Farm Sector Profitability Expected To Weaken in 2015
Both net cash and net farm income are forecast to decline for the second consecutive year after reaching recent highs in 2013. Net cash income is expected to fall by 27.7 percent in 2015, while the forecast 38.2-percent drop in net farm income would be the largest single-year decline since 1983 (in both nominal and inflation-adjusted terms).
See table on farm income indicators.
- Both net cash and net farm income are forecast to decline for the second consecutive year after reaching recent highs in 2013. Net cash income is expected to fall by 27.7 percent in 2015, while the forecast 38.2-percent drop in net farm income would be the largest single-year decline since 1983 (in both nominal and inflation-adjusted terms).
- Crop receipts are expected to decrease by 8.7 percent ($18.2 billion) in 2015, led by a forecast $8.6-billion decline in corn receipts, a $5.7-billion drop in soybean receipts, and a $2.7-billion drop in wheat receipts.
- Livestock receipts could fall by 12.0 percent ($25.4 billion) in 2015, a reversal from the 43.8-percent increase in receipts over 2005-14 period.
- The reduction in crop and livestock receipts is largely driven by changes in price rather than changes in output.
- Government payments are projected to rise 10.4 percent ($1.0 billion) to $10.8 billion in 2015.
- Total production expenses are forecast to fall 2.3 percent, the first time since 2009 that they have fallen year over year. Energy inputs and feed are expected to have the largest declines. Expenses are forecast to increase for labor, interest, and property taxes.
- After several years of steady improvement, farm financial risk indicators such as the debt-to-asset ratio are expected to rise in 2015, indicating increasing financial pressure on the sector. However, debt-to-asset and debt-to-equity ratios remain low relative to historical levels.
- Declining farm sector assets resulting from a modest decline the in value of farmland, investments, and other financial assets—as well as higher debt—are forecast to erode equity by 4.8 percent, the first drop since 2009.
- After several years of steady improvement, farm financial risk indicators such as the debt-to-asset ratio are expected to rise in 2015, indicating greater financial pressure on the sector. However, the sector appears to have remained well insulated from solvency risk.
The Value of Agricultural Sector Production Forecast To Fall for the Second Straight Year in 2015
The annual value of U.S. agricultural sector production is expected to fall 9.2 percent to $427.7 billion in 2015, as the value of both crop and livestock production decline (see table on value of production). The value of production is comprised primarily of cash receipts adjusted for any changes in inventories and home consumption use, plus all farm-related income. The falling value of crop production (to a forecast $186 billion in 2015) represents a second consecutive decline from 2013’s record high of $233.2 billion, and the third straight year of declining crop cash receipts despite a net inventory reduction. The value of U.S. livestock production is also forecast to decline 12.3 percent (to $191.3 billion) in 2015 as a large drop in receipts more than offsets the sector’s inventory expansion.
Falling Crop Prices and Receipts Forecast for 2015
Crop cash receipts—the cash income from crop sales in the 2015 calendar year—are forecast to fall 8.7 percent in 2015, led by broad price declines for most field crops. Corn cash receipts are expected to decline the most, falling by $8.6 billion in 2015. Since hitting a record high in 2012, corn receipts have fallen 36 percent. While production is expected to drop slightly relative to 2014, corn prices are expected to fall by a larger percentage in 2015. Cash receipts for soybeans and wheat are also expected to decline from 2014, falling $5.7 and $2.7 billion, respectively. Rice cash receipts are expected to decline by 36.4 percent ($1.3 billion) on lower expected production and calendar-year prices.
Despite an expected increase in production, cash receipts for fruits and nuts are expected to remain flat in 2015 due to lower prices received by farmers. Production of grapefruits and oranges are both expected to fall as citrus greening disease has resulted in unmarketable fruit throughout Florida and elsewhere. California citrus production has held steady or increased relative to 2014, despite continued drought conditions. California has historically accounted for a large portion of U.S. vegetable and fruit/nut cash receipts. The drought there is likely to affect fruit/nut and vegetable production, and to reduce cotton and rice cash receipts. California is the second largest rice producing State and accounts for a large share of long-staple cotton production (for more information, see the ERS drought page).
