Farm sector profits hit hard in 2018

Higher productions expenses and lower commodity prices put squeeze on U.S. agriculture sectors.

Inflation-adjusted U.S. net farm income is projected to decline $11.4 billion (14.8%) from 2017 to $65.7 billion in 2018, while inflation-adjusted U.S. net cash farm income (NCFI) is projected to decline $14.6 billion (13.8%) to $91.5 billion, according to the latest "Farm Sector Income & Finances" report released Aug. 30 by the U.S. Department of Agriculture's Economic Research Service (ERS).

The projected declines are largely due to higher production expenses, which, if realized, would reduce net income.

Inflation-adjusted net farm income is projected to be just slightly above the 2016 level and at its second-lowest level since 2002; inflation-adjusted NCFI is expected to be at its lowest level since 2009. NCFI measures cash receipts from farming as well as farm-related income, including government payments, minus cash expenses.

Average NCFI for farm businesses specializing in all types of crop production is expected to decrease in 2018, with farm businesses specializing in specialty crops expected to undergo the largest percentage and dollar decline (at -12.2%) due to expected higher production expenses and lower cash receipts.

The smallest (dollar) decrease (-$6,000) is foreseen for wheat farm businesses, where higher production expenses are expected to offset higher cash receipts, causing NCFI to drop 6.5%. The smallest percentage decrease (-5.6%) is foreseen for cotton farm businesses, which will also have expected higher production expenses along with higher cash receipts (for a $13,900 decrease in average NCFI).

Crop cash receipts are forecasted to be $197.8 billion in 2018, a decrease of $500 million (0.3%) from 2017. Corn receipts are expected to decline $800 million (1.8%) in 2018, reflecting an expected decline in the quantity of corn sold. Wheat receipts are expected to increase more than $500 million (6.3%) from 2017 as a predicted decline in quantity sold is more than offset by expected increase in the price of wheat.

Soybean receipts in 2018 are expected to dip slightly (by $39.1 million, or 0.1%) as an anticipated price decline more than offsets higher expected quantities sold. Roughly half of the forecast value for 2018 soybean cash receipts is from 2017-18 crop marketing year production that was sold prior to China raising import tariffs on U.S. soybeans by 25%. “While prices for soybeans are expected to drop in calendar year 2018, overall soybean production quantities are expected to be up slightly in both the 2017-2018 and 2018-2019 crop marketing years,” ERS said.

Average NCFI for farm businesses specializing in all types of livestock production is projected to decrease in 2018, with the largest decreases — both in dollar and percentage terms — for farms specializing in dairy. “Following an increase in 2017, average NCFI for dairy farms is forecasted to decline 40.3% — reflecting an anticipated decline in milk prices. Farm businesses specializing in poultry are expected to see the smallest decline in average NCFI, following a projected increase in poultry cash receipts,” ERS said.

Milk receipts are expected to decrease $2.8 billion (7.4%) in 2018, reflecting an expected price decline that more than offsets increased quantities of milk sold. Cash receipts from cattle and calves are expected to decrease $800 million (1.1%) as a projected increase in the quantity sold is more than offset by an expected price decline. Hog cash receipts are expected to decline $1.6 billion (7.7%), reflecting an price decline.

Broiler receipts are expected to rise $3 billion (10%) in 2018 as larger quantities are projected to be sold at a higher price. Chicken egg receipts are expected to rise $3 billion (39.5%), reflecting larger quantities sold at a higher price. Turkey receipts are expected to decline $900 million (17.8%) in 2018, with expectations of both declining prices and quantities sold.

Expenses

After reaching a record high exceeding $390 billion (nominal) in 2014 and then declining by almost $32 billion (8%) in 2015, farm sector production expenses (including operator dwellings) stabilized at an average of $354.4 billion from 2015 to 2017. In 2018, production expenses are projected to be $365.9 billion, up 3.3% ($11.8 billion) from 2017, with most categories of expenses projected to increase. When adjusted for inflation, total production expenses are expected to rise 1.2%.

Interest expenses (including operator dwellings) are expected to increase for the fifth consecutive year, rising 17.3% ($3.2 billion in nominal terms, to $21.9 billion) in 2018. This increase is the result of rising interest rates on all new debt, as well as on existing variable-interest-rate debt, and higher debt levels.

Feed expenses, which account for 18% of cash expenses, are projected to increase 4.8% to $57.9 billion in 2018. This would be the first increase in feed expenses since 2014.

Hired labor costs in 2018 are expected to increase by 5.1% (to $30.3 billion) and have been on an upward trend since 2015. Wage rate increases are expected to put upward pressure on hired labor costs.

Spending on fuel and oil is expected to increase 17.8% to $15.2 billion on top of a 5.9% increase in 2017. The 2018 forecast is driven, in part, by the U.S. Energy Information Agency's forecast for higher diesel prices (by 50 cents/gal., on average) in 2018.

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