Conference participants foresee another good year for farm income.Agriculture - Forecasting

Raymond E. Owens

English

Research Papers in Economics

AGRICULTURALSUMMARYANDOUTLOOK 
Raymond  E.  Owens 
After  deteriorating  rapidly  in the  early  198Os, the 
financial  condition  of  agriculture  leveled  off  by  the 
middle  of the  decade.  Since  then,  most  measures  of 
the  sector’s  financial  condition  have  strengthened. 
In  1987,  total  farm  income  was  higher  and  produc- 
tion  expenses  were  lower  than  in the  previous  year. 
The  improved  financial  condition  of farmers  was also 
apparent  in  the  expanded  equity  position  of  their 
balance  sheets,  which  resulted  from  a combination 
of increased  asset  values  and  reduced  debt  burdens. 
The  turnaround  in  the  agricultural  sector  was 
discussed  recently  at the  annual  Outlook  Conference 
sponsored  by  the  United  States  Department  of 
Agriculture  (USDA)  in  Washington,  D.C.  There, 
analysts  from  the  public  and  private  sectors  as- 
sessed  the  current  condition  of agriculture  and  gave 
their  views  of  its  future.  Most  analysts  at  the  con- 
ference  believed  that  the  recent  financial  turnaround 
was  likely  to  be  the  start  of a longer-term  economic 
improvement  for U.S.  agriculture.  What  follows  sum- 
marizes  their  consensus  view. 
World  Supply and Demand 
Conference  analysts  cited  tightened  world  supply 
and  demand  conditions  for  agricultural  products  as 
a primary  reason  for  an improved  farm  income  pic- 
ture.  Worldwide  grain  production  fell  short  of  con- 
sumption  of some  commodities  in  1987,  leading  to 
reductions  in carryover  stocks.  Worldwide  produc- 
tion  was lower  due  to fewer  planted  acres  and  lower 
yields  for  some  grains.  Lower  planted  acreage 
resulted  from  larger  acreage  set-asides  in the  United 
States  and the  withdrawal  of some  crop  land  in other 
nations.  Crop  yields  held  up well in the  United  States 
in  1987,  but  dry  weather  and  storm  damage  cur- 
tailed  yields  in  some  other  parts  of  the  world. 
While  production  was  lower,  world  coarse  grain 
usage  rose  in 1987  as the  expansion  of meat  produc- 
tion  raised  feed  usage.  Wheat  consumption  was flat 
and  rice  usage  was  down  slightly.  Oilseed  produc- 
tion  matched  usage. 
World  red  meat  and poultry  production  rose  1 per- 
cent  in  1987.  Consumption  increased  by  a  similar 
amount  so  that  carryover  stocks  were  unchanged. 
The  U.S.  Agricultural Trade  Position 
One  of  the  most  encouraging  developments  of 
1987  was  the  rebound  in agricultural  exports.  The 
total  value  of agricultural  exports  rose  to $27.5  billion 
in  1987,  an  increase  of  over  $1  billion  from  1986. 
The  volume  of agricultural  exports  rose  by 20 million 
metric  tons  to  129.2  million  metric  tons.  Both  wheat 
and  corn  exports  rose  sharply,  although  lower  prices 
dampened  increases  in export  values.  Increased  crop 
sales  were  primarily  responsible  for  the  higher  ex- 
port  value,  but  additional  meat  and  horticultural  ex- 
ports  accounted  for  about  40  percent  of  the  value 
increase.  The  increase  in  value  for  agricultural  ex- 
ports  was  the  first  since  1980,  when  a peak  value 
of $43.8  billion was reached.  The  value  of agricultural 
imports  fell  $875  million  in  1987  to  $20.0  billion. 
The  decrease  was  the  first  since  1981/82. 
