U.S. Farm Income Outlook: February 2020 Forecast
Released: 2020-03-03T00:00:00

Introduction

The U.S. farm sector is vast and varied. It encompasses production activities related to traditional field crops (such as corn, soybeans, wheat, and cotton) and livestock and poultry products (including meat, dairy, and eggs), as well as fruits, tree nuts, and vegetables. In addition, U.S. agricultural output includes greenhouse and nursery products, forest products, custom work, machine hire, and other farm-related activities. The intensity and economic importance of each of these activities, as well as their underlying market structure and production processes, vary regionally based on the agro-climatic setting, market conditions, and other factors. As a result, farm income and rural economic conditions may vary substantially across the United States.

Annual U.S. net farm income is the single most-watched indicator of farm sector well-being, as it captures and reflects the entirety of economic activity across the range of production processes, input expenses, and marketing conditions that have prevailed during a specific time period (see box "Measuring Farm Profitability" for a definition of net farm income ). When national net farm income is reported together with a measure of the national farm debt-to-asset ratio, the two summary statistics provide a quick and widely referenced indicator of the economic well-being of the national farm economy.

USDA's February 2020 Farm Income Forecast

In the first of three official U.S. farm income outlook releases scheduled for 2020 (see box "ERS's Annual Farm Income Forecasts" below), the U.S. Department of Agriculture's (USDA) Economic Research Service (ERS) projects that U.S. net farm income will rise 3.3% year-over-year in 2020 to $96.7 billion, up $3.1 billion from last year ( Figure 1 and Table A-1 ). The February forecast of $96.7 billion is 6.3% above the 10-year average of $89.9 billion (in nominal dollars) but is well below 2013's record high of $123.7 billion. In contrast, net cash income (calculated on a cash-flow basis) is projected lower in 2020 (down 10.8% from 2019) at $109.6 billionâ4.7% below the 10-year average of $115.0 billion.

The divergence in year-to-year changes between the two measures of net income is due to their different treatment of harvested crops. Net farm income includes a crop's value after harvest even if it remains in on-farm storage. In contrast, net cash income includes a crop's value only when it is sold. Thus, crops placed in on-farm storage are included in net farm income but not net cash income.

In 2018, U.S. farmers harvested a record soybean crop and the third-largest corn crop on record. That same year the U.S.-China trade dispute emerged as an impediment to trade and contributed to a widespread drop in soybean prices. However, the Administration assured producers that the trade dispute was temporary and would soon be resolved in their favor. As a result, many producers of soybeans and other crops held on to their crops in the hopes of capturing higher prices after the trade dispute was resolved. However, by mid-2019 there was no end in sight to the trade dispute, and farmer cash flows necessitated selling from on-farm inventories to meet household and farm operation needs. As a result, the net cash farm income forecast for 2019 included $14.7 billion in sales from on-farm crop inventories, whereas the 2020 forecast includes a much smaller amount ($0.5 billion) in sales from on-farm inventories. This difference accounts for much of the decline in the 2020 net cash farm income projection.

Highlights

When adjusted for inflation and represented in 2019 dollars ( Figure 2 ), both the net farm income and net cash income for 2019 are projected to be above their average values since 1940 of $88.2 billion and $101 billion, respectively. For historical perspective, both net cash income and net farm income achieved record nominal highs in 2013 but fell to recent lows in 2016 ( Figure 1 ) before trending higher during 2017-2019. Government farm subsidies are projected at $15 billion in 2020âdown nearly 37% from 2019 but still the second-highest since 2006 ( Figure 12 ). In 2019, support from traditional farm programs was bolstered by large direct government payments in response to trade retaliation under the trade dispute with China. Direct government payments of $23.6 billion in 2019 represented 25.2% of net farm incomeâthe largest share since a 27.6% share in 2006. The share of net farm income from government sources in 2020 is projected to decline to 15.5% ( Figure 11 ). Farm asset values and debt levels are projected to reach record levels in 2020âasset values at $3.1 trillion (+1.3% year-over-year) and farm debt at $425.3 billion (+2.3%)âpushing the projected debt-to-asset ratio up to 13.5%, the highest level since 2003 ( Figure 19 ). For the 2019-2020 marketing year for crops and the 2020 calendar year for livestock, USDA forecasts a mixed outlook for major commodity prices: Corn, soybeans, sorghum, oats, rice, hogs, and milk will be up slightly from 2019, while prices for barley, cotton, wheat, choice steers, broilers, and eggs are expected to be lower ( Table A-4 ).