See data on value of crop production and crop cash receipts.
Animal and Animal Product Receipts Forecast Lower in 2015
Animal and animal product cash receipts increased by 43.8 percent in real terms from 2005 to 2014, but in 2015 are expected to fall 12 percent in 2015 (to $186.8 billion) in nominal terms. Much of the decline is due to falling dairy and hog receipts, but broilers and cattle/calves are implicated as well. After reaching a record high of $49.3 billion in 2014, milk receipts are expected to drop 28.2 percent in 2015 as declining prices more than offset an expected increase in milk production. Hog production is expected to rise in 2015 as the industry recovers from the porcine epidemic virus. However, hog prices are expected to drop sharply relative to 2014 and result in a 25-percent decline in hog cash receipts. Cash receipts from cattle production are also expected to decline by 4.9 percent in 2015 due to an expected drop in both price received and quantity marketed. The decline has primarily been driven by declining price expectations since the August data release.
Overall poultry and egg cash receipts are expected to fall 2.4 percent in 2015, due primarily to falling broiler receipts. Poultry and egg receipts are expected to be broadly affected by the highly pathogenic avian influenza (HPAI or "Bird Flu") in 2015, although impacts are mixed. Since being detected in December 2014, HPAI has claimed 48.1 million birds, with turkeys and egg laying chickens most vulnerable. Both turkey and egg laying chicken quantities are forecast to decline and place upward pressure on prices. In contrast, U.S. broiler production is expected to increase in 2015. The increase in broiler production—coupled with HPAI-related import bans on U.S. poultry by some nations—has increased supply in the U.S. market, leading broiler prices sharply lower.
See data on value of livestock production and livestock/products cash receipts.
Falling Prices are Primary Driver of a Forecast Drop in Cash Receipts in 2015
Cash receipts for all commodities are expected to fall by nearly $41.5 billion in 2015. This decline largely reflects falling commodity prices, which are lower for a broad set of agricultural commodities in 2015 relative to recent years. To add perspective to the forecast change in cash receipts, the overall change for 2015 relative to 2014 can be decomposed into separate price and quantity effects for those commodities—soybeans, tobacco, peanuts, sugar beets, hay, potato, sunflower, flax, cottonseed, dry beans, barley, rapeseed, rye, canola, oats, mustard seed, safflower, sugarcane, sorghum, long-staple cotton, rice, wheat, upland cotton, and corn, hogs, broilers, milk, farm chickens, turkeys, eggs, and cattle/calves—where we forecast both prices and quantities. For these commodities, falling prices account for 96.5 percent of the decrease in receipts from 2014 to 2015.
Government Farm Program Payments Forecast To Increase in 2015
U.S. government farm program payments to the farm sector are forecast to rise 10.4 percent from 2014 levels to $10.8 billion (see table on government payments). New commodity-based programs introduced as part of the 2014 farm bill and implemented for the first time in 2015—such as the Price Loss Coverage (PLC) and Agricultural Risk Coverage (ARC) programs—are now the largest source of government payments to the farm sector. ARC is a revenue-based compensation system where payments are triggered when revenues fall below the ARC guarantee for the covered commodity. Payments on corn base acres are expected to account for over 80 percent of all 2015 ARC program payments. PLC payment levels depend only on the level of covered commodity prices relative to a reference price. PLC payments in 2015 are expected to go mainly to long-grain rice, peanuts, and canola base acres. Forecast increases in marketing loan gain and loan deficiency payments relative to 2014 reflect declining peanut and upland cotton prices in 2015, while increased payments for the Milk Income Loss Contract (MILC) and Margin Protection Program reflect declining milk prices. Increases in conservation spending reflect increases in Natural Resources Conservation Service (NRCS) financial assistance.
In contrast to increasing commodity program payments, the largest decline in payments relative to 2014 is expected in the Supplemental and Ad Hoc Disaster Assistance category, down $3.1 billion to $1.7 billion in 2015. The decrease primarily reflects a drop in payments from the Livestock Forage Disaster Program (LFP). In 2015, payments under the LFP are expected to decline significantly from 2014’s all-time high, which reflect delayed (since 2011) obligations collectively paid in 2014. This decline in ad hoc assistance is forecast to be partially offset by indemnity payments under an Animal and Plant Health Inspection Service (APHIS) program for losses from Highly Pathogenic Avian Influenza, or "bird flu," affecting U.S. poultry operations in 2015.