A higher  value  of exports  combined  with  a lower 
value  of imports  to widen  the  1987  agricultural  trade 
surplus  to $7.2  billion,  almost  $2.0  billion  above  the 
1986  figure.  While  improved  from  1986,  the  trade 
surplus  nevertheless  remains  low  by  historical  stan- 
dards.  As  recently  as  1981,  the  agricultural  trade 
surplus  stood  at  $26.5  billion. 
Farm  Income 
Analysts  from  USDA  reported  that  farm  cash 
income  totaled  about  $57  billion and net farm income 
reached  about  $45  billion in 1987.  As shown  in Table 
I, the  income  measures  were  boosted  by higher  cash 
receipts  from  the  sale  of  livestock,  record  levels  of 
government  payments,  and  lower  production  ex- 
penses  (lines  1, 2, and  7). Farm  production  expenses 
fell in  1987  primarily  due  to decreased  usage  of crop 
inputs  and lower  costs  for feed  used  by livestock  pro- 
ducers.  After  adjusting  for inflation,  net  farm  income 
reached  a  record  level  in  1987. 
Crop  sales  were  buoyed  by  larger  than  expected 
domestic  usage  and exports.  A total  of  129.2  million 
tons  of grains  moved  out  of  U.S.  ports  in  1986/87 
compared  to just  109.5  million  tons  in 198.5186. The 
higher  tonnage  figures  translated  into  a higher  world 
market  share  for  U.S.  agricultural  products.  Lower 
prices,  a  weaker  dollar,  and  government  export 
FEDERAL  RESERVE  BANK  OF  RICHMOND  25 Table  I 
FARM  INCOME  STATISTICS 
(Billions  of  dollars) 
Item  1981  1982  1983  1984  1985  1986  1987F  1988F 
1.  Farm  receipts  ............ 
Crops  ................. 
(incl.  net  CCC  loans) 
Livestock  .............. 
Farm  related’  ........... 
144.1  147.1  141.1  146.7  149.2  140.2  137  138 
72.5  72.3  67.1  69.4  74.4  63.6  58  62 
69.2  70.3  69.4  72.9  69.8  71.6  74  71 
2.5  4.5  4.5  4.4  5.0  5.1  5  5 
2.  Direct  Government  payments  .  1.9  3.5  9.3  8.4  7.7  11.8  17  15 
Cash  payments  ..........  1.9  3.5  4.1  4.0  7.6  8.1  9  7 
Value  of  PIK  commodities  .  .  0.0  0.0  5.2  4.5  0.1  3.7  9  8 
3.  Total  gross  farm  income  .... 
(4+5+6)* 
Gross  cash  income  ........ 
(1+2) 
Nonmoney  incomea.  ....... 
Value  of  inventory  change  ... 
166.3 
146.0 
13.8 
6.5 
163.5  153.1 
150.4 
13.5 
-  10.9 
174.7 
4.  150.6  155.1 
5. 
6. 
14.3 
-1.4 
13.4 
6.2 
166.0  159.5  163 
156.9  152.0  155 
11.8  10.8  10 
-2.7  -3.3  -1 
162 
153 
8 
1 
7.  Cash  expense9.  ..........  113.2  112.5  113.3  116.3  109.6  100.1  97  99 
8.  Total  expenses  ...........  139.4  140.0  140.4  142.7  133.7  122.1  118  118 
9. 
10. 
Net  cash  income  (4  -  7)  .... 
Net  farm  income  (3  -8)  .... 
Deflated  (1982$)  ...... 
32.8  38.1  37.1  38.8  47.3  52.0  58 
26.9  23.5  12.7  32.0  32.3  37.5  45 
28.6  23.5  12.2  29.7  29.1  32.9  39 
35.8  36.4  37.0  38.3  42.5  44.7  48 
52.5 
42.5 
36 
11.  Off-farm  income  ..........  49 
12. 
13. 
14. 
15. 
16. 
Loan  changes? 
Real  estate  ........... 
Non-real  estate  ........ 
