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pdfA Report from the Economic Research Service
United States
Department
of Agriculture
AIS-85
December 2007
www.ers.usda.gov
Agricultural Income and
Finance Outlook
Ted Covey, Mary Ahearn, Jim Johnson, Mitch Morehart,
Roger Strickland, Steve Vogel, Larry Traub, Dennis
Brown, Chris McGath, Bob Williams, Peter Stenberg,
Robert Green, Ken Erickson, and Mike Harris
Contents
Farm Income
Outlook . . . . . . . . . . . . 3
Farm Financial
Performance and
Risk Exposure . . . . . . 32
Income, Debt Use, and
Financial Performance
of Farm Businesses . . 41
Farm Household Income
Rebounds in 2007 . . . 49
Information
Contacts . . . . . . . . . . . 64
Led by record crop and livestock production expected for 2007, U.S. net farm income is
forecast to reach $87.5 billion, up $28.5 billion from 2006 and exceeding the 2004 alltime high. The anticipated rise in net farm income occurs as large increases in the value
of crop and livestock production are expected to more than offset a decline in direct
government payments and record-high farm production expenses.
U.S. agriculture’s net value added is expected to increase to $136.2 billion in 2007.
Family farms—where the majority of the farm business is owned by the operator and
individuals related to the operator—are expected to contribute over 80 percent of U.S.
agriculture’s net value added in 2007. Crop farms—where at least 50 percent of the value
of the farm’s production from crops and livestock is derived from crops—are expected to
account for over 60 percent of agriculture’s net value added in 2007. Livestock farms are
expected to account for the remainder.
This large boost is primarily the result of the increased demand for biofuels and agricultural exports, which has increased farm prices for corn, soybeans, milk, and other
farm commodities. The value of crop production is expected to increase by $30.5 billion
in 2007, the largest annual increase since 1984. The value of livestock production is
expected to increase almost $20 billion.
Direct government payments in 2007 are expected to decline by $3.7 billion from 2006.
Farm production expenses are forecast to rise to a record-level $254.2 billion in 2007.
Fuel price increases in 2007 are expected to be lower than the previous 4 years of consecutive double-digit annual percentage increases.
Average net cash income for U.S. farm businesses is projected to be $66,100 in 2007.
This represents a 21-percent increase from 2006 and would be 23 percent higher than its
most recent 5-year average.
Farm sector equity is expected to continue rising in 2007 as the anticipated
increase in farm asset value exceeds the rise in the value of farm debt. U.S.
farm sector net worth is expected to exceed $2.0 trillion in 2007, up from
$1.8 trillion in 2006.
The average household income (from farm and off-farm sources) of principal
U.S. farm operators is projected to be up 7.7 percent in 2007, to $83,622.
About 13 percent of the average farm operator household income is expected
to come from farm sources in 2007. Income from farm sources increased by
more than 30 percent in 2006-07, in contrast to a more moderate 5-percent
increase in off-farm income.
For every year since 1996, average income of farm households has exceeded
average U.S. household income. In fact, just the off-farm income component
of average farm operator household income has exceeded the average U.S.
household income from all sources since 1998. For the 15 major agricultural
States where data are available, the average income of farm operator households in 2006 exceeded the average income of all households in those States.
In addition, farm households have significantly more net worth than the
average U.S. household.
Trends in averages mask a great deal of diversity in the financial position of
U.S. farm operator households. The size of the farm operation, the commodities being produced, and the importance of off-farm sources of income all
influence the level of farm household income and net worth, and how much it
is growing or declining.
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Farm Income Outlook
Net farm income and value added to U.S. economy forecast to achieve record levels in 2007
Net farm income at $87.5 billion is forecast to be up 48 percent in 2007,
exceeding its previous high of $85.9 billion set in 2004. Net cash income at
$85.7 billion is forecast to be slightly below its prior record level of $85.8
billion in 2005 (table 1). Net value added is expected to increase by almost
$32 billion in 2007 (fig.1 and see box, “Defining the Key Terms”). Much of
these increases has been the result of the anticipated increase in the values of
both crop and livestock production, which are forecast to be at record levels
in 2007 (table 2). Both measures have trended steadily upward since 1970
and have been roughly equal over this period (fig. 2).
Net farm income has followed the value of commodity production over the
long term and in year-to-year fluctuations (fig. 3). Because farmers typically
do not vary their production mix dramatically from year to year, production
costs tend to be comparatively stable. The direction and magnitude in yearto-year change in value of livestock production arises primarily from changes
in livestock market prices. The variability in the value of crop production is
determined by variability in market prices and production levels. The volatility in crop production derives mainly from unanticipated, weather-induced
variability in yields.
The income earned from production activities in the farm sector, as measured
in net value added, is distributed among stakeholders (net rent, hired labor
Table 1
Income statement for U.S farm sector, 2005-07
2005
2006
2007
$ billion
Cash income statement:
1. Cash receipts
Crops
Livestock
240.7
115.9
124.9
239.3
120.0
119.3
282.2
142.6
139.6
2. Direct government payments
24.4
15.8
12.1
3. Farm-related income
16.2
17.5
17.8
4. Gross cash income (1+2+3)
281.3
272.5
312.1
5. Cash expenses
195.5
204.7
226.4
85.8
67.9
85.7
Farm income statement:
7. Gross cash income (1+2+3)
8. Nonmoney income
9. Inventory adjustment
281.3
19.3
-1.1
272.5
20.5
-1.6
312.1
23.9
5.8
10. Gross farm income (7+8+9)
299.6
291.5
341.7
11. Total expenses
222.5
232.5
254.2
77.1
59.0
87.5
6. NET CASH INCOME (4-5)
12. NET FARM INCOME (10-11)
Note: 2007 forecast.
Sources: USDA, ERS.
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 1
Components of value added among sources and earners
Value of commodity production
Crop
Service & other income
Livestock &
products
Customwork
Other
Forest
products
Imputed
rent
(+)
(=)
Output and
services
produced by
farms
Total value of production
(+)
Net government transfers
Direct government payments
less property taxes and licensing fees
(-)
Purchased inputs
(=)
Gross value added
Allocation
of the value
of goods and
services
(-)
Depreciation
on buildings & machinery
(=)
Net value added
Distribution
of net value
added
Equity holders
Farm
Other
operator
households
households
Nonfamily
corporations,
estates, etc.
Stakeholders
Contractors
Hired
labor
(wages)
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Lenders
(interest)
Landlords
(rent)
Defining the Key Terms
Net value added is a measure of U.S. agriculture’s contribution to the U.S.
economy’s production of goods and services created in a particular year.
It is derived as the total value of agricultural sector production within the
calendar year less the related annual costs of production plus net government transactions. U.S. agriculture’s net value added is distributed to its
equity holders (farm operators, their business partners, and contractors)
and its stakeholders (lenders, nonoperator landlords, and hired labor).
Net farm income is the residual portion of net value added after paying the
owners of factors of production (land, labor, capital) for which payment is
determined in advance of production and marketing activities. The residual
is the income accruing to those entrepreneurs providing factors of production for which the earnings are determined by assuming and managing the
risks of production and marketing.
Net cash income is computed in the same manner as net farm income, but
excludes the noncash components, of which the two largest are imputed
rental value of operators’ dwellings and capital consumption. It is a measure
of the farm income available to pay debts and household living expenses.
Figure 2
Value of crop production and livestock production, 1970-2007
$ billion
160
140
120
100
80
60
40
20
0
1970
Value of crop production
Value of livestock production
75
80
85
90
95
2000
05
Note: 2007 forecast.
Source: USDA, ERS.
Figure 3
Payments to stakeholders and net farm income, 1970-2007
$ billion
100
80
Net farm income
60
40
20
0
Payments to stakeholders
1970
75
80
85
90
95
2000
05
Note: 2007 forecast.
Source: USDA, ERS.
