percent) in 2006 from 2005, with Japan and South Korea allowing U.S. beef imports. (A ban imposed in May 2003 due to concerns about bovine spongiform encephalopathy was lifted in 2006.) Beef exports to Mexico continued strong because of a healthy Mexican economy, large U.S. beef supplies, and U.S. beef prices constant or declining in nominal terms. U.S. domestic demand improved slightly in 2006.

Pork exports, up 13 percent in 2006, failed to offset the increase in pork supply from higher hog numbers and heavier dressed weights. This caused average hog prices to fall nearly $4.50 per cwt (9 percent), pushing cash receipts down by a little over $900 million in 2006.

Milk output per cow, which has gradually improved since the early 1990s, continued to rise in 2006 and boosted milk production to a record-high 181.9 billion pounds. This increase dampened milk prices by almost $2.25 per cwt and reduced cash receipts by almost $3.3 billion from 2005.

Per capita consumption of chicken has been increasing steadily for decades, and only a modest increase is expected in 2006. Cash receipts to broiler producers was $2 billion lower than the record $20.9 billion in 2005. The farm price for broilers dropped 6 cents/pound (13 percent) from its high in 2005. Cash receipts for eggs rose by $300 million to $4.3 billion, even with egg production stable in 2006, as prices increased about 7 percent.

Government Payments at $15.8 Billion in 2006

Total government payments in 2006 fell by one-third from their record levels in 2005. Program payments to producers from three sources are responsible for this decline. First, strong commodity prices substantially reduced loan deficiency payments. The level of posted county prices relative to commodity loan rates during the marketing year determines loan deficiency payment rates, as well as the amount of the program commodity that realizes payments. The decrease in payments is attributed to a smaller share of program-eligible crops receiving loan deficiency benefits and a significant decrease in payment rates. Marketing loan gains and certificate exchange gains also declined substantially in 2006.

Second, ad hoc and emergency program payments in 2006 fell by almost 90 percent from their high in 2005 due to sharply reduced payments from the Crop Disaster Program, various hurricane disaster relief programs, and the Livestock Assistance Program. Other payments in this category include payments under the Dairy Indemnity Program, Dairy Market Loss Assistance Program, Emergency Conservation Program, Lamb Meat Assistance Program, Livestock Compensation Program, Livestock Indemnity Program, Market Loss Assistance Program, Noninsured Assistance Program, Quality Losses Program, Sugar Beet Disaster Program, Trade Adjustment Assistance Program, and the Tree Assistance Program.

Third, Tobacco Transition Payment (TTP) outlays declined by almost half in 2006 due to the large level of lump-sum payments made in 2005. Begun in 2005, this program provides payments over a 10-year period to eligible quota holders and producers of quota tobacco. Lump-sum payments to individuals are made through agreements with third parties in return for their rights to the 10-year TTP payment stream. The extent to which many tobacco producers and quota owners accept lump-sum payments in the early years of this 10-year period implies annual payments to producers will decline markedly in the latter years. The benefits from this program are realized primarily by the States where tobacco production is located.

The modest decline in direct payments in 2006 (made under the Direct and Countercyclical Payment Program) was the outcome of fewer farmers taking advantage of the advanced payment in October (optional), thus rolling more of the payment into the 2007 calendar year. There is little change in direct payments by crop year. The largest countercyclical payments go to corn base acreage. Corn and cotton remained the largest recipients of countercyclical payments in 2006. Of the 2006 harvested crops, only cotton and peanuts are expected to realize countercyclical payments that will largely be paid in the following calendar year. (Producers may elect to receive countercyclical payments in three installments. Countercyclical payments in calendar year 2006 include the second partial and final payments for 2005 crops and the first partial payment for 2006 crops.)

Conservation programs include all conservation programs administered by the Farm Service Agency (FSA) and the Natural Resources Conservation Service (NRCS) that provide direct payments to producers. The increased conservation payments received in 2006 reflect more of the programs being brought up to funding levels authorized by current legislation.

Production Expenses

Total production expenses rose $10.0 billion (4.5 percent) to $232.5 billion in 2006. The percentage change is less than in the 2 previous years, but continues the 4-year run of higher production expenses. Since a decrease in 2002 of about 2 percent, total expenses have risen $39.8 billion (20.7 percent). The price level of all production inputs combined climbed 5.0 percent more than the rise in total expenses over that span. Since 2002, overall prices have risen 22.6 percent, again more than total expenses. Total output in 2006 decreased slightly, with crop output falling 2.8 percent and livestock output rising 3.0 percent. Prices paid for crop sector inputs rose faster than for livestock inputs.

The largest increase in an individual expense was $2.5 billion for feed. Miscellaneous expenses were up $1.7 billion; capital consumption rose $1.2 billion. Real estate interest expenses and property taxes increased $1.0 billion each in 2006. Two expenses decreased—net rent to nonoperators fell $1.3 billion while livestock and poultry purchases dropped $290 million.

The 8.9-percent increase in feed expenses is the product of a 5.9-percent rise in feed prices and a 3-percent rise in livestock output. The number of grain-consuming animal units was 2.3 percent higher in 2006. A big factor in the amount of feed used is the number of cattle on feed, which was 9 percent higher than a year earlier. With continued poor pasture, hay, and forage conditions, more cattle were pushed into feedlots, despite lower prices received. Also, many cows were culled rather than kept for breeding, in part because of low dairy prices.

Livestock and poultry purchases were down in 2006, primarily because the drought-pressured placement of cattle on feed lowered the price being paid for them. The price for Oklahoma City feeder cattle was down 3.3 percent in 2006. With more hogs available for slaughter, their farm price was almost 7 percent lower than in 2005. The farm price for broilers also dropped 10 percent because of an increase in production.