9.4  4.0  2.5  -0.8  -  5.6  -7.3  -6  -6 
6.2  3.4  1.0  -0.8  -9.2  -  10.5  -9  -5 
Rental  income  plus 
monetary  change.  ........ 
Capital  expenditure9  ...... 
6.4  6.3  5.3  8.9  8.8  7.8 
16.8  13.3  12.7  12.5  9.6  8.6 
8 
8 
Net  cash  flow.  ........... 
(9+12+13+14-15) 
37.9  38.4  33.6  33.6  31.6  33.4 
7 
7 
44  42.5 
1  Income  from  machine  hire,  custom  work,  sales  of  forest  products,  and  other  misc.  cash  sources. 
2  Numbers  in  parentheses  indicate  the  combination  of  items  required  to  calculate  a given  item. 
3  Value  of  home  consumption  of  self-produced  food  and  imputed  gross  rental  value  of  farm  dwellings. 
4  Excludes  capital  consumption,  prerequisites  to  hired  labor,  and  farm  household  expenses. 
*  Excludes  farm  households. 
F  =  midpoint  of  forecast  range. 
Note:  Totals  may  not  add  due  to  rounding. 
Source:  U.  S.  Department  of  Agriculture,  Economic  Research  Service. 
26  ECONOMIC  REVIEW,  JANUARY/FEBRUARY  1988 subsidies  were,  in part,  responsible  for  the  increase 
in export  usage.  A second  factor  spurring  crop  sales 
was increased  domestic  usage for livestock.  Domestic 
grain  sales  were  boosted  by  low  feed  prices  and  in- 
creased  livestock  production  in  1987. 
The  net  effect  of  generally  lower  grain  prices 
dominating  higher  grain usage was a reduction  of crop 
cash  receipts  in  1987.  Cash  receipts  totaled  just  $58 
billion,  down  from  the  1986  total  of $63.6  billion. 
Livestock  cash  receipts  were  up  moderately  in 
1987,  as higher  production  and  strong  prices  coin- 
cided.  Strong  demand  for meat  led to expanded  pro- 
duction  and  generally  higher  prices  for  producers. 
Livestock  cash  receipts  rose  to  a record  $74  billion 
in  1987,  up  from  $71.6  billion  in  1986.  Direct 
government  payments  totaled  $17  billion  in  1987 
compared  to  $11.8  billion  in  1986.  Both  figures  are 
large  by  historical  standards.  As  recently  as  1981, 
direct  government  payments  were  only  $1.9  billion. 
Total  farm  production  expenses  fell in 1987.  Cash 
expenses  were  pressured  downward  by reduced  crop 
plantings  by  farmers  attempting  to  qualify  for  gov- 
ernment  price  support  programs.  Cash  expenses 
totaled  $97  billion  in  1987,  down  $3  billion  from 
1986. 
Balance Sheet 
Farmers’  total  equity,  as shown  in Table  II,  rose 
in  1987  for  the  first  time  in  the  1980s.  Stable  to 
slightly  higher  farm  real  estate  values  (line  1) and 
lower  farm  debt  burdens  (line  10) contributed  to the 
increase. 
The  value of farm real estate  peaked  at $785  billion 
in  1981  but  then  declined  steadily  to  $510  billion 
in 1986.  According  to the  Department  of Agriculture 
estimates,  this  decline  was  reversed  in  1987  when 
the  total  value  of farm real estate  rose  to $530  billion. 