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 2
Value added to the U.S. economy by the agricultural sector via the production of goods
and services, 2003-07
Change 1997-2006
Item
2003
2004 2005
2006 2007 2006-07 average
——————— $ billion ———————
Percent change
Value of crop production
Food grains
Feed crops
Cotton
Oil crops
Tobacco
Fruits and tree nuts
Vegetables
All other crops
Home consumption
Value of inventory adjustment
108.5
8.0
24.7
6.4
18.0
1.6
13.5
16.9
20.8
0.1
1.6
124.5
8.9
27.4
4.8
17.9
1.6
15.5
16.2
21.5
0.1
10.7
113.6
8.6
24.6
6.3
18.4
1.1
17.7
16.9
22.3
0.1
-2.4
118.0
9.1
28.0
6.2
18.2
1.2
17.0
17.9
22.4
0.1
-2.0
148.5
12.2
41.2
5.9
22.6
1.3
16.2
20.0
23.2
0.1
5.7
30.5
3.1
13.3
-0.3
4.4
0.1
-0.8
2.0
0.8
0.0
7.8
106.0
8.0
24.0
5.1
16.5
1.9
13.8
16.1
19.8
0.2
0.7
Value of livestock production
Meat animals
Dairy products
Poultry and eggs
Miscellaneous livestock
Home consumption
Value of inventory adjustment
105.0
56.2
21.2
24.0
4.2
0.1
0.8
124.4
62.4
27.4
29.5
4.4
0.2
0.6
126.4
64.8
26.7
28.9
4.5
0.3
1.3
120.1
63.7
23.4
27.5
4.7
0.3
0.5
140.0
65.3
35.2
34.6
4.5
0.4
0.1
19.9
1.6
11.8
7.1
-0.2
0.1
-0.4
106.1
54.0
23.3
24.6
4.1
0.2
-0.1
30.0
3.0
2.2
10.5
14.3
34.1
3.4
2.4
11.3
17.0
35.2
2.8
2.5
10.9
19.0
37.6
2.7
2.5
12.3
20.1
41.2
2.9
2.5
12.4
23.4
3.6
0.2
0.0
0.1
3.2
29.1
2.5
2.6
10.0
14.0
243.5
283.0
275.2
275.7
329.6
53.9
241.2
Revenues from services and forestry
Machine hire and customwork
Forest products sold
Other farm income
Gross imputed rental value of farm dwellings
Value of agricultural sector production
131.1
137.5
144.6
151.4
169.3
17.9
129.2
Farm origin
Feed purchased
Livestock and poultry purchased
Seed purchased
less: Purchased inputs
53.7
27.5
16.7
9.4
57.5
29.7
18.2
9.6
56.9
28.0
18.4
10.4
59.8
30.5
18.2
11.0
68.6
37.4
18.6
12.6
8.8
6.9
0.4
1.5
50.9
26.6
15.7
8.6
Manufactured inputs
Fertilizers and lime
Pesticides
Petroleum fuel and oils
Electricity
28.7
10.0
8.4
6.8
3.5
31.6
11.4
8.6
8.2
3.4
35.4
12.8
8.8
10.3
3.5
37.0
13.3
8.8
11.1
3.7
41.1
15.9
9.0
12.2
3.9
4.1
2.6
0.2
1.1
0.2
30.4
10.9
8.7
7.5
3.3
Other purchased inputs
48.7
Repair and maintenance of capital items
10.7
Machine hire and customwork
3.5
Marketing, storage, and transportation expenses 7.3
Contract labor
3.3
Miscellaneous expenses
23.9
48.3
11.9
3.6
7.2
3.1
22.4
52.3
11.9
3.5
8.8
3.1
25.1
54.7
12.4
3.5
9.0
3.1
26.8
59.6
13.4
3.7
10.0
3.2
29.3
5.0
1.0
0.3
1.0
0.1
2.6
47.8
11.1
3.9
7.6
2.8
22.3
——Continued
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 2
Value added to the U.S. economy by the agricultural sector via the production of goods
and services, 2003-07—Continued
Change 1997-2006
Item
2003
2004 2005
2006 2007 2006-07 average
——————— $ billion ———————
plus: Net government transactions
+
Direct government payments
-
Motor vehicle registration and licensing fees
-
Property taxes
Gross value added
Percent change
9.2
16.5
0.5
6.8
121.5
5.4
13.0
0.5
7.0
151.0
15.8
24.4
0.6
8.0
146.4
6.2
15.8
0.5
9.0
130.5
2.0
12.1
0.6
9.5
162.3
-4.2
-3.7
0.0
0.5
31.8
9.3
16.9
0.5
7.2
121.3
21.5
23.1
25.0
26.1
26.2
0.0
21.6
100.0
127.8
121.4
104.4
136.2
31.8
99.7
less:
Payments to stakeholders
Employee compensation (total hired labor)
Net rent received by nonoperator landlords
Real estate and nonreal estate interest
40.4
18.7
10.2
11.5
41.9
20.4
10.0
11.4
44.3
20.7
10.6
13.0
45.4
21.3
9.3
14.7
48.6
22.8
10.2
15.6
3.3
1.5
0.9
0.9
42.3
18.7
10.5
13.2
59.7
85.9
77.1
59.0
87.5
28.5
57.4
less:
Capital consumption
Net value added
Net farm income
Note: 2007 forecast. For explanation of terms see footnotes and glossary at http://www.ers.usda.gov/Data/FarmIncome/Finfidmu.htm
Sources: USDA, ERS.
compensation, and interest) and producers for their contributions of land,
labor, capital, and management acumen. The incomes earned by stakeholders
are agreed upon in advance of their contribution to the production activity.
Consequently, stakeholders are not subject to the vagaries of markets and
production. Equity holders bear the inherent risks of both their own production
and the prices generated by global markets. As such, equity holders bear the
brunt of losses when production and prices decline and reap the gains in years
when price and production are above average. The relative lack of variability
in stakeholder earnings, in contrast to those of equity holders, can be observed
by comparing the smaller fluctuations in the payments-to-stakeholders’ line in
contrast to the larger fluctuations of the net-farm-income line in figure 3.
In general, 2007 is proving to be a very good year for most U.S. producers of
agricultural commodities, both crops and livestock. The boost in 2007 U.S.
farm income is primarily the result of high commodity prices. Prices for a
number of major commodities have not only been high throughout the year,
but some commodities experienced unanticipated rises to unexpected levels,
with wheat, soybeans and milk being prime examples (figs. 4–9). The higher
prices available to U.S. farmers are principally due to strong demand from
the domestic biofuels industry and from exports. U.S. farmers have a lot to
sell at high prices.
The rising use of some major crops in biofuel production has increased the
demand for these commodities and contributes to upward pressure on feed
grain prices. Corn is the primarily beneficiary of the increased production
of biofuels. Soybeans are used in the production of biodiesel. Inadequate
rainfall in competitor countries that produce similar commodities combined
with increased international consumption are resulting in low worldwide
supplies and inventories in 2007. In addition, global wheat consumption has
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 4
Monthly wheat prices, 2005-07
$ per bushel
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
3.5
3.0
2007
2006
2005
Jan
Mar.
May
July
Sep.
Nov.
Source: USDA, National Agricultural Statistics Service.
Figure 5
Monthly corn prices, 2005-07
$ per bushel
4.0
3.8
3.6
3.4
3.2
3.0
2.8
2.6
2.4
2.2
2.0
1.8
1.6
Jan
2007
2006
2005
Mar.
May
July
Sep.
Nov.
Sep.
Nov.
Source: USDA, National Agricultural Statistics Service.
Figure 6
Monthly soybean prices, 2005-07
$ per bushel
9.0
8.5
8.0
7.5
7.0
6.5
6.0
5.5
5.0
4.5
4.0
Jan
2007
2005
2006
Mar.
May
July
Source: USDA, National Agricultural Statistics Service.
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 7
Monthly upland cotton prices, 2005-07
Cents per pound
0.6
2007
2006
0.5
0.4
2005
0.3
0.2
Jan
Mar.
May
July
Sep.
Nov.
Source: USDA, National Agricultural Statistics Service.
Figure 8
Monthly milk prices, 2005-07
$ per cwt
24
2007
22
20
18
16
2005
14
2006
12
10
Jan
Mar.
May
July
Sep.
Nov.
Source: USDA, National Agricultural Statistics Service.
Figure 9
Monthly beef cattle prices, 2005-07
$ per cwt
100
95
2007
2005
90
85
2006
80
75
Jan
Mar.
May
July
Sep.
Nov.
Source: USDA, National Agricultural Statistics Service.
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
exceeded production in recent years resulting from growth in world population and incomes.
As a result, the combination of reduced supplies and higher incomes in
developing countries with large populations is translating into rising demand
for farm commodities, regardless of where they are produced. In addition,
the US dollar has depreciated by 25 percent or more against major foreign
currencies since 2002, further increasing demand for U.S. exports and
boosting farm-level prices.
Continuing a Period of Sustained Income
and Value Added for U.S. Agriculture
Since 2004, this has been a period of exceptional earnings for U.S. agriculture (fig. 10). The value of crop and livestock production has established new
highs, with livestock establishing record levels of annual output in 3 of the
4 years. Net value added to the U.S. economy also established two record
annual highs. Net farm income and net cash income have also established
multiple record highs during the 2004-07 timeframe. The early 1970s as well
as late 1980s were roughly comparable periods when U.S. farming established multiple years of sustained high levels of output and income.
Even on an inflation-adjusted basis, 2007 is expected to be an exceptional if
not record-breaking year (see box, “Adjusting for Inflation using Constant
Dollars”). With income expressed in constant dollars, farming’s net value
added in 2007 trails only 2004 as the largest economic contribution since
1974. Net farm income mirrors net value added with 2007 income in constant
dollars, trailing only 2004 as the largest amount of net income earned in the
last three-plus decades. Both current and constant dollar measures of income
underscore that the recent 4 years through 2007 have been a time of large
output and earnings.
Figure 10
Farm sector net income in 2007 above 10-year average
in constant dollars
$ billion
160
Net value added (constant dollars)
140
120
Net farm income (constant dollars)
100
80
60
40
Net farm income (current dollars)
20
0
1970
75
10-year average
$54.8 billion
(constant dollars)
80
85
90
95
2000
Implicit GDP deflator with base year 2000
05
Note: 2007 forecast.
Source: USDA, ERS.
10
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Adjusting for Inflation Using Constant Dollars
“Current dollars,” “nominal dollars,” or simply “dollars” are terms used
to describe any time series where the actual number of dollars generated
each year is used in the table or figure. In order to determine whether
the recipients of those dollars received over time are better or worse off,
economists adjust the nominal or current dollar series by holding constant
the average price of goods and services purchased with those dollars over
time. Dollars where the average price of goods and services purchased is
held constant over time are referred to as “constant dollars,” “real dollars,”
or “inflation-adjusted dollars.” When inflation-adjusted net value added,
net farm income, and payments to stakeholders increase or decrease over
time, farm equity holders’ and stakeholders’ ability to buy goods and
services has increased or decreased as well.
In order to convert net value added, net farm income, payments to stakeholders and other economic time series to inflation-adjusted or a constantdollar series, we use the GDP chain-type price index developed by the
Bureau of Economic Analysis of the U.S. Department of Commerce. By
using the year 2000 as our base year, we are treating every year in that
time series as if the average price for all goods and services in that year
(e.g., 1970 or 2007) is the same as the average price for all goods and
services in 2000.
