Agriculture ; Farm income ; Agricultural prices

Alan D. Barkema

Nancy Novack

English

Research Papers in Economics

January 2001
Another big package of government financial aid cushioned
the farm slump in 2000 but did little to lift agriculture’s spirit.
Overall, the industry’s major financial indicators stayed
remarkably healthy. Farmers delivered more red meat and
poultry to supermarkets than ever before, and strong con-
sumer demand in the robust U.S. economy boosted livestock
prices and profits. But another big crop swamped still sluggish
global markets, and weak crop prices held down farm
incomes. In the end, help from Washington propped up the
industry’s financial indicators for the third consecutive year.
Some signs of improvement have emerged, but like the
year before, the industry’s outlook for 2001 hinges on the
weather and Washington. Global food consumption has
caught up with agriculture’s recent production surge, tighten-
ing world grain supplies and brightening prospects for farm
exports. Nevertheless, normal weather and another big crop
could keep U.S. granaries full and crop prices low. Livestock
producers are likely to have another good year, but weak crop 
CENTER FOR THE STUDY OF RURAL AMERICA
Federal Reserve Bank of Kansas City
The Farm Slump Eases
Alan D. Barkema Nancy Novack
Vice President & Economist Research Associate
Center for the Study of Rural America
Commentary on the rural economy
The Main Street 
Economist
January Newsletter 2001  2/1/01  2:44 PM  Page 2The Main Street Economist January 2001
prices could hold down farm income.
As in the past three years, agriculture’s
prospects in 2001 may rest on financial
assistance from Washington.
The farm slump continued in 2000
Farm financial conditions stayed on a
remarkably even keel in 2000. Farm
incomes and asset values edged up despite
weak crop prices, which lingered as the
sole reminder of agriculture’s continued
slump. Despite an early warning of wide-
spread drought, crop producers turned out
the nation’s fifth consecutive bumper
harvest. The big crop swelled crop inven-
tories and held down crop prices, but gen-
erous assistance from Washington lifted
incomes. Livestock producers notched
solid profits, with cheap feed holding
down costs and robust consumer demand
buoying livestock prices.
When all the numbers are in, the
nation’s farm income for 2000 compared
to 1999 is expected to be up slightly. The
U.S. Department of Agriculture pegs net
cash farm income, a cash flow gauge that
measures the difference between receipts
and expenditures, at $56.4 billion, up
more than 3 percent from the year before.
Net farm income, a broader measure that
takes into account inventory swings and
depreciation, could total $45.4 billion, up
more than 4 percent from the year before
and slightly above the decade average
(Chart 1).1
Livestock producers generally fared
well in 2000, with profits fueled by cheap
feed and strong livestock prices. The
strong prices and big production boosted
livestock receipts to a record $99.5 billion,
up more than 4 percent from 1999. Hog
producers earned strong profits through
the year, in a welcome turnaround from
two years of substantial losses. Profits for
cattle feeders seesawed through the year,
solidly in the black at the beginning of the
year, deeply in the red by summer, and
back in black in the fall. Despite the swing
in feedlot profits, high feeder cattle prices
kept profits steady for ranchers.
Crop producers had a brief opportu-
nity to market their crops at better than
break-even prices, when an early spring
warning of widespread drought rallied the
markets. The price surge was short-lived,
however. The summer weather in the
southern Great Plains was dry and harsh,
but many other areas dodged the drought.
By midsummer,
prices plunged
to the lowest
levels since the
mid-1970s for
soybeans and
since the mid-
1980s for corn
and wheat. The
low prices held
crop sales at a
relatively low
$96.6 billion, up
about 4 percent
from 1999.
As in the
year before,
financial assis-
tance from Washington anchored farm
incomes in 2000. Government payments
to farmers are expected to total a record
$22.1 billion, adding up to roughly half
of net farm income. Underscoring
Washington’s concern with the industry’s
lingering slump, nearly 25 percent of the
year’s big farm subsidy came from emer-
gency assistance authorized by Congress
and signed by the Clinton administration
in midsummer. Another 14 percent was
spillover from similar emergency assistance
authorized in 1998 and 1999.
With Washington’s help underpinning
farm incomes, the industry’s balance sheet
remained solid. The value of farmland,
which accounts for about four-fifths of the
nation’s farm assets, firmed and started
climbing again after softening the previous
year. A quarterly survey of farm bankers in
the Kansas City Federal Reserve District
(Colorado, Kansas, western Missouri,
Nebraska, northern New Mexico,
Oklahoma, and Wyoming) indicated an
average gain of more than 3 percent in
district farmland values during the year
ending September 30. A similar survey
reported a 7 percent gain in the Chicago
Federal Reserve District (Iowa and parts
of Indiana, Illinois, Michigan, and
Wisconsin). Ranchland values in the
mountain states climbed the most, influ-
enced more by nonfarm investors’ demand
for scenic mountain views than by ranch-
ers’ demand for additional grazing land.
Farm debt edged up just over 2 percent
to $180.6 billion, as farm borrowers and