Declines in other government payment categories in 2015 reflect the phasing out of previous farm bill programs—including the Average Crop Revenue Election (ACRE) program, the Direct and Counter-Cyclical Payment (DCP) program, and the Tobacco Buyout—and completion of the 2014 Farm Bill’s transitory program for upland cotton (CTAP).
The November 2015 forecast for U.S. government payments declined by $586 million (5 percent) from the 2015 forecast issued in August. The major reason was an even larger decline in the forecast for ARC payments since the August forecast.
Production Expenses Forecast To Decline for the First Time in Since 2009
Year-over-year reductions in farm production expenses are infrequent. However, in 2015, for the first time since 2009 and for the third time since 2000, total farm production expenses are forecast to fall. The $7.7 billion decline, about 2 percent, follows a period of rapid increases in production expenses, on average, of over 9 percent annually (in nominal terms) from 2010 to 2014. Despite the decline in 2015, production expenses are still projected to be high by historic standards, behind only 2014 in both real and nominal terms. The drop in expenses alleviates, but does not completely offset, the effect of the drop in cash receipts, leading to tighter margins.
See data on production expenses.
The forecast decline in expenses is driven primarily by lower spending on feed, fuel, and fertilizer, which outweigh expected increases in spending on labor, interest, and property taxes/fees.
- Even with higher expected demand for feed due to more cattle being fed, feed expenses are expected to be over $5 billion (8.5 percent) lower in 2015 due to lower feed prices.
- Continued rebuilding of cattle inventory and renewed poultry purchases to restore inventory depleted by the Highly Pathogenic Avian Influenza (HPAI or “Bird Flu”) contributed to forecast livestock and poultry purchases remaining in line with 2014 purchase expenses.
- Fuel and oil expenses are forecast to decrease by over 28 percent to $12.7 billion in 2015. This reflects the Energy Information Agency’s forecast of the price of diesel and gasoline fuel, both projected down over 28 percent in 2015.
- Seed, pesticide, and fertilizer expenses, which are the principal inputs into crop production, are expected to decrease by about $3.2 billion in 2015, driven primarily by lower fertilizer expenses.
- Labor costs are expected to increase in 2015 by over 4 percent, with most of the increase driven by higher expected wage rates.
The largest forecast increase in farm production expenses is for interest outlays, up significantly due to forecast increases in farm debt. Interest paid on debt secured by real estate is expected to increase by almost 19 percent in 2015, to $11.4 billion. Interest payments for nonreal estate debt are also expected to increase by 23 percent based on continued demand for operating and other types of nonreal estate loans.
Net rent expense—the amount paid to rent land, adjusted for the landlord’s share of government payments and insurance indemnities and net of any expenses paid by the landlords—is forecast to remain relatively flat, decreasing by a little under 1 percent in 2015. As in recent years, the majority of net rent expense is forecast to be paid to non-operator landlords.
Property taxes and fees—which include real estate and personal property taxes, as well as motor vehicle registration and licensing fees—are expected to increase by over 7.8 percent to $15.5 billion in 2015, driven primarily by the increase in the (taxes) prices-paid index.
Miscellaneous expenses—which include insurance premiums, spending on irrigation, production contract fees, and grazing fees—are expected to increase slightly in 2015.
Payments to Stakeholders Expected To Increase in 2015
In 2015, payments to stakeholders are forecast to increase by $4.1 billion (6.3 percent), while net farm income is forecast to fall 38.2 percent. Net value added represents the sum of economic returns to all the providers of factors of production. Net value added is distributed among stakeholders who receive a fixed payment in return for their services and equity owners who share in the profits. Stakeholders provide the hired labor, leased capital, and rental land used in agricultural production, but in most cases don’t directly share risk in the short term. An exception is landlords who sign operators to share rent agreements. Consequently, the payments that stakeholders receive can be more stable over time than net returns to the equity owners of agricultural production.
See data related to payments to stakeholders.