Family Farms’ Share of Net Value Added
Expected To Increase in 2007
Equity holders, who are the farm operation’s owners, are composed of
family farm operators, their business partners, nonfamily farm operators,
and contractors. Contractors are processors, elevators, and retailers who use
both production and marketing contracts with farm operations to obtain agricultural products with specific, desired attributes. Farm-sector data in figure
10 shows how net farm income tends to rise and fall with agriculture’s net
value added, reflecting equity holders’ status as residual claimants. Farmlevel data is used in table 3 to show how the net value added expected in
2007 is expected to be distributed among agriculture’s equity holders and
stakeholders (see box, Measuring Agriculture’s Value Added: Farm-Level
and Sector Approaches).
Stakeholders’ share of net value added moves inversely to annual changes in
equity holders’ share. This is because stakeholder payments are less reliant on
changes in the value of farm output. All three stakeholder groups are expected
to see their 2007 shares of agriculture’s net value added decline from 2006.
Two resource regions, the Fruitful Rim and the Heartland, are expected to
account for more than half of U.S. agriculture’s net value added in 2007 (fig.
11) despite having only 31.4 percent of the nation’s farm operations in 2006
(table 4). While these 2 regions are ranked as the top 2 in value of livestock
production, it is in crops where they dominate with almost 64 percent of the
U.S. value of production. These 2 regions are expected to account for almost
57 percent of U.S. agriculture’s stakeholder payments and 53.1 percent of net
farm income in 2007.
11
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Measuring Agriculture’s Value Added: FarmLevel and Sector Approaches
The USDA measures U.S. agriculture’s value added using two approaches:
the farm sector and the farm-level approaches.
The farm-level approach relies almost entirely on data obtained from
USDA’s survey of individual farm-level operations, the Agricultural
Resource Management Survey (ARMS). The advantage of the farm-level
approach is that it allows a separation and measurement of the shares of
value added by different classes of equity holders, different geographic
and resource regions, various farm sales classes, farm sizes, or farm types
of production. Value added measures based on farm-level data are indicated by “Source: USDA, Agricultural Resource Management Survey”
below the table or figure. ARMS does not include Alaska and Hawaii in
its survey.
The farm sector approach uses a mix of both farm-level as well as other data
sources. These other data sources do not identify and distinguish among
the individual farms that generated that data. Value added measures based
on the sector approach are indicated by noting “Source: USDA, ERS”
below the table or figure. The sector approach relies on data for all 50
U.S. States.
Table 3
Distribution of net value added among resource owners, 2002-07
2002
2003
2004
2005
2006
2007
Percent
Stakeholders
. Hired labor
. Lenders
. Nonoperator landlords
54.4
26.9
15.0
12.5
41.1
19.8
10.9
10.4
34.3
16.5
7.9
9.9
34.5
17.5
8.4
8.6
44.3
21.9
11.3
11.1
36.0
17.8
9.0
9.2
Equity holders
. Family farm operators
. Nonfamily farm operators
. Contractors
45.6
30.6
3.6
11.4
58.9
46.4
4.7
7.8
65.7
45.3
7.3
13.2
65.5
43.8
8.0
13.6
55.7
34.4
9.3
12.0
64.0
39.6
10.6
13.8
100.0
100.0
100.0
100.0
Total
100.0 100.0
Note: 2007 forecast.
Source: USDA, Agricultural Resource Management Survey.
Farm operations specializing in crops accounted for less than half of all farms
in 2006 (table 5). However, farms specializing in crops in 2007 are expected
to account for over 60 percent of U.S. agriculture’s net value added (fig. 12).
This can be explained in part by the large shift to corn production by farmers
and the higher corn and other crop prices expected in 2007. However, highvalue crop farms are expected to account for the largest share of overall
value of crop production. Crop farms account for almost 95 percent of value
of U.S. crop production whereas livestock farms account for just over 95
percent of value of U.S. livestock production. Crop farms are expected to
account for two-thirds of U.S. payments to stakeholders and 58 percent of
U.S. net farm income.
12
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 4
Shares of U.S. value of production (VOP), stakeholder payments, and
net farm income by ERS Resource Region, 2007
Region
Farms
in 2006
Crop
VOP
Heartland
Northern Crescent
Northern Great Plains
Prairie Gateway
Eastern Uplands
Southern Seaboard
Fruitful Rim
Basin & Range
Mississippi Portal
Total
Livestock
VOP
Stakeholder
payments
Equity holder
net income
Percent
20.3
13.5
4.8
14.0
16.1
10.5
11.1
4.7
5.0
26.1
9.1
5.6
7.7
2.0
4.8
37.8
2.5
4.4
19.0
11.5
7.5
15.1
11.0
14.1
17.1
3.3
1.4
23.0
10.9
5.9
10.2
3.6
5.9
33.9
3.4
3.2
23.1
10.9
6.8
6.7
8.8
8.5
30.0
3.0
2.2
100.0
100.0
100.0
100.0
100.0
Notes: 2007 percentages are USDA forecasts while the percent of farms is based on 2006 data.
See figure 11 for description of ERS Resource Regions.
Source: USDA, Agricultural Resource Management Survey.
13
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 5
Shares of U.S. value of production (VOP), stakeholder payments, and
net farm income by production specialty, 2007
Type of production
Farms
in 2006
Crop
VOP
Livestock
VOP
Stakeholder
payments
Equity holder
net income
Percent
Crops farms
43.6
Cash grain and soybean 12.9
Other field crops
24.8
High-value crops
5.9
Livestock farms
Beef cattle
Hogs
Poultry
Dairy
General livestock
Total
94.7
37.7
16.3
40.7
4.4
2.7
1.5
0.2
68.0
26.6
11.8
29.6
57.7
17.5
11.9
28.3
56.4
33.9
0.9
1.7
2.8
17.1
5.3
2.4
1.1
0.3
0.9
0.6
95.6
38.8
11.0
18.5
23.0
4.3
32.0
13.3
2.1
2.2
10.1
4.3
42.3
14.9
8.1
9.4
7.8
2.1
100.0
100.0
100.0
100.0
100.0
Notes: 2007 percentages are USDA forecasts while the percent of farms is based on 2006 data.
Source: USDA, Agricultural Resource Management Survey.
Figure 12
Distribution of U.S. net value added by farm production
specialty, 2007
General livestock–2.9%
Dairy–8.6%
Cash grain and soybean–20.8%
Poultry–6.8%
Hogs–5.9%
Other field crops–11.9%
Beef cattle–14.3%
High-value crops–28.8%
Note: 2007 forecast.
Source: USDA, Agricultural Resource Management Survey.
Family farms, which made up over 97 percent of all farms in 2006 (table 6),
are expected to account for over 80 percent of farm net value added in 2007
(fig. 13). (See box, “Farm Types, 2006.) Commercial family farms were
expected to contribute over half of all of U.S. agriculture’s net value added.
While rural residential farms made up more than 6 out of every 10 U.S. farm
operations in 2006, they are expected to account for less than 10 percent of
U.S. net value added in 2007. Family farms are expected to account for over
80 percent of crop and livestock value of production and about 80 percent of
U.S. payments to stakeholders and net farm income.
Farm operations with $1 million or more in gross sales are few in number
yet are expected to be the source almost half of U.S. agriculture’s net value
14
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Farm Types, 2006
Small family farms
(gross sales less than $250,000)1
Commercial family farms
(gross sales of $250,000 or more)
Retirement farms. Small farms whose operators report
they are retired.
Large family farms. Gross sales between $250,000
and $499,999.
Residential/lifestyle farms. Small farms whose operators report a major occupation other than farming.
Very large family farms. Gross sales of $500,000 or
more.
Farming-occupation farms. Small family farms whose
operators report farming as their major occupation.
Nonfamily farms
• Low-sales farms. Gross sales less than $100,000.
• High-sales farms. Gross sales between $100,000
and $249,999.
Nonfamily farms. Any farm where the operator and
persons related to the operator do not own a majority
of the business. Also includes farms organized as
estates, trusts, cooperatives, and grazing associations.
Nonfamily farms are regarded as commercial farms if
gross sales are at least $250,000.
Note: This farm classification focuses on the “family farm,” or any farm where the majority of the business is owned by the operator and
individuals related to the operator by blood, marriage, or adoption. In 2006, about 97 percent of all farms were family farms. The farm
operator is the person who makes the day-to-day management decisions. Farming is regarded as the operator’s major occupation if the
majority of his or her work time is spent on farm activities.
1The National Commission on Small Farms selected $250,000 in gross sales as the cutoff between small and large-scale farms.
Source: USDA, ERS. Structure and Finances of U.S. Family Farms: Family Farm Report, 2007 edition, EIB-24.
Table 6
Shares of U.S. value of production (VOP), stakeholder payments, and
net farm income by farm typologies, 2007
Farm typology
Farms
in 2006
Crop
VOP
Livestock
VOP
Stakeholder
payments
Equity holder
net income
Percent
Rural residence family
Retirement
Residential/lifestyle
62.0
19.2
42.8
6.3
1.6
4.7
7.0
1.5
5.5
9.2
1.5
7.7
7.7
1.9
5.8
Intermediate family
Farming occupation
Low sales
High sales
26.0
16.4
12.9
15.3
13.7
20.1
5.9
5.4
11.0
5.5
7.4
5.8
9.5
5.6
8.1
7.5
4.1
3.4
58.2
15.5
42.7
61.7
11.3
50.4
56.9
14.0
42.9
58.2
12.0
46.2
95.5
80.9
81.6
81.4
79.6
Commercial family
Large
Very large
Family farms
Nonfamily
Total
4.5
19.1
18.4
18.6
20.4
100.0
100.0
100.0
100.0
100.0
Notes: 2007 percentages are USDA forecasts while the percent of farms is based on 2006 data.
Source: USDA, Agricultural Resource Management Survey.
