Based on the data released by the U.S. Department of Agriculture’s Economic Research Service (ERS) in early December, U.S. net farm income is expected to increase by $36 billion (or 43 percent) above 2019 levels. The USDA’s 2020 Farm Income Forecast stated net farm income is now estimated at $119 billion, which would be the highest inflation adjusted net farm income since 2013 and is 32 percent above the 20-year (2000-2019) average net farm income of $90.6 billion.
It should be noted, however, the 2020 net farm income is greatly inflated by the highest level of government farm program payments in decades.
In the recent farm income report, USDA estimated 2020 total U.S. net cash income for 2020 at $134.1 billion, which is an increase of 24.7 billion or 22.6 percent from a year earlier. Net cash income includes cash receipts from all farm-related income, including government payments, minus cash expenses for the year. Net farm income is accrual-based, which includes adjustments in the cash income for changes in inventories, depreciation, and rental income. Generally, net farm income is a truer measure of overall profitability in the farm sector.
The Farm Income Report also included a number of statistics to note.
Overall, 2020 cash receipts for all commodities on U.S. farms are estimated at $366.5 billion, which is a decline of $3.2 billion or 0.9 percent compared to 2019.
Total 2020 crop receipts are expected to increase by $3.3 billion or 3.3 percent over 2019 levels, primarily due to an estimated increase of $2.6 billion in receipts for soybeans, as well as higher receipts from sugar beets, potatoes, fruit and nuts. Receipts from corn sales are expected to decline by $2.5 billion, primarily due to reduced corn inventories following the 2019 crop year. Receipts from 2020 wheat and cotton production also declined from 2019 levels.
Total cash receipts from livestock production in 2020 are expected to decline by $9.7 billion or 5.5 percent, reflecting the market disruptions and price declines which resulted from the Covid-19 outbreak in 2020. As compared to a year earlier, 2020 receipts from cattle sales dropped by $4 billion, hog sales declined by $1.1 billion, and broiler sales fell by $6.7 billion. Sales from turkey production and egg production increased in 2020.
The biggest factor in the sharp increase in 2020 net farm income and net cash income levels was the major increase in the level of government payments to the farm sector during 2020. Direct government payments to farmers in 2020 was listed at $46.5 billion in 2020, which was an increase of $24 billion or 107 percent from 2019 levels.
Ad hoc or one-time government program payments accounted for $35.7 billion of the total payments to farmers. This included $11 billion in Coronavirus Food Assistance Program-1 (CFAP1) payments, $13.3 billion in CFAP2 payments, $5.9 billion in Paycheck Protection Program (PPP) payments, and $2.4 billion in other ad hoc payments.
There was another $3.7 billion from the final 2019 market facilitation program payment, which was paid in 2020. 2019 farm program payments, which were paid during 2020, increased by $3.1 billion for the Price Loss Coverage (PLC) program and only $0.4 billion for the Ag Risk Coverage (ARC) farm program. This was primarily due to a large number of corn base acres being switched from the ARC-CO to the PLC program option in 2019, which was the first year of the new farm bill.
Total farm production expenses in 2020 are estimated at $343.6 billion, which is a decline $5.2 billion or 1.5 percent from a year earlier. The 2020 total farm expenses are at the lowest level since 2011. Major factors in the decline of farm-level expenses are lower interest rates, lower fuel costs, and reduced livestock purchase costs.
On the other hand, land rent expenses increased by $1.3 billion, fertilizer costs increased by $1.1 billion, and taxes and fees increased by just over $1 billion in 2020.
Working capital, which measures the cash available after all farm expenses have been paid and all annual debt payments have been made, is expected to increase by 6 percent by the end of 2020. Deterioration of working capital has been a major concern in many farm businesses in recent years.
The nominal value of U.S. farm assets is expected to increase by 1.5 percent or $45.5 billion in 2020, raising the total value of U.S. farm assets to approximately $3.12 trillion. This increase comes primarily from higher farm real estate values in some portions of the U.S. However, when adjusted for inflation, the value of farm assets and the equity level of farm operations is almost unchanged from 2019 levels.
Even though net farm income is expected to increase in 2020, total U.S. farm debt is also expected to increase by year-end. Total farm debt is projected to increase by 4 percent or about $16.6 billion in 2020, raising the total U.S. farm debt to $435.2 billion.
The overall farm sector debt-to-asset ratio remains relatively low at 13.95 percent at the end of 2020. However, this is a small increase from 13.65 percent a year earlier. The debt-to-equity ratio increased to 16.2 percent in 2020, which is at the highest level since it was 17.6 percent in 2002. However, the 2020 ratio is still well below the record high ratio of 22.2 percent in 1985.
While the 2020 U.S. net farm income projections do show some dramatic improvement in 2020 as compared to the previous six years (2014-2019), a person does have to take a pause and dig a little deeper into the data behind that increase. The net farm income which resulted from crop and livestock sales was $73 billion in 2020, which was the highest in recent years — primarily due to the increase in crop prices in the final four months of the year. The 2020 net farm income from crop and livestock receipts was comparable to 2015 income levels. However, it was still well below net income levels achieved from 2011-2014.
Just over $46 billion of the estimated $119 billion in projected 2020 net farm income was due the farm program payments from the federal government, with ad hoc or one-time program payments accounting for over 75 percent of that total.
Federal farm program payments had an annual total of $11 to $13 billion from 2011 to 2018, before increasing to $22 billion in 2019, which was the result of the market facilitation payments paid to farmers to offset losses from the trade war with China and other countries. Government farm program payments accounted for 39 percent of the net farm income in 2020, which was an increase from 26 percent in 2019, and compared to 9-16 percent in most other years from 2011 to 2018.
There are some certainly some reasons for optimism in net farm income and profitability levels revealed in the latest USDA farm income report for the U.S. farm sector. However, it will be interesting to see how sustainable the improved farm income levels are in 2021 and beyond. Obviously, it is likely not realistic to expect the same level of government farm program payments in 2021 as existed in 2020. A big key going forward will be maintaining the strength in crop and livestock prices which existed late in 2020 due to the improved U.S. export markets to China and other countries.
Of course, weather is always a big wild card in final U.S. net farm income figures from year to year.
Kent Thiesse is a government farm programs analyst and a vice president at MinnStar Bank in Lake Crystal, Minn. He may be reached at (507) 726-2137 or firstname.lastname@example.org.