Farm Credit Administration 1 12/14/2017

Economics Report

Farm Credit Administration 

Office of Regulatory Policy 

Agricultural and Economic Policy Team

December 14, 2017

Summary

USDA expects net cash farm income 

to increase from $93.3 billion in 2016 

to $96.9 billion in 2017. The gain is 

driven by stronger cash receipts for 

cattle/calves, hogs, broilers, and 

dairy. Cash receipts are expected to 

be down for most crop categories in 

2017. Adjusted for inflation, net cash

income is near the historic average 

(1960 to 2016) for the second 

consecutive year.

Farm debt remains relatively high, at 

four times the sector income. This 

compares with the historical average 

of three times the sector income. As 

a result, some farmers may not have 

enough liquidity to cover farm 

expenses and repay their loans.

Several economic and policy issues 

could affect risk in the System. 

Continued strong demand in the 

protein sector will be necessary to 

prevent steep drops in farm prices 

amid the expanding supplies of meat. 

For crops, demand is critical for 

clearing out grain stocks.

An increase in interest rates is a risk 

for producers with debt, but a

gradual rise will allow producers (as 

well as the land market) to more 

easily absorb the increase. Another 

concern would be a geopolitical event 

that triggers an oil shock or some 

other economic shock that disrupts 

global growth. Potential changes to 

farm policy and trade policy in 2018 

could affect farm sector income and 

the ability of farmers to mitigate risk.

Author

Dennis A. Shields, Senior Economist, 

703-883-4056

Economic Conditions Affecting the 

Farm Credit System, December 2017

The direction of the U.S. farm economy at the end of 2017 might be best 

described as sideways. Positives, such as strong demand in the livestock 

sector, are contrasting with weak markets for many crops. According to 

USDA’s latest forecast, inflation-adjusted farm income appears to be 

stabilizing near its historical average, but concerns remain that some 

farmers may not have enough liquidity to cover farm expenses and repay 

their loans.

Cropland values continue to decline in parts of the Midwest and Great 

Plains, but the current rate of decline is mild enough to prevent alarm 

among lenders regarding collateral values. The pressure on land values and 

farm returns, as well as liquidity concerns for farmers, stems from 

continued large commodity supplies and strong export competition. As 

usual, export demand across all sectors will be key in shaping farm sector 

prospects. A big unknown heading into 2018 is policy — both trade and 

farm policy — and how any changes might affect farm returns and the 

ability of farmers to manage risks.

Macroeconomic factors are positive

A seven-year global economic expansion continues to underpin demand for 

agricultural products. The expansion is broad based, with the top U.S. 

export markets growing. As shown in figure 1, the growth in world GDP per 

capita is expected to be 2.0 percent. 

Figure 1. Real GDP per capita of the world and major exporters, 

2015 to 2018F

Source: USDA’s Economic Research Service (ERS), using data and forecasts from 

Global Insight, the International Monetary Fund, and Oxford Economics.

The relative weakness of the U.S. dollar against the currencies of our 

trading partners is another positive factor for U.S. agriculture. The dollar 

has weakened since the beginning of the year and is expected to continue

to weaken next year. Relative economic growth and actions by various 

central banks are expected to favor foreign currencies such as the euro and 

Canadian dollar. 
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However, even with this year’s decline, the dollar remains relatively strong compared with its value

earlier in the decade.

Figure 2 shows how a relatively high exchange rate a few years ago contributed to the decline in U.S. 

exports from a record $152.3 billion in 2014 to $129.6 billion in 2016. In fiscal years 2017 and 2018, 

total exports are bouncing back, and tonnage of bulk commodity exports is higher. The top three U.S. 

export markets are China, Canada, and Mexico, each with a little under one-sixth of the U.S. total.

Figure 2. U.S. agricultural exports from FY 2013 to FY 2018F

Source: “Outlook for U.S. Agricultural Trade,” USDA’s ERS.

As the U.S. economy advances, macro forecasters expect mild growth in personal income and 

declining unemployment. See table 1. Both trends bode well for domestic demand for meat, fruits and 

vegetables, processed food, and for restaurant sales. And because of its effect on off-farm income, the 

domestic economy also affects the ability of many System borrowers to pay back their loans. In fact, 

the domestic economy can have an even more profound effect than the price of corn or hogs. USDA’s 

late-November update of its forecast for 2017 income indicates that average off-farm income is 

relatively strong and up slightly. This is important because more than half of farm households have 

lost money on their farming operations in each of the past several years according to USDA.