15
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
added in 2007 (table 7). While these farm operations represented less than
2 percent of farm operations in 2006, they are expected to account for more
than half of U.S. livestock value of production and almost 43 percent of
crop value of production in 2007. These large farms are expected to make
over 43 percent of U.S. stakeholder payments and earn over half of U.S. net
farm income.
Value of U.S. Crop Production Is at
an All-Time High
The value of crop production is forecast to be up by more than $30 billion
in 2007, the largest increase since 1984. For most field crops, 2007 cash
receipts are forecast to be at record highs. Receipts from corn and soybeans,
the top two crops in receipts, are both expected to be up, with corn receipts
nearly reaching $33 billion and soybeans reaching $21 billion. Cash receipts
for wheat and rice are expected to rise to all-time highs of $10 billion and
$2 billion. Cash receipts for vegetables are expected to increase by over
Figure 13
Distribution of U.S. net value added by farm typologies, 2007
Commercial nonfamily–19.8%
Commercial family:
Very large–45.0%
Retirement–1.7%
Residential lifestyle–6.5%
Farming occupation:
Low sales–5.7%
Farming occupation:
High sales–8.6%
Commercial family:
Large–12.7%
Note: 2007 forecast.
Source: USDA, Agricultural Resource Management Survey.
Table 7
Shares of net value added (NVA), value of production (VOP), net farm
income, and stakeholder payments by sales class, 2007
Sales class
$1 million and above
Farms
in 2006 NVA
1.7
47.8
Crop Livestock Stakeholder Equity holder
VOP
VOP
payments
net income
42.8
Percent
54.5
43.2
50.4
$500,000 - $999,999
2.2
13.0
15.8
12.6
14.8
12.0
$250,000 - $499,999
4.3
13.6
16.6
12.1
15.1
12.7
$100,000 - $249,999
7.9
11.2
14.0
9.9
12.4
10.5
83.9
14.4
10.8
10.9
14.5
14.4
100.0 100.0
100.0
100.0
100.0
100.0
Below $100,000
Total
Notes: 2007 percentages are USDA forecasts while the percent of farms is based on 2006 data.
Source: USDA, Agricultural Resource Management Survey.
16
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
$2 billion. Cash receipts for cotton and for fruits and nuts are expected to
decline in 2007, with fruits and nuts down by $800 million.
Cash receipts for corn have benefited from the higher farm gate price in
2007, up over a dollar per bushel from 2006 to around $3.40. Rising corn
prices are the result of a combination of continual food and feed demand and
expanding ethanol demand. Ethanol refineries in the United States have the
capacity to produce more than 7 billion gallons per year and by early 2010,
may add an additional 6.5 billion gallons in capacity through new construction and expansion of existing facilities. The forecast for corn exports in crop
year 2007 is for a rise of about 11 percent from last year. An estimated 93.6
million acres of corn was planted in 2007, the largest area planted to corn
in over 60 years. Favorable weather conditions in the major corn-producing
States combined with higher acreage will result in a new record for production of 13.2 billion bushels, up 2.7 billion bushels from 2006.
Cash receipts for soybeans are expected to rise by more than $4 billion in
2007, reflecting strong market sales in the early months of 2007 from the
record 2006 harvest (3.2 billion bushels) and high prices in the latter months
of 2007. Pressure to expand corn acreage in 2007 lowered planted acreage
for soybeans by almost 12 million acres (16 percent) from 2006. The strong
demand for soy oil to produce biodiesel has nearly doubled since 2005.
Soybean prices are closing in on $9.00 per bushel, an increase over $ 3.00
per bushel compared to the same time last year.
Wheat cash receipts are expected to rise by almost $3 billion in 2007. Wheat
prices, which started to rise in late 2006 are expected to average a record of
nearly $5.70 per bushel in 2007. A critical factor influencing wheat price is
that this year’s domestic ending stocks could be the lowest since 1948-49.
Even with these high prices, U.S. wheat exports are forecast to rise by nearly
27 percent in 2007 with a number of importers removing import restrictions
and/or subsidizing consumption, and also benefiting from a corresponding
fall in the dollar exchange rate. Global wheat production in 2007 is projected
to lag behind world demand due to freezes and untimely rains in the U.S.
Plains, planting delays and a hot summer in Canada, drought in Australia,
rains in the West EU, and drought in the East EU, Russia and the Ukraine.
As a result, global ending stocks in 2007 are expected to fall to their lowest
level since 1975-76.
Blossoming issues in 2006 and frost in the spring of 2007 have resulted
in reduced sales of U.S. apples. Similarly, blossoming issues in 2006
reduced sales of U.S. oranges and lemons. These reduced sales combined
with steady aggregate prices for fruits and nuts caused expected 2007 cash
receipts for fruits and nuts to drop to a little over $16 billion, down 14
percent from 2006.
In mid-January 2007, temperatures plummeted to below freezing in some
parts of California, damaging newly planted strawberries, broccoli, carrots,
and lettuce. Reduced supply raised prices particularly in the first half of 2007
and is projected to elevate cash receipts for vegetables to almost $20 billion
in 2007, a record high.
17
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Value of Livestock Production Exceeds
$140 Billion for the First Time
The value of livestock production in 2007 is forecast to be a record $140
billion. Cash receipts from all livestock species are forecast to exceed the
$100-billion mark for the fifth consecutive year and the previous record high
by $15 billion.
Dairy producers’ cash receipts are forecast to be the highest on record,
approaching $35 billion and will record the largest annual increase (nearly
$12 billion) of any commodity for 2007. Milk prices strengthened during
the year and are forecast to be up almost 50 percent (around $6.00 per cwt).
Tight world supplies of dairy products caused by drought in Australia and
slow growth in milk production in the EU, together with a weak dollar
and rising real incomes in Asia, especially China, are boosting U.S. dairy
exports. These effects combined with robust demand for dairy products and
low inventory levels in the major milk producing countries are pushing milk
prices upward. In the face of rising demand, milk production is up 2 percent
due to modest growth in production per cow and herd size.
Cash receipts for beef producers are expected to continue upward in 2007 by
more than $1.2 billion and top $50 billion, a new high. Beef supplies in 2007
have been influenced by the continued above-normal cow slaughter due to
poor forage conditions (particularly in the Southeast and Southwest) and high
prices. Export demand strengthened in 2007 but less than anticipated because
of Korea’s import restrictions and Japan’s age limits on imported beef.
Domestic demand in 2007 is expected to slightly weaken from a slowing
economy and high energy and wholesale prices.
Cash receipts for pork producers, which fell in 2006, are forecast to rebound
to $14.5 billion, with prices remaining steady and production increasing
for the seventh consecutive year. Domestic demand is expected to increase
modestly, while pork exports are expected to remain steady in 2007, representing nearly 14 percent of production. A decline in exports to Mexico
resulting from its weakening economy is offset by increases in exports to
Japan and Canada due to the low-valued U.S. dollar, to Russia due to higher
economic growth, and to Hong Kong and China due to reduced Chinese hog
supplies resulting from an outbreak of swine disease.
Cash receipts for U.S. broilers are expected to rise by $4.3 billion to a record
$23.1 billion in 2007. Broiler prices are forecast to rise more than 22 percent
as a result of falling stock levels and increasing exports, mainly to Russia.
U.S. egg producers could see a $2.4 billion gain in cash receipts with egg
prices expected to rise nearly 53 percent in 2007. Egg price increases are
the result of fewer eggs and a strong export market. Mexico and Hong Kong
have increased their imports of U.S. eggs, and the EU is forecast to more
than double its egg imports, due to the appreciation of the Euro relative to the
U.S. dollar.
18
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
2007 Total Direct Payments
Forecast at $12.1 Billion
Total direct payments by the U.S. government to U.S. farmers are expected
to total $12.1 billion in 2007, down from the $15.8 billion paid out in 2006
(table 8). This would be nearly 26 percent below the previous 5-year average.
Direct payments under the Direct and Countercyclical Program (DCP) in
2007 are forecast at $5.3 billion, less than a 5-percent increase from 2006.
DCP rates are fixed in legislation and are not affected by the level of program
crop prices or production. Since 2004, there has been little change in direct
payments by crop year. The small fluctuations realized across calendar years
are the result of changes in the number of farmers taking advantage of the
optional advanced payment in December, affecting the share of the payment
rolled into the following calendar year.
Countercyclical payments are forecast to decrease from $4.0 billion in 2006 to
$1.2 billion in 2007. Only upland cotton and peanuts were expected to receive
countercyclical payments in 2007. This is quite a change from previous years,
when more than half the payments for 2004 and 2005 were to corn producers
and a quarter of the payments were to cotton. Producers may elect to receive
countercyclical payments in three installments. Countercyclical payments in
calendar year 2007 include the second partial and final payments for 2006
crops and the first partial payment for 2007 crops.
Marketing loan benefits—including loan deficiency payments, marketing
loan gains, and certificate exchange gains—are projected at $1 billion in
2007, down from $1.8 billion in 2006. In 2006, upland cotton producers and
corn producers received 62 percent and 24 percent, respectively, of total
marketing loan benefits. In 2007, upland cotton producers are likely to realize
almost 99 percent of the total marketing loan benefits in 2007, of which 95
percent are certificate exchange gains. At current price levels, marketing
loan benefits are either are not, or at most minimally, available to the other
program crops.
Forecast at $950 million in 2007, Tobacco Transition Payment Program
(TTPP) payments are expected to be 21 percent lower than in 2006. As in
2006, the number of quota holders and producers taking advantage of the
lump-sum payment option is expected to decline in 2007. The Commodity
Credit Corporation (CCC) is not authorized to make lump-sum payments,
but a third party may. Payments reported here include the portion of the
CCC payment that went to quota holders and producers, plus the lump-sum
payments received by quota holders and producers that entered into agreement with third parties. However, the portion of the CCC payment that went
to third parties is not included.