Improved  farm  income  prospects  and lower  interest 
Table  II 
BALANCE  SHEET  OF  THE  U.  S.  FARMING  SECTOR 
Item  1981  1982  1983  1984  1985  1986P  1987F 
Assets 
1.  Real  estate’.  .  .  .  .  .  .  .  . .  .  .  .  .  784.7  748.8  739.6 
2.  Non-real  estate  .  .  .  .  .  . .  .  .  .  .  212.0  212.2  205.4 
3.  Livestock  and  poultry  .  .  .  .  .  53.5  53.0  49.7 
4.  Machinery  and  motor  vehicles  101.4  102.0  100.8 
5.  Crops  stored’  .  .  .  .  .  .  .  . .  .  .  29.1  27.7  23.7 
6.  Financial  assets  .  .  .  .  .  .  .  . .  28.0  29.5  31.3 
7.  Total  farm  assets  .  .  .  .  . .  996.7  961.0  945.0 
Liabilities 
8.  Real  estate2.  .  .  .  .  .  .  .  .  . .  .  .  .  98.7  102.5  104.8  103.7  97.7  88.1  83 
9.  Non-real  estatea.  .  .  .  .  .  .  . .  .  .  83.6  87.0  87.9  87.1  77.5  66.8  58 
10.  Total  farm  liabilities  .  . .  .  182.3  189.5  192.7  190.8  175.2  155.0  141 
11.  Total  farm  equity  .  .  .  .  . .  814.4  771.5  752.3  657.7  574.9  536.6  568.5 
Selected  ratios 
12.  Debt-to-assets  .  .  .  .  .  .  .  .  .  .  . .  18.3  19.7  20.4 
13.  Debt-to-equity  .  .  .  .  .  .  .  .  .  .  , .  22.4  24.6  25.6 
14.  Debt-to-net  cash  income  .  .  .  .  556  497  519 
$  billion 
639.6 
208.9 
49.6 
96.9 
29.6 
32.8 
848.5 
Percent 
22.5 
29.0 
558.9  510.1  530 
191.2  181.5  179.5 
46.3  47.6  48.5 
87.7  80.4  76 
23.1  18.4  19 
34.2  35.0  36 
750.1  691.6  709.5 
23.4  22.4  20 
30.5  28.9  25 
370  298  245 
’  Non-CCC crops  held  on  farms  plus  value  above  loan  rates  for  crops  held  under  CCC. 
*  Excludes  debt  on  operator  dwellings,  but  includes  CCC storage  and  dryng  facilities  loans. 
’  Excludes  debt  for  nonfarm  purposes. 
P  =  preliminary 
F  =  midpoint  of  forecast  range. 
Source:  U.  S.  Department  of  Agriculture,  Economic  Research  Service. 
FEDERAL  RESERVE  BANK  OF RICHMOND  27 rates  may  have  assisted  the  rebound.  While  the  1987 
increase  in farmland  value  is not  large  in percentage 
terms,  it accounts  for the  rise in total  farm asset  values 
from  $692  billion  in  1986  to  around  $710  billion  in 
1987. 
Farm  liabilities  were  lower  in both  the  real  estate 
and  non-real  estate  categories  in  1987.  Lower  debt 
loads  resulted  from  loan  paydowns  by  farmers  with 
available  cash  and  further  farm  debt  writedowns  by 
financial  institutions.  Real  estate  liabilities  fell  an 
estimated  $3  to  $7  billion  to  about  $83  billion  and 
non-real  estate  liabilities  declined  $8  to  $10  billion 
to  about  $58  billion. 
Total  farm  equity  reached  an  estimated  $568 
billion  in 1987,  up from  $537  billion  the  year  before. 
While  far  short  of  the  $829  billion  equity  peak 
reached  in  1980,  the  1987  figure  is  encouraging: 
stabilization  in the  farm  balance  sheet  is one  of the 
most  important  developments  of  1987. 
OUTLOOK  FOR  THE  FARM  SECTOR  IN  1988 
Trade 
The  outlook  for  agriculture  in  1988  bears  some 
similarities  to  the  summary  for  1987.  A  primary 
similarity  is that  agricultural  trade  should  continue 
to  improve.  Agricultural  exports  are  projected  to 
reach  $31  billion  in 1988,  up  sharply  from  last year’s 
$27.9  billion.  The  higher  export  value  is anticipated 
to result  from  a combination  of increased  volume  and 
higher  prices.  Export  volume  is expected  to  reach 
137.0  tons  in  1988,  up  from  129.2  tons  in  1987. 
