The USDA’s most recent Farm Income Forecast was released on February 5, 2020. According to the report, the preliminary forecast for farm and ranch income strengthened from 2019’s already strong level. The USDA estimates that net farm income will improve to $97 billion in 2020 from $94 billion in 2019. It also highlighted a decline in net cash income based on the timing of crop inventories.
Farmers work on a cash accounting basis that helps them smooth out taxable earnings by deferring sales of crops or booking ahead expenses. This cash flow structure hits the crop input sellers and the grain processors as they deal with this “hurry up and wait” cash accounting. Over several years, it all smooths out, but this practice can impact accrual accounting in a significant manner. The numbers seem surprising given the negative press that has been printed on the farming sector over the last 12 to 16 months.
2019’s stronger results did require $23.7 billion in direct farm payments which is a recent record. With the Phase I trade agreement with China in place, direct farm payments are forecast to decline to $15 billion which still remains elevated compared to the previous 10 year’s average of $11.5 billion. It helps to put the $15 billion of direct farm payments into relationship to the combined revenues of $384 billion for crops, livestock and products. They are equivalent to 4 percent of the cash revenue stream. They are not insignificant, but they do not make or break the U.S. agricultural system.
A big part of the stronger forecast comes from the additional $8 billion in livestock and animal products revenue in 2020 versus 2019. Stronger milk prices and better cattle and hog prices help the bottom line given the high fixed costs these producers face. Even with slightly higher feed costs and labor expenses, the USDA forecasts that the bottom line will improve significantly versus 2019. With the stronger exports, both the volumes and margins should be improving which is welcome relief from a difficult 2019.
Every state has a unique make up of crops and livestock, the big three; California, Iowa and Texas accounted for 26 percent of the U.S. value of crop and livestock production in 2018 (the last year with state level data). California’s relatively low concentration in livestock and high concentration in high value fruits, nuts and vegetables helps keep its revenue more stable, but it has added costs faster than other states through regulation. Iowa and Texas have much larger relative contributions from livestock which have had greater variability. Given the USDA’s forecast for stronger gains in the livestock and dairy sectors, they will see a stronger recovery than California which did not experience a major retrenchment of row crop revenue or livestock.
What the USDA’s forecasts and aggregate numbers fail to illustrate is the gap in financial performance at the operator level. Industry numbers from a variety of sources show the major difference between strong, average and subpar performers in each crop and geography. The rate of technological change and the volatility of the input and output market continue to separate top and bottom performance. Even with the USDA’s forecast of $97 billion for 2020 net farm income, the number of farmers and livestock operators exiting the industry will remain elevated as their historical finances catch up to their ability to operate today. Hopefully, their financial and legal advisors will help them work out an exit strategy that preserves their family’s financial equity. However, this requires everyone to take a clear eyed look at the results. The support industries in agriculture and agribusiness can deploy talented individuals in many valuable roles that can advise both the businesses and the families.