Conservation programs include all conservation programs operated by the
Farm Service Agency (FSA) and theNatural Resources Conservation Service
(NRCS) that provide direct payments to producers. Estimated conservation
payments of $3.1 billion in 2007 reflect programs being brought up toward
funding levels authorized by current legislation.
Ad hoc and emergency program payments are forecast at $500 million.
Ad hoc and emergency program payments include all programs providing
19
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 8
Direct government payments, 2002-07
2007/
Change 2002-06
Item
2002
2003
2004
2005
2006
2007 2006-07 avg.1
——————— $ million ———————
Total direct payments1
12,414.9 16,523.5 12,969.9 24,395.9 15,789.1 12,098.7
Production flexibility contract
Direct
payments2
payments3
Counter-cyclical
Percent change
payments4
3,499.8
-280.0
-4.2
367.1
6,703.6
5,242.4
-0.9
-0.3
0.0
5,198.8 5,052.0
5,262.4
-23.4
-26.3
-100.0 -100.0
4.2
16.6
203.4
2,300.7
1,122.0
4,073.8 4,035.9
1,184.8
-70.6
-49.5
1,196.7
576.4
2,865.1
5,080.3
730.6
67.5
-90.8
-96.8
459.7
198.2
131.2
368.7
188.3
6.4
-96.6
-97.6
1,178.6
556.4
475.7
1,614.0
873.3
932.6
6.8
-0.7
Peanut quota buyout payments
983.0
237.6
24.7
22.3
21.2
0.0
Milk income loss program payments
859.6
913.3
205.7
9.6
431.2
90.0
-79.1
Loan deficiency payments
Marketing loan gains5
Certificate exchange gains
Tobacco Transition Payment
Program6
-100.0 -100.0
-81.4
0.0
0.0
0.0
2,083.1 1,206.3
950.0
-21.2
44.4
1,965.8
2,167.3
2,319.6
2,767.5 2,974.3
3,100.0
4.2
27.1
Ad hoc and emergency program payments8 1,655.0
3,143.2
582.4
3,168.8
274.5
500.0
82.1
-71.7
6.8
5.4
9.9
1.7
5.0
194.1
-64.2
Conservation program payments7
Miscellaneous program
payments9
46.1
Note: 2007 forecast. Numbers may not add due to rounding.
1Includes
only those funds paid directly to farmers within the calendar year.
2Enactment
of the 2002 Farm Act terminated the authority for production flexibility contract payments.
3For
2007, this is the estimated direct payments to be received for 2007 crops less what the CCC reported as advanced payments for 2007 crops
received in 2006. With no direct payments authorized for 2008 crops, 2007 forecast does not include advanced payments for 2008.
4The
2006 payment includes the 1st partial payment for 2006 crops. The rest of the 2006 crop counter-cyclical payments are to be received in
2007. The 2007 estimate also assumes that 60 percent of program participants receive 35 percent of the estimated 2007 crop counter-cyclical as
first partial payments.
5In
publications prior to May of 2001, marketing loan gains were included in cash receipts rather than in government payments in the farm sector
income accounts.
6The
estimates here include TTPP payments and lump-sum payments to quota holders and producers. The TTPP payments to private parties are
not included.
7This
category includes all conservation programs except for those considered as emergency assistance such as the Emergency Conservation
Program.
8This
category includes all programs providing disaster and emergency assistance payments to growers. The regulations for payment of 2007
disaster assistance have not been approved by OMB. So most of the payments will not be realized until calendar 2008.
9Miscellaneous
programs and provisions vary from year to year. Included here are CCP—Fruit and Vegetable Violation, CCP—Late Fees, and
CCP—Payment Limitation Over payments which could not be directly linked to either Direct or Counter-cyclical Program payments.
disaster and emergency assistance to farmers. The carryover of payments
from 2006 was lower than expected. Furthermore, almost all of the payments
authorized by the Agricultural Assistance Act of 2007 are expected to be paid
in 2008. Figure 14 shows the fluctuation in payment levels over time.
Distribution of Government Payments
by Sales Class
In 2006, 43 percent of all U.S. farms received government payments.
However, the amount of government payments and their importance with
respect to gross cash income varies by the sales class of the farm operation. Larger farm operations received a larger than proportionate share of
20
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 14
Government payments, 1997-2007
$ billion
25
20
15
10
5
0
1997
99
Fixed1
2001
Function of prices2
03
Conservation
05
07
All other3
Note: 2007 forecast.
1
Production flexibility contract payments and direct payments, where payment rates
are fixed by legislation.
2
Counter-cyclical payments, loan deficiency payments, marketing loan gains, and certificate
exchange gains; where payment rates vary with market prices.
3
All other refers to ad hoc and disaster relief programs, milk payments, Tobacco Transition
Programs, and other miscellaneous programs.
Sources: USDA, Natural Resource Conservation Service (NRCS), Commodity Credit
Corporation (CCC), Farm Service Agency (FSA).
government payments (fig. 15). At one end, about 7 percent of all government payments went to farm operations with less than $10,000 in sales—a
group accounting for 35 percent of all farms receiving government payments.
These payments averaged $2,451 per farm and contributed 28 percent of
gross cash income. At the other end, farms generating over $1 million
in sales represent less than 3 percent of all farms receiving government
payments but receive 16 percent of all government payments. The average
payment of $80,386 per farm contributed less than 4 percent of gross cash
income of farms with $1 million or more in sales. As a measure of government payments’ significance to the stability of the farm operation, the
average payment per farm increases with an increase in sales class, but this
larger government payment contributes a much smaller share of the gross
cash income, particularly at the extremes.
Over time, the composition and distribution of payments going to the various
size classes of farms has been changing. Farms in the two lowest sales classes
receive about 54 percent of all conservation payments but only 7 percent of all
commodity program payments (fig. 15). The shares of commodity and conservation payments to these two classes of small farms have remained relatively
unchanged since 1999. In contrast, farms in the three largest sales classes
increased their share of conservation payments from 13 percent to 22 percent
and their share of total commodity payments from 51 percent to 64 percent
from 1999-2006. The increasing shares of payments going to the largest farms
is due to the increasing size of this class of farms as the value of farm receipts
has increased over time and to the increasing concentration of production
21
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 15
Characteristics of farms receiving government payments,
by sales class, 2006
Dollars
90,000
Percent
35
30
Average payment
80,386
(right axis)
25
55,579
20
70,000
60,000
50,000
40,000
15
32,183
10
2,451
6,029
9,482
Less
$10,000 $50,000
than
to
to
$10,000 $49,999 $99,999
Farm receiving payments
30,000
20,000
16,267
5
0
80,000
10,000
0
$100,000 $250,000 $500,000 $1,000,000
to
to
to
or
$249,999 $499,999 $999,999
more
Payments received
Payments as % of gross income
Sources: USDA, Natural Resource Conservation Service (NRCS), Commodity Credit
Corporation (CCC), Farm Service Agency (FSA).
among the large farms. Rising cash receipts shifts more farms into the higher
sales categories while increasing concentration of production increases the
share of commodity payments going to large farms.
Farm-Related Income Anticipated To Reach
5.4 Percent of 2007 Production Value
Many farm operators use their farm assets to generate income from business
activities other than crop and livestock production. These farm-related income
activities include machine hire and customwork, sales of forest products,
insurance indemnities, farm recreation (agritourism), and livestock grazing
(fig. 16). Farm-related activities generated $17.5 billion in farm-related
income in 2006, and are forecast to generate $17.8 billion in 2007, comprising
5.4 percent of projected value of U.S. agricultural production (see table 1).
Nationally, machine hire and customwork is forecast to generate $2.9 billion
in 2007. In 2006, farms specializing in crops accounted for three-fourths of
total machine hire and customwork income. Based on farm size, commercial
farms accounted for two-thirds of this total (fig. 17). Significant income generators were general crop farms located mostly in the West, followed by corn
farms mainly in the Midwest, and fruit and nut farms located in the West.
Another major component of farm-related income is the sale of forest products, which is forecast to generate $2.5 billion income in 2007. In 2006,
about two thirds of this income was earned by rural residence farms. Beef
cattle farms and general crop farms, the dominant types of rural residence
farms, accounted for nearly half. On a regional basis, Appalachia accounted
for more than 40 percent of all receipts of forest product sales.
22
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 16
Farm-related income by source, 2007
$ billion
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
Machine hire
& customwork
Forest product
sales
Insurance
indemnities
Farm
recreation
Livestock
grazing
Note: 2007 forecast.
Source: USDA, Agricultural Resource Management Survey.
Figure 17
Farm-related income components by farm typology, 2006
Percent
5.8
10.2
21.2
Rural residence farms
24.2
Intermediate farms
29.9
24.4
63.7
65.4
64.3
54.6
29.5
Commercial farms
6.9
Machine hire
& customwork
Forest
products
FCIC
indemnities
Recreation
Source: USDA, Agricultural Resource Management Survey.
Total insurance indemnities are forecast as $4 billion in 2007. Federal Crop
Insurance Corporation (FCIC) receipts accounted for $3.5 billion of this
total, with crop farms receiving nearly $6 out of every $7. Overall, commercial farms received about two-thirds of FCIC payments, with crop farms
receiving the majority. About 60 percent of FCIC receipts were earned
in either the Northern Great Plains or Prairie Gateway regions, while the
Fruitful Rim received nearly 20 percent of receipts, almost entirely accounted
for by greenhouse and nursery farm operations. In terms of farm types, more
than one-third of FCIC indemnities were earned by cash grain, corn, or
cotton farms; beef cattle operations received about one-fifth of FCIC receipts.
Other insurance indemnities were fairly evenly split between crop and livestock operations.
23
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
On-farm recreation is another source generator of farm-related income.