Table 1. Change in U.S. personal income and unemployment rate, 2016 to 2018F

U.S. real disposable personal 

income (percent change)

Unemployment 

rate

2016 1.4 4.9

2017F 1.4 4.4

2018F 2.4 4.1

Source: Consensus Economics, Inc.

A risk is that an unexpected reversal in the domestic economy could result in two unfortunate hits, 

one on farm demand and another on off-farm income used to repay loans. More broadly, other parts 

of the System portfolio could feel the effects, including rural home loans, forestry, and horticulture 

because of their dependence on landscaping and the housing market.

Fitting into the macro story is relatively low but potentially rising input costs for farmers. This year 

long-term interest rates have moved up a bit from very low levels, and the Federal Reserve just 

bumped up short-term rates again. Some upward pressure on Treasury debt yields is expected as new 

debt is issued.
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Natural gas and oil prices this year have traded in a favorable range, keeping a lid on prices of fuel, 

fertilizer, and chemicals. For example, average prices for nitrogen fertilizer are reportedly lower than 

they have been for nine years, and these lower prices are expected to translate into modest cost 

savings for the 2018 crop year. Factors that support weak fertilizer prices include weak grain prices 

(which reduce fertilizer demand) and overcapacity in fertilizer production.

Real net cash farm income is near historical average

For a large part of the farm sector, the high farm income of several years ago is now a distant 

memory. Global grain supplies have expanded, and prices have returned to historical levels. The 

November USDA forecast shows inflation-adjusted net cash farm income in 2017 near the historical

average for the second consecutive year. (See figure 3.) Net farm income, which focuses on the value 

of production rather than cash flow, is below its long-term average.

Figure 3. Inflation-adjusted net cash farm income, from 1960 to 2015

Source: USDA’s ERS.

The modest overall improvement in 2017 is driven by stronger cash receipts for cattle/calves, hogs, 

broilers, and dairy after they posted significant declines in 2016. Cash receipts are forecast down for 

most crop categories in 2017. 

Although farm income is in its historical range, farm debt remains relatively high, at four times the 

sector income. See figure 4. This compares with the historical average of three times the sector 

income. As a result, some producers may have difficulty covering expenses and paying back their 

loans. For example, USDA estimates that producers will have to use 27 percent of their production just 

to make farm loan payments; this is the highest share since 2002.
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Figure 4. Farm debt relative to net cash income from 1960 to 2015

Source: USDA’s ERS.

The current level of both farm income and debt illustrate how critical income growth will be moving 

forward. Also, sector-wide averages hide farm-level problems where individual producers may be 

highly leveraged and suffering liquidity problems because of current commodity prices. USDA reports 

that 9.1 percent of crop farms and 7.2 percent of livestock farms are highly leveraged, with debt 

amounting to more than 40 percent of farm assets.

Cropland values continue to decline in the Corn Belt and Northern Plains

Critical to economic conditions in the farm sector is not just the income needed to support the level of 

debt, but whether land values continue to provide sufficient collateral. As shown in the tan area in 

figure 5, the U.S. average cropland value is stable. Declines in the Corn Belt and the Northern Plains 

have been offset by gains in other regions. 

The good news here is that the rate of change has been slow enough to support overall equity levels

and to avoid alarming lenders. According to USDA, cropland values from mid-2016 to mid-2017 

dropped 4.4 percent in the Northern Plains and 0.6 percent in the Corn Belt, with some states in the 

Corn Belt showing small gains. While some areas are experiencing steeper declines than others, 

demand for cropland appears to be sufficient to prevent a precipitous drop in values. 

Figure 5. Cropland values by region from 2007 to 2017

Dollars per acre

Source: USDA’s National Agricultural Statistics Service (NASS).
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Outside of these regions of primary concern, average values show mild increases or are little changed. 

These areas have their own supply-and-demand conditions, and they did not see such a rapid rise 

during corn and soybean boom time.

Farmers who own their own land have options for dealing with cash flow problems by structuring debt. 

The same is less true for renters. The map in figure 6 shows that a substantial share of farmland is 

rented in the Corn Belt, the Great Plains, and elsewhere. It is in these regions that farm stress could 

be greatest, especially if rents are “sticky” on the way down. In some cases, rent may not decline in 

areas where farmers with good cash positions are willing to farm the property at current rent levels.