Principal crop-related expenses—seed, fertilizers, and pesticides—were an estimated $33.2 billion in 2006, up $1.1 billion (3.4 percent) from 2005. One factor affecting this expense, planted acreage of principal crops, was down marginally in 2006.

Seeds purchased rose an estimated $600 million (5.8 percent) to a record-high $11.0 billion. Seed expenses have risen consistently since 1999. Following 2006, they stand $3.8 billion (52.8 percent) higher than in 1999. The prices paid for seed rose 8.6 percent in 2006. Including 2006, seed prices have increased 6.3 percent or more in 5 of the last 6 years, and 50 percent since 1999. The rise in seed prices is tied to the greater use of GMO seeds, which are more expensive to produce and are in higher demand because of their traits.

Following 3 years of double-digit percentage increases in the annual average price for fertilizer (during which time it climbed 52 percent), the annual average rose only 6.9 percent in 2006. However, prices for fertilizer dropped 12 percent between January and August. Through this period, nitrogen prices fell 22.5 percent. The principal reason for this drop was the fall in natural gas prices during 2006. The annual average price for natural gas was 14 percent lower than in 2005, and 41 percent lower in the fourth quarter of 2006 than in the fourth quarter of 2005. The lower prices for fertilizer during 2006 may also have influenced some operators to prepurchase fertilizer for use in 2007. According to the 2005 ARMS, 32 percent of fertilizer expenses were prepurchased in that year. Applying the previous year's application rates to forecast planted acreage of individual crops, the use of fertilizer in 2006 should have been down 0.8 percent, with use on corn down 2.9 percent.

Pesticide expenses remained steady in 2006. Pesticide prices began rising in May 2005, and between then and November 2006 increased 8.2 percent. Between 1997 and 2005, pesticide prices rose very slowly or decreased. The increase in prices during 2006 was likely due to the increases in oil prices, since petrochemicals are used in many pesticides. Use of pesticides should be slightly lower in 2006 than in 2005, with decreased use on corn offset by increased use on soybeans and cotton.

Direct energy expenses were up 7.7 percent, rising from $13.8 billion in 2005 to $14.8 billion in 2006. Electricity rates were up 10 percent and expenditures rose 6.9 percent. Fuel and oil expenses rose 8.0 percent in 2006, much more slowly than in the preceding 2 years. Average fuel prices rose for the fourth consecutive year. Since bottoming out in 2002, annual average fuel prices have risen 113 percent. The slower growth (11 percent) in 2006, was the result of a 19-percent falloff in fuel prices after they peaked in August. Monthly prices from January to August averaged 18 percent higher than in the same months in 2005. Most farming activities occur during these months, so most operators probably paid higher prices than the annual average price would indicate. Fuel prices did dip from November 2005 to February 2006, so farmers who obtained fuel during that period would have been able to reduce their costs. Many operators with onfarm storage probably purchased fuels in late 2006 to avoid a rise in fuel prices predicted for early 2007.

The increase in contract labor expenses in 2006 was the result of a 3.8-percent climb in wage rates and a 1-percent drop in production on vegetable, fruit, and nut farms, the heaviest users of contract labor. Miscellaneous expenses were up $1.7 billion, with about half of the increase in custom feeding fees.

State Income Performance Varies by Mix of Commodities

With net farm income dropping more than 20 percent nationwide in 2006, 40 of the 50 States also suffered declines in net farm income. Net farm income dropped by more than 20 percent in 25 States. Lower prices in the livestock sector especially affected farmers in the Western Corn Belt and Mountain regions. States situated along the Mississippi River and its major tributaries—such as Iowa, Illinois, Ohio, Missouri, Nebraska, and Minnesota—are major producers of corn, soybeans, cattle, hogs, and milk. These are the commodities that drove U.S. net farm income to record levels in 2003 and 2004. In 2006, these States had a significant decline in eligibility for government payments based on prices. Rising prices for soybeans and corn late in the year exceeded target prices. But the higher prices did allow farmers in these States to offset the declining fortunes of the livestock sector and lower government payments. Incomes in tobacco producing States in the Mid-Atlantic continued to be bolstered by the tobacco buyout program implemented in 2005.

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Table

Payments to Hired Labor, Landlords, and Lenders Up in 2006

Even with the 23.5 percent drop in net farm income, payments to stakeholders were up 2.4 percent to a record-high $45.4 billion in 2006. This comprises around 43 percent of the farm sector's net value added.

Employee compensation, also referred to as hired labor, rose $650 million (3.1 percent). Wage rates were up 3.8 percent in 2006, while production of vegetables, fruits and nuts, and greenhouse/nursery products (the heaviest users of hired labor) was down 1 percent.

Net rent to nonoperators fell $1.3 billion (12.4 percent). The leading factors in the decline were a 33-percent drop in government payments to landlords and an 11-percent rise in landlord expenses. The ratio of landlord expenses to gross income climbed to 56 percent, the highest proportion ever. The largest increase in expenses was a 21-percent hike in property taxes.

The $1.7 billion-increase in interest expenses was the result of a $1.0-billion rise in real estate interest and a $735-million rise in nonreal estate interest expenses. End-of-year real estate debt rose $7.5 billion and end-of year nonreal estate debt was up $6.6 billion over 2005. The average real estate interest rate went from 6.4 percent in 2005 to 6.8 percent in 2006, while the average nonreal estate rate climbed from 6.3 percent to 6.8 percent.

Even though interest expenses rose from 2005, total interest expenses were $2.5 billion lower than in the February forecast. As a result of ARMS demonstrating a portion of debt reported as farm debt but not being used for farm business purposes, 2006 real estate debt was revised down $10.9 billion and nonreal estate debt was reduced $8.0 billion.

See glossary.

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