Sometimes called agritourism, farm recreation refers to a wide variety of
activities, including hunting, fishing, horseback riding, ranch stays, winery
tours, on-farm rodeos, and petting zoos. Farm recreation is forecast to
generate $1.75 billion in income in 2007. In 2006, about 2.3 percent of farms
nationwide were involved in some form of recreation. Outdoor recreation
(hunting, fishing, and horseback riding) was the largest component of farm
recreation, generating $758 million nationwide, followed by hospitality
services (bed and breakfast and/or ranch stays), which accounted for $575
million. More than half of all farms generating income from recreation are
located in the South, which, as a region, accounted for nearly 60 percent of
all farm recreation income reported nationwide.
Receipts from other sources of farm-related income are generally smaller,
with livestock grazing forecasted to generate about $650 million in income
nationally in 2007. In 2006, three-quarters of grazing revenues were generated by livestock operations. All other farm-related income was forecast to
generate $6 billion in 2007, about the same level as in 2006.
Production Expenses Are Expected
To Achieve a Record High in 2007
U.S. farm production expenses are forecast to rise $21.8 billion (9.4 percent)
to a nominal record-high $254.3 billion in 2007. This anticipated increase in
2007 expenses would be the largest on record if realized. Since a decrease
in 2002, total expenses in nominal dollars will have risen $61.5 billion (32
percent). Expressed in constant dollars, total production expenses will have
risen 15 percent since 2002 (fig. 18). Despite the large increase in forecast
2007 total expenses, the ratio of total expenses to final agricultural sector
output, at 77.1 percent, is expected to be lower than it was in 2006.
The largest forecast increase in an individual expense is a $6.9 billion (22.5
percent) jump in feed expenses (fig. 19). Fertilizer expense is expected to
increase almost 20 percent in 2007. Miscellaneous expenses (a very broad
Figure 18
Total production expenses, 1970-2007
$ billion
300
Constant dollars
250
200
150
Current dollars
100
50
0
1970
75
80
85
90
95
2000
Implicit GDP deflator with base year 2000
05
Note: 2007 forecast.
Source: USDA, ERS.
24
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
category that include custom feeding fees, insurance, general management
expenditures such as the Internet, etc.) are predicted to rise more than $2.5
billion or 9.5 percent (See box, “Internet Access and Use Has Become
Extensive on U.S. Farms”). Total labor should be up $1.6 billion (6.5
percent) and seed expenses are forecast up $1.5 billion (14 percent).
Crop farms accounted for 52.1 percent of total expenses and livestock farms
47.9 percent in 2006 (fig. 20). Fuel and oil expenses are heavier on crop
farms because of their use in farm machinery. The greater percentage of
labor expenses is located on crop farms because fruit and nut, vegetable, and
greenhouse and nursery farms are the heaviest users of labor. Crop farms
have more tax expenses due to their more extensive use of land. However, a
large number of rural residence livestock farms are located closer to urban
areas and thus have higher taxes per acre.
The projected 22.5-percent increase in feed expenses is almost totally
the product of a 21-percent rise in feed prices. This price increase is due
primarily to higher corn prices. The number of grain-consuming animal units
is predicted to be 1.6 percent higher in 2007 and production in each of the 3
animal product types–meat animals, milk, and poultry and eggs—will be up.
The biggest factor in the amount of feed used, though, is the number of cattle
on feed, which was down 1.6 percent on July 1, 2007 from the previous year.
Total U.S. animal purchases should be up, primarily because of conditions
in the cattle sector, which represents more than 75 percent of this expense.
Opposing factors are at work in the cattle-on-feed situation. Drought is still
pressuring cattle and calves into feedlots and exports are rising more slowly
than expected, both of which exert downward pressure on prices. However,
where favorable pasture and range conditions exist, cattle are being fed to
heavier weights before being shipped to feedlots to reduce grain feeding; the
supply of feeder cattle outside feedlots is tightening; and beef production is
Figure 19
Production expenses by group, 2002-07
$ billion
250
200
150
100
50
0
2002
Farm origin
03
04
Manufactured
05
Interest
06
Other operating
07
Overhead
Note: 2007 forecast.
Source: USDA, ERS.
25
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Internet Access and Use Has Become Extensive on U.S. Farms
Internet access on U.S. farms rose from 43 percent in 2001 to 62 percent in 2006
Internet use has become commonplace on the farm,
but farms having high-speed Internet access are less
common (table 9). Sixty-two percent of U.S. farms had
Internet access in 2006, up from 43 percent in 2001.
Internet access was roughly evenly split between dial-up
and broadband technologies. Farms with higher value of
production were much more likely to have broadband
connections than smaller farm operations. Farms with
Internet access also had greater production than farms
with no Internet connection. Greater affordability and
need may be causal reasons for these relationships.
Socio-economic characteristics of farm operators can
explain some of the variation in Internet use. Farm operators’ characteristics also appear to vary with broadband Internet access. Average age, number of children
in the farm household, off-farm wages and total household income all differ between the no Internet, dial-up
Internet access, and broadband Internet access groups.
Older farmers are less likely to have Internet access
than younger farmers. Farmers with broadband Internet
access are, on average, younger than farmers with
dial-up access. The greater the education of the farm
operator and spouse, the more likely the farm operation
will have Internet access. Broadband Internet access is
more likely when the combined educational attainment
of farm households is high.
The presence of children increases the likelihood of
Internet access. The higher the average off-farm wage
and average total household income the greater the
chance of Internet access. Among farms with Internet
access, those with higher off-farm wages and total
household income were more likely to have access to
broadband.
A number of reasons were stated by farm operators
for not having Internet access (table 10). A majority
stated that they had no computer to access the Internet.
Only 5 percent stated that they were unable to obtain
adequate service. This implies that nearly all farm
operators have Internet service of some sort available
for their location.
Table 10
Reasons for no Internet access, 2006
Percent
No computer
58
Inadequate service
5
Security concerns
2
Other
35
Total
100
Source: USDA, Agricultural Resource Management Survey.
Table 9
Farm Internet access with selected farm operator characteristics, 2006
Item
Number of farms
Percent of farms
Percent of value of production
Percent of farms by education:
Education below college
College graduate
Operator age
Number of children
Combined off-farm wages
Total household income
Type of Internet access
No internet
Dial-up
Broadband
788,313
37.8
20.7
647,142
31.1
28
648,188
31.1
51.3
88.6
11.4
61
0
19,565
58,178
69.8
30.2
55
1
39,189
80,719
63.2
36.8
53
1
53,781
104,678
Source: USDA, Agricultural Resource Management Survey.
26
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 20
Percent of production expenses by farm type, 2006
Percent
100
80
60
40
20
0
Total
Seeds
Fertilizer Chemicals
Fuels
& oils
Crop farms
1Farm
Feed
Livestock
& poultry
Labor
Livestock farms
operators only; excludes landlords.
Source: USDA, Agricultural Resource Management Survey.
predicted to be up slightly. These factors tend to push feeder cattle prices
up. The net effect is that the annual average price for Oklahoma City feeder
cattle and Nebraska choice steers are both expected to rise. Additionally,
milk cows are commanding higher prices because of rising milk prices.
Prices paid for milk cow replacements have jumped 22 percent since January.
As for hogs, commercial pork production is slated to increase nearly 3
percent, which should produce a 3-percent rise in the farm price for hogs.
The principal crop-related expenses (seed, fertilizers, and pesticides) are
forecast to be $37.5 billion, up $4.3 billion from 2006 and the fifth straight
annual increase of $1 billion or more. One factor affecting this expense,
planted acreage, is up around 0.5 percent in 2007. All three expenses are
expected to rise to their highest levels ever (fig. 21).
The principal reason for the forecast $1.5 billion (14 percent) increase in
seed expenses is the forecasted 12 percent increase in prices paid for seed.
The demand for corn seed caused by the increase in corn acreage is the major
reason that the prices paid index for seeds rose so much in 2007. The price
for all corn seed was 12.7 percent higher in April 2007 than in April 2006.
Seed expenses and prices have been rising rapidly since 1999, with the 2007
increase being the largest ever. The rise in seed prices is tied to the greater
use of genetically modified seeds, which are more expensive and are in
greater demand.
Fertilizer expenses in 2007 are forecast to increase $2.6 billion (19.5 percent)
to a record-high $15.9 billion. Another double-digit increase, 14 percent, is
forecast for prices paid for fertilizer in 2007. The primary factor driving up
the fertilizer prices in 2007 is the demand for fertilizer caused by expanding
corn production. Fertilizer use should be up 8 percent, with use on corn up 19
percent in 2007.
27
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Taxes
Interest1
Farms
Figure 21
Crop-related expenses, 1987-2007
$ billion
16
14
12
Fertilizer
10
8
Pesticides
6
Seeds
4
2
0
1987
89
91
93
95
97
99
2001
03
05
07
Note: 2007 forecast.
Source: USDA, ERS.
The expected 3.4-percent increase in pesticide expenses in 2007 will take this
expense item to a point slightly higher than its previous peak in 1997-98. The
prices paid index for pesticides rose 9.2 percent between February 2005 and
November 2006, most likely in response to relatively high oil prices, since
petrochemicals are used in many pesticides. Nonetheless, the annual average
prices paid index for pesticides is predicted to be up only 1.2 percent in 2007.
Use of pesticides on field crops should be around 1 percent higher. Use of
herbicides will rise in response to higher corn acreage and the use of insecticides should fall due mostly to fewer cotton acres being planted.
Payments to Stakeholders Expected
To Rise to Record High in 2007
Payments to stakeholders (hired labor, lenders, nonoperator landlords) are
expected to rise 7.2 percent to a record-high $48.6 billion in 2007. This
increase would be the fourth straight since 2003, during which payments will
have risen 20 percent. The increase in payments in 2007 will be less than
the rise in net farm income and net value added, however, so payments to
stakeholders will constitute a smaller portion of both figures. As a percentage
of total expenses, payments to stakeholders have been dropping since they
reached a peak at 26.5 percent in 1984. In 2007, this ratio is forecast to
decline slightly to 19 percent.