Figure 6. Share of farmland that is rented

Source: USDA’s ERS, using data from 2012 Census of Agriculture.

Commodity outlook: Fruit and tree nuts

The commodity category of fruits and nuts has been the unsung hero in farm income statistics. Prices

for these commodities, as shown by the dotted line in figure 7, remain well above levels seen in 2011 

and prior. This contrasts with the 10-year pattern for major field crops and livestock, where current 

prices are not elevated relative to the earlier period. Two factors have helped fruit and tree nut prices: 

strong demand for tree nuts and limited growth in the number of acres for noncitrus fruit.

Labor availability and costs are significant concerns to growers. The industry is trying to control costs 

by mechanically harvesting crops such as table olives that traditionally have been hand harvested. 

Also, hurricane damage and long-term issues with disease are affecting Florida citrus crops.
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Figure 7. Price index for fruit and tree nuts, and for vegetables and melons, 2008 to 2017

2011 = 100

Source: USDA’s NASS. 

Commodity outlook: Corn, soybeans, and wheat

The corn and soybean markets are moving in a clear sideways pattern at relatively low levels as global 

production continues uninterrupted. See figure 8. Use is expanding, but not enough to prevent stock 

buildup that keeps corn in the $3-to-$4-per-bushel range and soybeans in the $9-to-$10 range. 

Assuming normal weather, USDA expects no significant change for crops in 2018. Returns above 

variable costs are not sufficient to cover land and other fixed costs for some producers, and farm 

program payments per acre are declining. Without a jarring crop shortfall somewhere in the world, the 

corn and soybean markets could just keep grinding along. 

Figure 8. Price of corn and soybeans, 2008 to 2017

Sources: USDA’s NASS; USDA baseline projections by crop year, released Nov. 28, 2017.

Wheat prices bounced up a bit in 2017 because of a smaller crop and drought in the Northern Plains. 

(See figure 9.) Still, global supplies are large and international competition is very strong, putting 

downward pressure on prices. Crop insurance helped farmers in the Northern Plains after drought hit 

the region. Also, wheat farmers recently received their 2016 farm program payment, which was a 

timely boost to returns.
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Figure 9. Price of wheat, 2008 to 2017

Sources: USDA’s NASS; USDA baseline projections by crop year, released Nov. 28, 2017.

Commodity outlook: Cattle, hogs, and dairy

Livestock and dairy producers have had two important advantages in 2017: strong domestic and 

export demand for protein products and low feed costs. See figures 10 and 11. An unexpected 

resurgence in calf prices this year — in the midst of a cattle expansion, no less — has turned cow-calf 

margins in 2017 from negative to positive. As cattle supplies build next year, however, producers could 

see negative returns.

Despite increases in production, hog prices are also relatively strong. Products are moving through 

distribution channels at a good clip, and exports now take about one-fifth of hog production. Another 

positive factor has been the increase in pork packer competition, which occurred when two new plants 

opened. For 2018, futures contracts have already afforded hedging opportunities to lock in profits next 

year.

Figure 10. Calf and hog prices per hundredweight, 2008 to 2017

Sources: USDA’s NASS; USDA baseline projections released Nov. 28, 2017; margins from Informa Economics IEG.

Milk producers are sitting somewhere between the devastating market conditions of 2009 and the 

euphoric highs of 2014. After registering small profits this year, producer returns in 2018 are projected 

to be near breakeven, implying stress for higher-cost producers who are already running in the red. 

Growth in China’s demand for dairy products reportedly remains strong, but it may not be enough to 

keep pace with global production.
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Figure 11. Milk prices per hundredweight, 2008 to 2017

Sources: USDA’s NASS; USDA baseline projections released Nov. 28, 2017; margins from Informa Economics IEG.

Managing farm risks: Government assistance following natural disasters

Most of the price risk shown in the previous charts is managed in large part by the producers, with 

government payments supplementing market returns, depending on the commodity and the program 

triggers. 

For production losses, however, a suite of programs can help farmers affected by natural disasters. 

The following programs helped farmers and ranchers following the many hurricanes, floods, droughts, 

and wildfires of 2017:

Federal crop insurance. (Insurance payments depend on coverage levels selected by 

producers. The use of federal crop insurance is widespread, but coverage levels vary widely.)

Noninsured Crop Disaster Assistance Program. (This is generally available where crop 

insurance is not.)

Disaster programs for livestock-related losses, trees and vines, and farmland rehabilitation.

