Net farm income declining as production costs rise, prices fall

Net farm income declining as production costs rise, prices fall

Another “golden age of agriculture” seems to be fading into the rear-view mirror, but there’s no need for pessimism. It’s the cycle of farming and of life. Nothing is ever set in stone, not prices, input costs, or the maximum number of seats you would think could be bolted into a passenger jet.

A glass half empty person would say that we’re in a squeeze between low prices and rising input costs, which is true.

But the glass half full person would point out that U.S. agriculture still has the power to produce commodities, and at times overproduce commodities, when called upon. We can feed the world, even with one hand tied behind our back.

And while USDA is projecting that net farm income is falling, we are still in an era of historically high prices for many commodities.

For example, even though USDA’s forecasts net farm income at $113.2 billion in 2014, which is down from 2013’s forecast of $131.3 billion and the lowest since 2010, the forecast still remains more than $25 billion above the previous 10-year annual average.

Another positive, USDA’s August forecast is more optimistic than its February forecast, “largely the result of improved prospects for the value of both crop and livestock production, reflecting more optimistic price expectations,” USDA says.

To be fair, the down cycle is looming large. Production expenses are now forecast to be $20 billion higher than they were in February. The increase in production expenses would be the fifth consecutive increase since 2010.

The big reason for this is higher input prices, which are forecast to rise 4.2 percent during the year. If realized, total production expenses would constitute 77 percent of gross farm income in 2014, the highest since 2010, indicating a return to tighter margins.

The three major crop-related expenses – seeds, fertilizer and pesticides – are expected to increase a combined $2.3 billion (3.5 percent) in 2014, according to USDA. Prices for all three inputs are up. Fertilizer prices have risen 17 percent since the beginning of the year and, although they will fall off during the second half of the year, are expected to remain above last year’s level.

Even so, the U.S. farm sector remains in good financial health, according to USDA. Land prices are still holding, interest rates are low and farmers typically are not carrying a lot of debt.

Many Mid-South farmers I’ve talked to are optimistic about yield potential of this year’s crop, but are already thinking about where they will cut costs in 2015. A golden age is usually followed by penny pinching and dollar stretching.

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