Hired labor compensation, both cash and noncash, is forecast to rise 7.5
percent. Wage rates are predicted to rise 4 percent. Labor usage is expected
to rise 2.5 percent. Hired labor expenses are heavily concentrated on
commercial farms. In 2006, 85 percent of hired labor expenses were incurred
on commercial farms, in contrast to around 71 percent of gross rent and 55
percent of interest expenses.
A 9.7-percent increase in net rent to nonoperator landlords is the result of
a combination of offsetting factors. Cash rent is forecast up 4 percent as
a result of the continuing increases in land values and the 26-percent rise
in the value of crop production should push share rent up around the same
28
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
percentage. Countering these increases is a 22-percent projected fall in direct
government payments to landlords.
Total interest expenses are expected to increase as a result of a $555-million
rise in real estate interest and a $350-million rise in nonreal estate interest
expenses. The increases are almost entirely due to increases in end-of-year
and average outstanding debt with only a small increase in interest rates
expected in 2007. End-of-year debt is forecasted to rise 3.8 percent with real
estate debt was projected to be up 4.6 percent and nonreal estate debt up by
2.8 percent.
The ratio of fixed expenses to gross farm income has been generally
declining since it peaked in 1983, indicative of the U.S. farm sector’s
improved liquidity position (fig. 22). During 1980-85, this ratio exceeded 30
percent, as large amounts of debt and relatively high machinery prices raised
interest payments to its highest level and capital consumption to a level not
reached again until 2005. Since 2002, the ratio of total expenses to gross
farm income has reached low levels not seen since the early 1970s.
Rising Energy Costs Have Marginal Impact
on the Farm Sector’s Bottom Line
Over the past 5 years, the price of fuels has increased sharply and, by historical standards, remains relatively high (fig. 23). Through September 2007, the
inflation-adjusted annual average of prices paid for diesel, gasoline/gasohol,
and LP (liquefied petroleum) gas rose 94 percent since 2002. The forecast
fuels and oils expense for 2007, at $11.6 billion, is the highest recorded
nominal expenditure for this input.
Following 4 years of double-digit percentage increases, the price index for
fuels has increased only 5 percent through October 2007. However, the
effect of this price increase on farm expenses is limited because fuels and
oils comprise about 5 percent of total production expenses in 2007, about the
same share as fertilizers. Also, there is significant variation in fertilizer and
Figure 22
Ratio: Expenses/gross farm income,1970-2007
Ratio
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1970
Total expenses
Variable expenses
Fixed expenses
75
80
85
90
95
2000
05
Note: 2007 forecast.
Source: USDA, ERS.
29
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
fuel usage among different farm types, with wheat, corn, soybean, and cotton
producers among the heaviest users of fuels and oils (fig. 24).
The rapid rise in fertilizer prices during 2007 is mainly due to the greater
demand by farm operations for fertilizer. This increased demand results from
the sudden, large-scale switch to corn production by farm operations. Corn
production requires more fertilizer than the crops it replaced. It is also the result
of land previously set aside for conservation being put into corn production.
Higher energy prices have encouraged farm operators to employ energysaving farming practices. About one quarter of all U.S. farmers took actions
to reduce their fuel or fertilizer expenses in 2006. To reduce fuel expenses,
the most common practices were to regularly service engines (employed
Figure 23
Prices paid index for fuels, 1970-2007
Price index
180
160
140
120
100
80
60
40
20
0
1970
75
80
85
90
95
2000
Implicit GDP deflator with base year 2000
05
Note: 2007 forecast. Index reflects annual average of prices in constant dollars paid for
diesel, gasoline/gasohol, and LP gas.
Source: USDA, National Agricultural Statistics Service.
Figure 24
Fertilizers and fuels: share of total expenses by farm type, 2006
Percent of total expenses
Source: USDA, Agricultural Resource Management Survey.
30
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
iry
Da
y
Po
ul
tr
gs
Ho
ttle
ca
ef
ee
gr
ry
&
Be
ou
se
nh
ab
et
Nu
rs
e
Fuels
Ve
g
&
its
Fr
u
Fertilizer
les
ts
nu
tto
n
Co
n
ea
So
yb
rn
Co
at
he
W
Al
lf
ar
m
s
14
12
10
8
6
4
2
0
on 18 percent of all operations) and reduce the number of trips over a field
(employed on 14 percent of all operations). Commercial farms were most
likely to engage in strategies aimed at reducing fuel usage, with 47 percent
responding that they had utilized one or more cost-saving activity. On
average, intermediate farms negotiated 7 percent price discounts from fuel
suppliers in contrast to 6 percent for commercial farms and 5.4 percent for
rural residence farms.
Strategies employed to reduce fertilizer expenses in 2006 were also most
common among commercial operations. Conducting a soil test was the
most common practice employed, with about a quarter of all commercial
operations using this technique. Other actions taken by commercial farms
to reduce fertilizer expenses include reducing the quantity of fertilizer used
(employed by 23 percent of commercial farms), using precision technology
for fertilizer, pesticide, or seeding applications (employed by 15 percent
of commercial farms), and adjusting the plant population (employed by
11 percent of commercial farms). Commercial farms also negotiated price
discounts with fertilizer suppliers, obtaining discounts of 8 percent, on
average, compared to 7-percent discounts for intermediate operations and 6percent discounts for rural residence farms.
In recent years, growing demand for ethanol, combined with government
policies encouraging its production, have enticed many farmers to participate in the alternative energy market. In 2006, nearly 4,000 farm operators produced biomass crops solely for energy purposes. About half were
commercial farms. The average acreage for biomass crop operations was
more than double the average U.S. farm size. About 60 percent of biomass
crop farms were located in the Midwest.
Almost 14,000 farm operators in 2006 earned dividends from their investments in firms that produced ethanol. Farmers earning dividends from
ethanol tend to be older and wealthier. About half were at least 65 years
of age and 85 percent lived in households with high income/high wealth
(relative to the national median). In comparison, only about a quarter of all
farmers nationwide were 65 or older, while just over half were in the high
income/high wealth category.
Crops grown for ethanol use are generally produced in counties that are more
distant from areas of population concentration. Approximately 50 percent of
farmers earning ethanol-related dividends in 2006 operated farms in counties
that are totally rural. About one-quarter lived in population-loss counties.
31
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Farm Financial Performance
and Risk Exposure
Rising real estate values and cautious borrowing use are
projected to keep the farm sector balance sheet at sound
levels in 2007
Farm asset, debt, and equity values are expected to continue rising through
the end of 2007 (fig. 25). The value of U.S. farm assets is forecast to
increase by about 12.3 percent in 2007 (table 11). The value of farm real
estate assets, which comprise about 85 percent of farm sector assets, is
expected to rise by 13.7 percent. Farm sector equity is expected to continue
rising in 2007 as the increase in farm asset values exceeds the rise in farm
debt. Sector net worth, the total value of farm assets less total farm debt,
is expected to be about $2 trillion in 2007, up from $1.8 trillion in 2006.
Overall, farm sector equity growth has exceeded 12 percent each of the past
4 years and has risen 54.6 percent since 2003. This growing stock of equity
capital can help finance investments in farm and nonfarm capital, and also
help pay off outstanding debt.
The value of year-end 2007 crop inventories is expected to grow by nearly
21 percent from 2006 while the value of livestock and poultry inventories
is expected to fall slightly. The value of machinery and motor vehicles is
expected to rise by about $3.4 billion in 2007, based on higher expected
capital expenditures. Purchased inputs are expected to increase by about 8.6
percent in 2007 and financial assets are expected to rise about 7 percent.
Farmland and Building Values
Rose 13.3 Percent in 2006
Farmland and building values (dollars per acre) rose by about 13.3 percent
in 2006 and are expected to rise another 13.7 percent in 2007. The demand
for farmland for recreation and nonfarm development will continue to exert
upward pressure on U.S. farmland values, especially in urban and urbanizing
Figure 25
Farm sector asset values = farm equity value + farm debt
$ billion
2,500
2,000
Farm asset value
1,500
Farm debt
1,000
500
0
1970
Farm equity
75
80
85
90
95
2000
05
Note: 2007 forecast.
Source: USDA, ERS.
32
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 11
Balance sheet of the U.S. farming sector, 2002-07
2002
2003
2004
2005
2006
2007
$ million
Farm assets
1,304,049
1,378,757
1,584,842
1,769,339
1,979,087
2,222,619
1,045,655
75,621
93,582
23,114
5,632
60,445
1,111,777
78,540
95,944
24,429
5,627
62,440
1,307,597
79,420
102,190
24,435
5,700
65,500
1,484,989
81,097
105,006
24,291
6,491
67,465
1,682,381
80,747
113,144
22,699
6,460
73,656
1,912,194
80,649
116,538
27,407
7,019
78,812
177,224
175,145
182,965
193,230
207,325
215,155
Real estate debt
Farm Credit System
Farm Service Agency
Commercial banks
Life insurance companies
Individuals and others
95,423
37,815
3,181
33,060
11,421
9,946
94,138
37,662
2,485
32,937
11,371
9,684
96,872
37,723
2,222
35,233
10,912
10,782
101,518
40,125
2,050
36,939
11,019
11,384
109,038
43,851
2,260
40,521
11,019
11,388
114,083
Nonreal estate debt
Farm Credit System
Farm Service Agency
Commercial banks
Individuals and others
81,801
20,491
3,973
44,344
12,993
81,006
20,165
3,646
43,571
13,625
86,093
21,896
3,242
45,830
15,125
91,712
24,218
3,015
48,523
15,956
98,287
27,905
2,758
51,671
15,953
101,071
1,126,825
1,203,612
1,401,877
1,576,109
1,771,762
2,007,465
15.7
13.6
14.6
12.7
13.1
11.5
12.3
10.9
11.7
10.5
10.7
9.7
Real estate
Livestock and poultry
Machinery and motor vehicles1
Crops stored2
Purchased inputs
Financial assets
Total farm debt3
Farm equity
Selected ratios:
Debt-to-equity
Debt-to-asset
Note: 2007 forecast. Numbers may not add due to rounding. Balance sheet is as of December 31.
