A Golden Outlook

March 26, 2011 12:58 AM

Despite higher input costs for 2011, lofty prices for most U.S. crops and livestock are translating into an increase in net cash income and net income. USDA’s Economic Research Service (ERS) says net cash income for farm businesses is forecast at $98.6 billion, up $7.3 billion (8%) from 2010 and $26.8 billion above the 10-year average (2000 to 2009). Net income is forecast to be $94.7 billion in 2011, up $15.7 billion (19.8%) from the 2010 forecast.

What’s the difference between the two? "Net cash income" reflects only the cash transactions occurring within the calendar year, ERS notes, while "net income" reflects income from production in the current year, whether or not it was sold within the calendar year. In simple terms, net income is a measure of the increase in wealth from production, whereas net cash income is a measure of solvency, or the ability to pay bills and make payments on debt.

Both crop and livestock farmers are expected to share the wealth. Crop receipts are expected to increase $24.1 billion, with cotton, soybean, wheat and corn making the largest gains. For livestock, cash receipts are expected to rise $4.3 billion this year.

Along with higher receipts come more expenses. ERS predicts total expenses to increase by $20.2 billion in 2011, topping the $300 billion mark for the first time. Production expenses are forecast to be up 7% this year after a 2.2% boost in 2010.

Government payments should make up less of the bottom line, as they are forecast at $10.6 billion in 2011, a decline of 12.7% from 2010.

A strong footing. Mention of the years 1974, 1979 and 1980 conjures up times in agriculture when the outlook was bright just before a financial storm hit. That raises the question: How are farm financial conditions now?

On the asset side, ERS predicts a 6.1% jump in 2011, "influenced by a 6.3% increase in farm real estate assets." Land values are still expected to rise.

What about the debt picture? Yes, farm debt is forecast to increase in 2011 to $241.6 billion, up from $240.3 billion in 2010. The real estate component of farm debt is actually forecast to fall 0.6% from 2010 to $131.5 billion in 2011. Non–real estate debt, however, is expected to be up 2%, reaching $110.1 billion.

farm sector debt rations

Where does that leave U.S. agriculture on the all-important debt-to-asset ratio? The debt-to-asset ratio is forecast at 10.7% in 2011, down from 11.3% in 2010, while the debt-to-equity ratio is expected to be 12% in 2011, down from 12.8% in 2010.

All of these numbers and percentages mean one thing to ERS: "Overall, the farm sector is more solvent than it was in 2010."

ERS further notes that the debt repayment capacity utilization (DRCU)—which is the ratio of actual farm debt outstanding relative to the maximum feasible farm debt supportable out of farm income—is expected to decrease to 43%. Is that something to worry about? Not according to ERS, which says a "decrease in DRCU indicates that a smaller proportion of net cash earnings is needed to repay farm debt."

That strong financial footing for U.S. agriculture was underscored by David Oppedahl of the Federal Reserve Bank of Chicago. He told USDA’s Outlook Forum in February that in his Fed district, fewer than 2% of loans experienced "major" or "severe" repayment problems in 2010 and that loan extensions and renewals were lower.

The bright farm income forecast could still be clouded by events outside of agriculture’s control. But the data certainly suggests that agriculture is on solid ground to deal with negative developments.

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