their lenders hunkered down to await better
financial times. With farm assets nearly
steady and farm debt up slightly, the indus-
try’s debt-asset ratio inched up to a still
solid 16.1 percent. Farm borrowing costs
climbed, with the average interest rate on
farm operating loans rising about 75 basis
points during the year ending September
30. But big government payments and
healthy livestock profits enabled most bor-
rowers to repay operating loans and keep
payments up to date on machinery and
farm real estate loans. Nevertheless, farm
borrowers and their lenders remained
uncomfortable with the notion that govern-
ment assistance was at the root of agricul-
ture’s financial stability.
Modest improvement
likely in 2001
Agriculture enters the new year in gen-
erally solid financial health, thanks mainly
- 2 -
60
50
40
30
20
10
0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999  2000* 2001*
Billions of dollars
*Forecast
Source: U.S. Department of Agriculture
Direct
government
payments
1990–99
average
Emergency
assistance
Chart 1
U.S. Net Farm Income
January Newsletter 2001  2/1/01  2:44 PM  Page 3to the large doses of government financial
aid received over the last three years. The
industry’s 2001 outlook points to more of
the same. Only modest financial gains are in
prospect, with farm income still heavily
reliant on government assistance.
Crop producers face another challeng-
ing year in 2001, although prospects for crop
prices are brightening. A tighter balance of
global crop supplies and prospective demand
points to big swings in crop prices, as crop
prospects shift with changing weather pat-
terns during the year. But with U.S. grana-
ries already filled to the brim by the 2000
crop, normal weather and prospects for
another big harvest in 2001 could limit gains
in crop prices. Crop receipts are expected to
climb to $100.2 billion, up almost 4 percent
compared to 2000. 
Livestock producers may have another
good year in 2001, but probably not as
solid as in 2000. The outlook points to
mixed outcomes—stronger profits for beef
producers but weaker profits for pork and
poultry producers. Bigger meat supplies are
likely, with expanding pork and poultry
supplies outpacing a cutback in beef pro-
duction. But with slower growth expected
in the nation’s economy, consumer demand
may ease a notch from the record levels of
recent years. As in the year before, livestock
receipts may fall just short of the $100
billion benchmark.
As in recent years, help from
Washington will be a big part of farm
income in 2001. How big a part remains an
open question, however. Current projections
suggest net farm income could total $41.3
billion, down 9 percent from the year
before. Stronger crop receipts and steady
livestock receipts would boost the market-
based portion of the total to $27.2 billion,
a welcome improvement over the previous
two years. Nevertheless, the total also
includes $14.1 billion in government pay-
ments expected under current legislation.
Moreover, during the past three years
Washington provided add-on payments
totaling nearly $20 billion, setting a strong
precedent for additional aid that would
limit the drop now foreseen in farm income.
How much government aid the indus-
try will receive in 2001 is an open question.
But the industry’s continued reliance on
government support is almost certain to
fuel a vigorous debate on the farm policy
that will replace the current legislation,
which expires in 2002. The central theme
of the current farm law, the Federal
Agricultural Improvement and Reform Act
(FAIR), is a seven-year phase-out of the
industry’s government support in exchange
for fewer government controls on farm pro-
duction decisions. Farmers have quickly
embraced the additional flexibility in decid-
ing what crops to produce, and backtrack-
ing to government production controls
seems unlikely. Still, the industry’s slump
has put the bold spirit of FAIR to a critical
test, and the result is the recent surge in
farm subsidies. The experience suggests that
the transition to a market-based agriculture
is more than a seven-year undertaking and
that Washington may consider a stronger
safety net for the industry in the meantime.
Little change is likely in the farm
balance sheet in 2001. The value of farm-
land, by far the industry’s biggest asset com-
ponent, will probably continue its gradual
climb. Weak crop prices could hold down
returns on farmland investments, triggering
some erosion in farmland values, but a sig-
nificant slide in farmland values seems
unlikely. Big government payments have
supported farmland values the past three
years, and in some areas demand for land
with scenic mountain views and recre-
ational uses continues to push up farmland
values. Still, prospective gains in farmland
values will be limited by the sobering recog-
nition that the size of future government
payments remains uncertain.
Farm debt may edge up slightly in
2001. Entering the year, farm lenders
attribute the generally good health of farm
loan portfolios to the large government
payments many of their borrowers received
in recent years. Both borrowers and lenders
remain concerned, however, that subsidies
are a poor substitute for market-based earn-
ings, especially since future subsidies could
be trimmed in the scheduled 2002 rewrite
of U.S. farm programs. As a result, little
expansion is likely in farm debt, as farmers
and their lenders wait for better times to
expand farm businesses.