Abundant domestic and international supplies of grains and oilseeds contributed to a fifth-straight year of relatively weak commodity prices in 2019 ( Figure A-1 through Figure A-4 , and Table A-4 ). However, the commodity price projections for 2020 are subject to substantial uncertainty associated with as-yet-unknown domestic production and international commodity market developments. Three major factors dominated U.S. agricultural markets during 2019 and have contributed to uncertainty over the supply, demand, and price prospects for most major commodities heading into 2020: surplus stocks, wet weather, and international trade disputes.

First, large corn and soybean stocks kept pressure on commodity prices throughout the grain and feed complex in 2019 ( Figure 3 ). Second, adverse weather conditions during the spring planting and fall harvesting periods contributed to market uncertainty regarding the size of the 2019 corn and soybean crops. Third, the U.S.-China trade dispute led to declines in U.S. exports to Chinaâa major market for U.S. agricultural productsâand added to market uncertainty. In particular, the United States was displaced by Brazil as the world's preeminent exporter of soybeans to China.

Weather conditions and planting prospects for 2020 are unknown this early in the year. Also, despite the signing of a Phase I trade agreement with China on January 15, 2020, it is unclear how soonâif at allâthe United States may resume normal trade with China or how international demand may evolve heading in 2020.

USDA Projects Corn, Soybean, and Wheat Stocks Lower in 2019

Corn and soybeans are the two largest U.S. commercial crops in terms of both value and acreage. For the past several years, U.S. corn and soybean crops have experienced strong growth in both productivity and output, thus helping to build stockpiles at the end of several successive marketing years through the 2018 season.

In 2018, U.S. farmers produced a record U.S. soybean harvest of 4.4 billion bushels and record-ending stocks (909 million bushels or a 22.9% stocks-to-use ratio) that year ( Figure 3 ). The record soybean harvest in 2018, combined with the sudden loss of the Chinese soybean market, kept downward pressure on U.S. soybean prices. Despite a smaller crop and lower stocks in 2019, the reduction in volume of U.S. soybean exports to China has prevented a major price recovery.

Similarly, several consecutive years of bumper U.S. corn crops have built domestic corn supplies. U.S. corn ending stocks in 2019 are projected down slightly to 1.8 billion bushels after three consecutive years of above 2-billion-bushel ending stock totals. U.S. wheat and cotton supplies are also expected to decline relative to use levels in 2019 but remain high relative to the historical average thus limiting price recovery.

Livestock Outlook for 2020

Because the livestock sectors (particularly dairy and cattle but hogs and poultry to a lesser degree) have longer biological lags and often require large capital investments up front, they are slower to adjust to changing market conditions than is the crop sector. As a result, USDA projects livestock and dairy production and prices an extra year into the future (compared with the crop sector) through 2020, and market participants consider this expanded outlook when deciding their market interactions (e.g., buy, sell, expand herd sizes).

Background on the U.S. Cattle-Beef Sector

During the 2007-2014 period, high feed and forage prices plus widespread drought in the Southern Plainsâthe largest U.S. cattle production regionâresulted in an 8% contraction of the U.S. cattle inventory. Reduced beef supplies led to higher producer and consumer prices and record profitability among cow-calf producers in 2014. This was coupled with a subsequent improvement in forage conditions, all of which helped to trigger the slow rebuilding phase in the cattle cycle that started in 2014 ( Figure 4 ). The expansion continued through 2019 despite weakening profitability, primarily due to the lag in the biological response to the strong market price signals of late 2014.

However, the cattle expansion appears to show the first signs of contraction in USDA's January 2020 U.S. cattle inventory report. The estimated cattle and calf population was down slightly from a year earlier at 94.4 million (compared with 94.8 million in January 2019). A factor working against continued expansion in cattle numbers is that producers are now producing more beef with fewer cattle as a result of heavier weights for marketed cattle.