Volume  growth  should  be  centered  in larger  quan- 
tities  of grains  and  cotton.  Demand  for  these  com- 
modities  will be  helped  by  the  Export  Enhancement 
Program  that  subsidizes  U.S.  agricultural  exports  to 
qualifying  purchasers.  Higher  prices  are  anticipated 
in  grains,  cotton,  and  soybeans  as  world  supply 
tightens  relative  to  demand. 
Imports  of agricultural  commodities  are  expected 
to  remain  level  or  decline  slightly.  In  1987,  $20.6 
billion of agricultural  commodities  were  imported  into 
the  United  States.  The  Department  of  Agriculture 
is  forecasting  this  value  to  fall  to  $20.5  billion  in 
1988. 
Income 
Conference  analysts  look  for  only  modest  food 
price  increases  in  1988.  Stronger  grain  prices  will 
place  some  upward  pressure  on  cereal-based  foods, 
but  expected  expansion  in  meat  production  and 
only  slight  increases  in the  prices  of fresh  fruit  and 
vegetables  should  limit  the  overall  increase  in food 
prices. 
Farm  income  prospects  are  bright  in  1988.  Net  Nonfarm  factors,  including  processing,  packaging, 
farm  income  is projected  to  range  between  $40  and  and  distribution  costs  should  show  only  modest  in- 
$45  billion,  only  a little  below  the  record  $45  billion  creases  in  1988.  The  net  effect  of farm  and  nonfarm 
of  1987.  Total  government  payments  are  likely  to  influences  on food  prices  should  be  a 2 to 4 percent 
contribute  significantly  to  net  income  in  1988,  ac-  increase. 
counting  for  about  $13  billion.  Production  expenses 
should  remain  about  even  with  1987. 
Balance Sheet 
If  all  goes  as  predicted,  the  farm  balance  sheet 
should  be  stronger  by the  end  of  1988.  Asset  values 
are projected  to rise further  provided  farmland  values 
increase  in response  to strong  farm income  prospects, 
as  most  analysts  believe  they  will.  Further,  debt 
reductions  are anticipated  as farmers  pay  down  more 
of their  existing  debt  and  financial  institutions  con- 
tinue  to  charge  off  some  of their  uncollectible  farm 
loans. 
Farm  Policy 
The  provisions  of  the  1985  Farm  Bill remain  in 
effect  in  1988.  Under  these  provisions,  farmers  will 
continue  to  operate  under  programs  which  provide 
crop  price  supports  in  exchange  for  reduced  plant- 
ings.  Smaller  crop  plantings  should  reduce  produc- 
tion  and  pressure  crop  prices  upward.  Since  direct 
government  payments  are the  difference  between  the 
target  and  actual  market  prices  farmers  receive, 
rising grain  prices  should  reduce  the  differential  and 
thus  also  direct  government  payments. 
Livestock  producers  will  also  feel  the  effects  of 
these  government  programs.  Such  programs,  which 
push  grain  prices  up,  affect  livestock  producers’ 
profit  margins.  Rising  grain  prices,  for  example, 
translate  into  higher  feed  costs,  which  reduce  the 
profit  margins  of  livestock  producers. 
The  cost  of farm  policy  has  risen  dramatically  in 
recent  years.  While  USDA  expects  these  costs  to 
fall somewhat  in  1988,  they  still will remain  high  by 
historical  standards.  The  increasing  concern  over  the 
federal  budget  deficit  has  focused  attention  on  farm 
program  outlays  and many  analysts  warn  that  the  cur- 
rent  expenditures  may  be  subject  to  reductions  in 
the  next  several  years. 
Food  Prices 
I  28  ECONOMIC  REVIEW,  JANUARY/FEBRUARY  1988 

Agricultural summary and outlook

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