Overall, the 2001 outlook points to
still modest financial gains, although a bit
stronger than in 2000. With farm income
heavily dependent on government assis-
tance, only small changes are likely in asset
and debt levels. But gains in farm assets
may outpace farm debt, opening the door
to a modest increase in farm equity.
Summary
The biggest package of government
financial assistance in history cushioned the
nation’s farm slump in 2000. As a result,
agriculture’s major financial indicators
remained remarkably stable. Farm income
edged above the average of the past decade,
farmland values resumed their gradual climb,
and farm loan portfolios stayed healthy.
Welcome signs emerged during the
year that the industry could be gradually
working its way out of its long slump.
A stronger global economy enabled world
food consumption to catch up with the
industry’s recent production surge. U.S.
farm exports turned up. Global grain inven-
tories were whittled down.
Nevertheless, farm income prospects
may depend on additional aid from
Washington, following the precedent of
the past three years. With normal weather
and another big crop, weak crop prices
could hold down incomes for crop produc-
ers. For livestock producers, low feed costs
and strong meat demand point to another
good year, although probably not as strong
as in 2000. As the debate begins on the
next generation of farm policy, the industry
will grapple with the notion that the indus-
try’s recent financial stability rests on gov-
ernment support.
1 Farm finance and commodity projections in this
article are based on data from the U.S. Department of
Agriculture.
A more detailed assessment of the farm economy
appears in the fourth quarter 2000 issue of the bank’s
Economic Review.
The Main Street Economist January 2001
- 3 -
January Newsletter 2001  2/1/01  2:45 PM  Page 4The Main Street Economist January 2001
- 4 -
Survey of Agricultural Credit Conditions
Federal Reserve Bank of Kansas City
September 30, 2000
Highlights from the second quarter survey.
• Gains in district farmland values averaged 1.1 percent during the third quarter of 2000, but the gains were not evenly shared.
Dry conditions limited gains in Oklahoma and Nebraska cropland values, while Missouri and the Mountain states posted strong
gains. Ranchland values continued to climb, approaching record levels in Kansas and Nebraska. 
• The district index of farm commodity prices fell nearly 7 percent in the third quarter but remained above year-ago levels.
Declining prices for corn, soybeans, hogs, and cattle more than offset a post-harvest rebound in winter wheat prices. Since the
end of the third quarter, corn and cattle prices have recovered somewhat, but prices for hogs and soybeans remain weak.
• Farm credit conditions weakened in the third quarter. Despite big government payments to farmers, demand for farm loans edged
down, loan repayment rates slowed, and loan renewals or extensions edged up. District bankers remain concerned that producers
would have difficulty repaying farm loans without government aid. 
• After rising for five straight quarters, farm interest rates held steady in the third quarter. At the end of the third quarter, average
interest rates on new farm loans averaged 10.52 percent for operating loans, 10.36 percent for feeder cattle loans, 10.29 percent
for intermediate-term loans, and 9.73 percent for real estate loans. 
Note: 292 bankers responded to the third quarter survey.
Kendall McDaniel, associate economist with the Center, can respond to questions at 816-881-2291, or kendall.l.mcdaniel@kc.frb.org.
Farm Real Estate Values
September 30, 2000
(Average value per acre by reporting banks)
Nonirrigated Irrigated Ranchland
Kansas $640 $1,041 $369
Missouri 957 1,161 636
Nebraska 862 1,420 359
Oklahoma 519 753 371
Mountain states* 349 1,122 220
Tenth District $687 $1,172 $375
Percent change from:
Last quarter+ 0.92 1.24 1.21
Year ago+ 3.38 3.23 6.98
Market high -18.65 -18.65 -7.57
Market low 73.38 72.28 124.70
* Colorado, New Mexico, and Wyoming combined.
+ Percentage changes are calculated using responses only from
those banks reporting in both the past and the current quarter.
Source: Federal Reserve Bank of Kansas City
Selected Measures of Credit Conditions
at Tenth District Agricultural Banks
Loan Loan Average Loan-to- District
Loan Fund repayment renewals or deposit farm commodity
demand availability rates extensions ratio* price index
(index)+ (index)+ (index)+ (index)+ (percent) (1980=100)
1998
Jan.-Mar. 120 108 93 109 65.9 94.3
Apr.-June 123 100 78 118 68.0 92.2
July-Sept. 112 99 58 136 68.4 78.7
Oct.-Dec. 107 108 55 138 66.9 80.7
1999
Jan.-Mar. 105 113 56 143 65.7 86.0
Apr.-June 107 107 71 127 66.5 87.8
July-Sept. 103 90 74 126 67.7 87.0
Oct.-Dec. 100 99 86 115 67.7 91.2
2000
Jan.-Mar. 107 95 92 108 67.1 97.9
Apr.-June 112 78 86 108 70.4 97.0
July-Sept. 103 85 84 112 70.8 90.3
* At end of period.
+ Bankers responded to each item by indicating whether conditions during the current quarter
were higher than, lower than, or the same as in the year-earlier period. The index numbers
are computed by subtracting the percent of bankers that responded “lower” from the
percent that responded “higher” and adding 100.
Source: Federal Reserve Bank of Kansas City
January Newsletter 2001  2/1/01  2:44 PM  Page 1

The farm slump eases

http://www.kansascityfed.org/Publicat/mse/MSE_0101.pdf

The farm slump eases

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