Robust Production Growth Projected Across the Livestock Sector

Similar to the cattle sector, U.S. hog and poultry flocks have been growing in recent years, but unlike cattle they are expected to continue to expand in 2020. USDA projects production of beef (+1.2%), pork (+4.5%), broilers (+4.3%), and eggs (+1.8%) to expand robustly through 2020. A key uncertainty for the meat-producing sector is whether demand will expand rapidly enough to absorb the continued growth in output or whether surplus production will begin to pressure prices lower. USDA projects that combined domestic and export demand for 2020 will flatten for red meat (+0.0%) but expand for poultry (+3.9%).

Livestock-Price-to-Feed-Cost Ratios Signal Lower Profitability Outlook

The changing conditions for the U.S. livestock sector may be tracked by the evolution of the ratios of livestock output prices to feed costs ( Figure 5 ). A higher ratio suggests greater profitability for producers. The cattle-, hog-, and broiler-to-feed ratios have all exhibited significant volatility during the 2017-2019 period but in general have trended downward during 2018 and 2019, suggesting eroding profitability. The milk-to-feed price ratio has trended upward since mid-2018 into 2020. This result varies widely across the United States. Many marginally profitable cattle, hog, broiler, and milk producers face continued financial difficulties.

Continued strong production growth of between 1% and 5% for red meat and poultry suggests that prices are vulnerable to weakness in demand. USDA projects that the price increase for hogs will slow in 2020, up 2.2% after 4.4% growth in 2019 ( Table A-4 ). Similarly, U.S. milk production is projected to continue growing in 2020 (+1.7%). Despite this production growth, USDA projects U.S. milk prices up slightly in 2020 (+1.3%).

Gross Cash Income Highlights

Projected farm-sector revenue sources in 2020 include crop revenues (46% of sector revenues), livestock receipts (43%), government payments (3%), and other farm-related income (7%), including crop insurance indemnities, machine hire, and custom work. Total farm sector gross cash income for 2020 is projected down (-0.3%) to $430.9 billion, driven by declines in both direct government payments (-36.6%) and other farm-related income (-8.0%). Cash receipts from crop receipts (+1.0%) and livestock product (+4.6%) are up a combined (+4.6%) ( Figure 6 ).

Crop Receipts

Total crop sales peaked in 2012 at $231.6 billion when a nationwide drought pushed commodity prices to record or near-record levels. In 2020, crop sales are projected at $198.6 billion, up 1.0% from 2019 ( Figure 7 and Figure 8 ). Projections for 2020 and percentage changes from 2019 include

Feed cropsâcorn, barley, oats, sorghum, and hay: $60.1 billion (+2.0%); Oil cropsâsoybeans, peanuts, and other oilseeds: $36.8 billion (-2.3%); Fruits and nuts: $31.0 billion (+6.3%); Vegetables and melons: $20.1 billion (-1.8%); Food grainsâwheat and rice: $11.3 billion (+1.4%); Cotton: $7.1 billion (+2.1%); and Other including tobacco, sugar, greenhouse, and nursery: $31.2 billion (-0.6%).

Livestock Receipts

The livestock sector includes cattle, hogs, sheep, poultry and eggs, dairy, and other minor activities. Cash receipts for the livestock sector grew steadily from 2009 to 2014, when it peaked at a record $212.3 billion. However, the sector turned downward in 2015 (-10.7%) and again in 2016 (-14.1%), driven largely by projected year-over-year price declines across major livestock categories ( Table A-4 , Figure 9 , and Figure 10 ).

In 2017, livestock sector cash receipts recovered with year-to-year growth of 8.1% to $175.6 billion. Cash receipts increased slightly in 2018 (+0.5%) and 2019 (+0.6%). In 2020, cash receipts are projected up strongly (+4.6%) for the sector at $185.8 billion as increased cattle, hogs, and dairy sales offset declines in poultry. Projections for 2020 (and percentage changes from 2019) include

Cattle and calf sales: $69.0 billion (+1.6%), Poultry and egg sales: $40.1 billion (+1.7%), Dairy sales: $42.5 billion (+5.2%), Hog sales: $27.1 billion (+18.4%), and Miscellaneous livestock: $7.1 billion (+2.0%).