Agriculture Risk Coverage revenue program. (Payments made through this program are based 

on county yields.)

Emergency loans in counties that have been declared disasters.

Some of the programs listed above were of particular help to producers who lost livestock and grazing 

options. USDA programs have been put to the test this year.

A good example is citrus in Florida, where crop and tree losses from this year’s hurricane were 

substantial. Many producers had low insurance coverage levels and had to absorb a 50 percent loss 

before indemnities started. The financial blow compounded an already difficult situation in the state 

because of long-term disease and yield loss.

Many growers benefitted from the Tree Assistance Program (TAP), a USDA disaster program that 

provides funds for tree removal and replanting. Producers received disaster proceeds in addition to 

crop insurance indemnities. 

For lenders in Florida, commodity diversification within their loan portfolios helped them weather this 

year’s storm. For example, lenders whose portfolios included loans from the forestry and cattle sectors 

were much less affected. This was also true for those lending to vegetable growers because the 

growing season was not yet underway when the hurricane hit.
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Farm policy review is on the horizon

A major review of farm policy, including disaster programs, is getting underway. Most of the 

discussions surrounding the next farm bill involve making tweaks to existing farm programs. One 

proposed tweak is to even out revenue payments in counties that are adjacent to each other. 

Efforts to raise program parameters to boost payments are limited by budget constraints, so the 

ability of farm programs to reduce risk may not change much. 

Most of the value of the revenue program might be in the rearview mirror for corn and soybean 

producers. Many are expected to switch to the price loss program, which gives better protection from 

extremely deep price losses. Since the current farm bill covers crops harvested in 2018, many would 

like to see the next farm bill passed before farmers start planning for their 2019 crops, the first of 

which is winter wheat to be planted in the fall of 2018.

Challenges to the federal crop insurance program are a given, and it is worth noting that critics got 

close to enacting some changes on subsidies during the last farm bill. Cuts would result in farmers 

paying a greater share of the premium. Some would likely scale back a bit of their coverage to 

compensate if subsidies are cut. 

And finally, during farm bill discussions, there are always calls for more research dollars because 

research can improve the long-term competitiveness of the agriculture industry, but research funding 

always has trouble competing with farm subsidies and other farm bill priorities. 

U.S. agricultural trade policy in flux

The case for pursuing export markets is clear for agriculture since roughly 20 to 25 percent of farm 

output is exported. This explains why many U.S. ag groups had high hopes that the 12-member TransPacific Partnership would significantly boost exports for U.S. beef, pork, dairy, soybeans, and other 

commodities. Earlier this year the Trump Administration halted U.S. participation in the trade deal for 

reasons unrelated to agriculture. 

In its place has been an increased emphasis on bilateral discussions. One recent example of positive 

news for U.S. exporters is that China plans to remove its 11 percent value-added tax on distillers dried 

grains, which came after the president’s recent visit to China. The question is whether this new 

emphasis will result in faster trade gains than under the previous multilateral approach.

Another major trade uncertainty is the impact of renegotiating the North American Free Trade 

Agreement (NAFTA). U.S. agriculture benefits from significantly lower tariffs and improved market 

access under the existing agreement. For example, Mexico, which accounts for three-quarters of U.S. 

barley exports, places a zero tariff on that commodity. The previous tariff was 175 percent. Any 

backsliding on NAFTA could dampen future U.S. exports and test the continent’s well-integrated 

agricultural markets.

Issues that could cause some pain (or gain) in 2018

In summary, several economic and policy issues could affect risk in the Farm Credit System. Continued 

strong demand for the protein sector will be necessary to prevent steep drops in farm prices amid the 

expanding supplies of meat. For crops, demand is critical for clearing out grain stocks. 

Another major concern would be a geopolitical event that triggers an oil or other economic shock that 

disrupts global growth. Any export-dependent industry like agriculture is vulnerable to losses. The 

transition to higher interest rates is another issue. The key will be a gradual rise that can be absorbed 

by producers and the land market.
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On crop insurance and farm policy, departures from the status quo could affect risk mitigation for 

farmers. Trade policy may be the ultimate wildcard, and the sector is working hard to hold onto gains 

secured during previous decades. 

Finally, for borrowers and their lenders, producers who are low-cost and are successful hedgers tend 

to prosper when the sector is under competitive pressures. That will likely be the case as we move 

into 2018. For farmers who are struggling, economic conditions appear to be changing slowly enough 

to allow them either to adjust or to exit gracefully.