Government Payments

Historically, direct government farm program payments have included

Direct payments (decoupled payments based on historical planted acres); Price-contingent payments (both coupled and decoupled program outlays linked to market conditions); Conservation payments (including the Conservation Reserve Program and other environmental-based outlays); Ad hoc and emergency disaster assistance payments (including emergency supplemental crop and livestock disaster payments and market loss assistance payments for relief of low commodity prices); and Other miscellaneous outlays, including payments under ad hoc programs initiated by the Administration such as the Market Facilitation Program (MFP) or the cotton ginning cost-share programs but also legislatively authorized programs such as the biomass crop assistance program, peanut quota buyout, milk income loss, tobacco transition, and other miscellaneous programs.

Projected government payments of $15.0 billion in 2020, if realized, would represent a 36.6% decline from 2019 but would still be the second-largest since 2006. The $23.6 billion in federal payments in 2019 was the largest taxpayer transfer to the agriculture sector (in absolute dollars) since 2005 ( Figure 12 and Table A-1 ). The surge in federal subsidies in 2019 was driven by large "trade-damage" payments made under the MFP initiated by USDA in response to the U.S.-China trade dispute. MFP payments (reported to be $14.6 billion) in 2019 include outlays from the 2018 MFP program that were not received by producers until 2019, as well as payments under the first and second tranches of the 2019 MFP program. In 2020, MFP payments are projected to decline to $3.7 billion representing the third and final tranche of payments from the 2019 MFP program. No new MFP program has been announced for 2020 by the Administration.

USDA permanent disaster assistance is projected higher year-over-year in 2020 at $2.5 billion (+14.2%). Most of the $2.5 billion comes from a new, temporary program, the Wildfire and Hurricane Indemnity Program Plus, enacted through the Disaster Relief Act of 2019 ( P.L. 116-20 ). Payments under the Price Loss Coverage program are projected at $3.9 billion in 2020, up from $1.9 billion in 2019. In contrast, Agricultural Risk Coverage outlays are projected to decline to $39 million, down from $641 million in 2019 (see "Price Contingent" in Figure 12 ).

Conservation programs include all conservation programs operated by USDA's Farm Service Agency and the Natural Resources Conservation Service that provide direct payments to producers. Estimated conservation payments of $4.2 billion are forecast for 2020, up (+4.4%) from $4.0 billion in 2019.

Total government payments of $15.0 billion represents a 3.5% share of projected gross cash income of $432.2 billion in 2020 ( Figure 6 ). In contrast, government payments are expected to represent 15.5% of the projected net cash income of $109.6 billion ( Figure 11 ). The government share of net farm income reached a peak of 65.2% in 1984 during the height of the farm crisis of the 1980s. The importance of government payments as a percentage of net farm income varies nationally by crop and livestock sector and by region.

Dairy Margin Coverage Program Outlook

The 2018 farm bill ( P.L. 115-334 ) made several changes to the previous Margin Protection Program (MPP) for dairy, including a new nameâthe Dairy Margin Coverage (DMC) programâand expanded margin coverage choices from the original range of $4.00-$8.00 per hundredweight (cwt.). Under the 2018 farm bill, as a cushion against low milk prices, producers have the option of buying coverage to insure a margin between the national farm price of milk and the cost of feed up to a threshold of $9.50/cwt. on the first 5 million pounds of milk coverage.

The DMC margin differs from the USDA-reported milk-to-feed ratio (shown in Figure 5 ) but reflects the same market forces. In August 2019, the formula-based milk-to-feed margin used to determine government payments rose to $9.85/cwt., thus exceeding the newly instituted $9.50/cwt. payment threshold ( Figure 13 ) and decreasing the likelihood of DMC payments in the near future. Since then, the DMC margin continued its rise to $12.21 in November 2019. These increases in the DMC margin decrease the likelihood that DMC payments will be available during the first half of 2020. Despite these price movements, USDA projects that the DMC program will make $637 million in payments in 2020, up from $279 million in 2019.

Production Expenses

Total production expenses for 2020 for the U.S. agricultural sector are projected to be up by $10.4 billion (+3.0%) from 2019 in nominal dollars at $354.7 billion ( Figure 14 ). Production expenses peaked in both nominal and inflation-adjusted dollars in 2014 then declined for five consecutive years in inflation-adjusted dollars but are projected to turn up again in 2020.

Production expenses affect crop and livestock farms differently. The principal expenses for livestock farms are feed costs, purchases of feeder animals and poultry, and hired labor. In contrast, fuel, seed, pesticides, interest, and fertilizer costs are major crop production expenses. USDA projects that all expense categories with the exception of interest rates will be up in 2020 ( Figure 15 ). But how have production expenses moved relative to revenues? A comparison of the indexes of prices paid (an indicator of expenses) versus prices received (an indicator of revenues) reveals that the prices received index generally declined from 2014 through 2016, rebounded in 2017, then trended lower through 2019 ( Figure 16 ). Farm input prices (as reflected by the prices paid index) showed a similar pattern but with a smaller decline from their 2014 peak and have climbed steadily since mid-2016, suggesting that farm sector profit margins have been squeezed since 2016.

Farm Asset Values and Debt

A measure of the farm sector's financial well-being is net worth as measured by farm assets minus farm debt. A summary statistic that captures this relationship is the debt-to-asset ratio.

The U.S. farm income and asset-value situation and outlook suggest a slowly eroding financial situation heading into 2020 for the agriculture sector as a whole. Considerable uncertainty clouds the economic outlook for the sector, reflecting the mixed outlook for prices and market conditions, an increasing dependency on international markets to absorb domestic surpluses, and an increasing dependency on federal support to offset lost trade opportunities due to ongoing trade disputes.

Farm asset values (see box "Measuring Farm Wealth: The Debt-to-Asset Ratio" below for details)âwhich reflect farm investors' and lenders' expectations about long-term profitability of farm sector investmentsâare projected to be up 1.3% in 2020 to a nominal $3.1 trillion ( Table A-3 ). The projected rise in asset value is due to increases in both real estate values (+1.5%) and non-real-estate values (+0.6%). Real estate is projected to account for 83% of total farm sector asset value. Inflation-adjusted farm asset values (using 2019 dollars) are projected lower in 2020 (-0.6%). In inflation-adjusted terms, farm asset values peaked in 2014 ( Figure 17 ). Crop land values are closely linked to commodity prices. The leveling off of crop land values since 2015 reflects stagnant commodity prices ( Figure 18 ).

Total farm debt is forecast to rise to a record $425.3 billion in 2020 (+2.3%) ( Table A-3 ). Farm equityâor net worth, defined as asset value minus debtâis projected to be up slightly (+1.1%) at $2.7 trillion in 2020 ( Table A-3 ). The farm debt-to-asset ratio is forecast up in 2020 at 13.6%, the highest level since 2003 but still relatively low by historical standards ( Figure 19 ). If realized, this would be the eighth consecutive year of increase in the debt-to-asset ratio.

Average Farm Household Income

A farm can have both an on-farm and an off-farm component to its income statement and balance sheet of assets and debt. Thus, the well-being of farm operator households is not equivalent to the financial performance of the farm sector or of farm businesses because of the inclusion of nonfarm investments, jobs, and other links to the nonfarm economy.

Average farm household income (sum of on- and off-farm income) is projected at $118,908 in 2020 ( Table A-2 ), down 1.5% from 2019 and 11.4% below the record of $134,165 in 2014. About 18% ($20,926) of total farm household income in 2020 is projected to be from farm production activities, while the overwhelming majority, at 82% ($97,982), is earned off the farm (including financial investments). The share of farm income derived from off-farm sources had increased steadily for decades but peaked at about 95% in 2000 ( Figure 20 ). Since 2014, over half of U.S. farm operations have had negative income from their agricultural operations.

Total vs. Farm Household Average Income

Since the late 1990s, farm household incomes have surged ahead of average U.S. household incomes ( Figure 21 ). In 2018 (the last year for which comparable data were available), the average farm household income of $112,211 was about 25% higher than the average U.S. household income of $90,021 ( Table A-2 ).

Appendix. Supporting Charts and Tables

Figure A-1 to Figure A-4 present USDA data on monthly farm prices received for several major farm commoditiesâcorn, soybeans, wheat, upland cotton, rice, milk, cattle, hogs, and chickens. The data are presented in an indexed format where monthly price data for year 2010 = 100 to facilitate comparisons.

USDA Farm Income Data Tables

Table A-1 to Table A-3 present aggregate farm income variables that summarize the financial situation of U.S. agriculture. In addition, Table A-4 presents the annual average farm price received for several major commodities, including the USDA forecast for the 2019-2020 marketing year for major program crops and 2020-2021 for livestock products.