1Includes
only farm share of value for trucks and automobiles.
2Non-CCC
3Includes
crops held on farms plus value above loan rates for crops held under CCC.
CCC storage and drying facilities loans but excludes debt on operator dwellings and for nonfarm purposes.
Source: USDA, ERS.
areas. The sluggish growth in the U.S. housing sector and decreasing demand
for new housing have not slowed the demand for farmland investment.
Upward Trend in Farm Debt Expected
To Continue in 2007
Farm sector debt is anticipated to stand at about $215.2 billion by the end of
2007, up to a new record level for the fourth consecutive year (table 11). Real
estate debt is expected to rise to $114.1 billion, up 4.6 percent, while nonreal
estate debt is expected to be $101.1 billion, a 2.8 percent increase. Expected
debt increases in 2007 built on 3 consecutive years of rising farm debt. From
the beginning of 2003 through the end of 2006, farm debt rose almost $32
billion, or 18 percent.
The recent rise in loan balances can be at least partially attributed to farmers’
positive view of the sector’s future. Strong farmland markets of the last
several years attest to farmers’ long-term confidence. While many farmers
33
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
have financed expansions with cash purchases of adjacent properties, farm
mortgage debt levels rose over 7 percent in 2006 and are expected to rise
almost 5 percent in 2007.
Most borrowers in 2007 should have little difficulty cash-flowing their
production loans, given relatively high commodity prices. Funding gaps, if
any, may be filled by the increasing number of machinery, seed, and chemicals suppliers who are expanding their traditional use of financing as a means
to boost product sales, and are offering financing to meet the farmer’s full
production credit needs.
Farm real estate debt accounted for 53 percent of total farm debt in 2006, up
from about 50 percent in 1997 (fig. 26). Nonreal estate debt is increasing and
is shifting toward Farm Credit System and commercial bank lending sources
which accounted for 81 percent of nonreal estate farm debt in 2006, up from
71 percent in 1997.
Only 11 Percent of Farm Assets Financed
With Debt by End of 2006
While farms combine debt, equity capital, retained earnings, and leasing to
acquire farm inputs, in fact the farm sector makes minimal use of debt. Over
60 percent of all U.S. farms reported owing no debt to lending institutions,
individuals, or other creditors at year-end 2006. Overall, farm liabilities were
only 11 percent of farm assets.
The percentage of farms reporting no debt in the ARMS survey has continued
to rise since 2000 and increased nearly 2 percent from 2005-06 (table 12).
Conversely, the percentage of farms with debt continues to decrease by an
equivalent amount. While farm asset values rose 9.2 percent from 2005-06,
liabilities rose 18 percent mainly due to increased real estate debt. However,
in dollar terms, asset values continue to rise more rapidly than debt.
Data on differing types of U.S. farms provide some interesting details on
which operations hold farm debt in 2006 (table 12). Commercial farms,
Figure 26
Real estate as a percent of farm debt, 1988-07
Percent
60
50
40
30
20
10
0
1988
91
94
97
2000
03
06
Note: 2007 forecast.
Source: USDA, ERS.
34
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 12
Farm-operation balance sheet summary, by debt classification, 2000-06
Classification/item
2000
2001
2002
Farms with no debt:
Percent of farms
2004
2005
2006
Percent
57.4
57.8
57.0
Farm assets
Farm liabilities*
Farm equity
2003
59.0
60.4
62.8
64.6
532,640
988
531,652
616,415
1,109
615,305
683,083
1,222
681,862
Dollars per farm
425,615
899
424,716
436,387
957
435,430
460,045
1,028
459,017
514,874
1,015
513,859
Percent
Debt/asset ratio
0.21
0.22
0.22
0.20
0.19
0.18
0.18
Farms with debt:
Percent of farms
42.6
42.2
43.0
41.0
39.6
37.2
35.4
Farm assets
Farm liabilities*
Farm equity
Dollars per farm
622,662
124,801
497,861
659,917
131,750
528,168
626,760
140,268
486,492
Debt/asset ratio
741,128
142,862
598,265
885,011
150,102
734,910
949,607 1,027,611
155,250
184,429
794,357
843,182
Percent
20.0
20.0
22.4
19.3
17.0
* Contingent liabilities only.
Source: USDA, Agricultural Resource Management Survey.
despite a higher debt-to-asset ratio, had larger returns on assets (5.1), higher
returns to equity (4.6), and higher operating profit margin (16.4) than other
farm types (table 13).
Debt-to-asset ratios vary geographically (table 13). Farms in the Corn Belt
and Northern Plains had the highest debt-to-asset ratios in 2006, while the
Southeast had the lowest. However, farms in the Corn Belt had the highest
(2.4 percent) return on assets and nearly the highest returns on equity.
Regional variability is principally due to differing economic circumstances
and types of farms across the regions. Corn-belt farms are expected to benefit
from strong net returns to corn and soybean production in 2007.
Another way of looking at farm debt is to examine farm operator’s use of
borrowed capital (fig. 27). Loans made to agricultural producers are classified as real estate and nonreal estate loans. Real estate loans generally have
terms of 10 to 40 years, and are ordinarily used to purchase farmland or to
make major capital improvements to farm property. Nonreal estate loans are
typically made with loan maturities of less than 10 years, depending on the
purpose of the loan. In 2006, over 35 percent of farm operations with debt
had only real estate loans. Nearly 20 percent of farms with debt had a combination of real estate, nonreal estate, and short term loans.
Farm Debt Repayment Capacity Utilization
Expected To Fall in 2007
From 1993 to 2003, farm debt rose almost $37 billion, or $4.1 billion per year
(fig. 28). From 2003 to the end of 2007, it is expected to increase by another
35
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
16.3
17.9
Table 13
Financial ratios for farm operations with debt payable to lenders
by selected characteristics, 2006
Characteristic/Item
Debt/asset
ratio
Return on
assets
Return on Operating profit
equity
margin
Farm typology:
All
Rural residence farms
Intermediate farms
Commercial farms
Percent
18.4
19.0
14.2
20.7
1.14
-2.46
-1.95
5.06
-0.11
-4.39
-3.44
4.57
5.92
-34.16
-17.57
16.37
Region:
All
Northeast
Lake States
Corn Belt
Northern Plains
Appalachia
Southeast
Delta
Southern Plains
Mountain
Pacific
18.4
15.1
17.9
21.5
21.0
15.6
13.8
19.9
17.9
15.3
19.4
1.14
-0.59
1.35
2.43
0.10
2.23
0.77
-0.63
-1.79
1.12
2.21
-0.11
-2.04
0.22
1.40
-1.71
1.49
-0.28
-2.71
-3.66
0.10
1.14
2.76
-11.18
3.99
9.44
2.11
4.93
4.68
-11.79
-23.19
5.84
9.44
Source: USDA, Agricultural Resource Management Survey.
Figure 27
Loan types used by farm operators with debt, 2006
Percent
40
Operators using a single loan types
35
30
25
Operators using a multiple loan types
20
15
10
5
0
Non-real estate debt
Real estate debt
Short term debt
Source: USDA, Agricultural Resource Management Survey.
$37 billion, over $9 billion per year, while interest rates on new farm loans
have increased by almost 300 basis points (a basis point is 1/100 of 1 percent).
While this recent rise in farm debt and its cost may cause additional financial
difficulty for some farm operators, it has been offset by a 20-percent rise in
farm earnings before interest and income taxes. Thus, operators’ maximum
feasible farm debt and their unused repayment capacity are both expected to
rise to their third-highest levels since 1970. Farm debt repayment capacity is
the farm operators’ maximum feasible farm debt given current farm interest
rates, net cash farm income before interest and taxes, and a 7-year repayment
36
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 28
Farm operators’ farm debt repayment capacity and farm debt,
1970-2007
$ billion
450
400
Maximum feasible farm debt
350
300
250
Unused repayment capacity
200
150
100
Farm debt
50
0
1970
75
80
85
90
95
2000
05
Note: 2007 forecast.
Source: USDA, ERS.
period. Unused farm debt repayment capacity, which is farm operators’ credit
capacity less current actual farm debt, has grown considerably if unsteadily
since the early 1980s.
A measure of risk exposure for farm operators is debt repayment capacity
utilization (DRCU). DRCU can be estimated using only farm operators’ farm
income and debt (i.e.; farm DCRU). It can also be estimated using operators’
total farm income and debt; i.e.; farm and nonfarm income and debt (i.e.;
total DRCU).
DRCU for farm debt and income only is the ratio of farm operator farm debt
relative to their maximum feasible farm debt. Liquidating farm assets and
other possible means of paying off farm debt are not included in the estimation of farm DRCU.
Since the idea underlying borrowing is to pay the debt over time through the
successful production and sale of farm products and services, DRCU makes
sense as a measure of financial risk. A higher DRCU indicates higher risk
exposure. Declining government payments and farm cash receipts or rising
interest rates and debt loads increase DRCU. A farm DRCU exceeding 100
percent indicates that debt payments must be made by some source other
than net cash farm and nonfarm earnings. A DRCU of 120 percent is used to
indicate the high-risk DRCU threshold.
The farm DRCU for farm operators ranged from about 84 percent to about
110 percent from 1979-84 (fig. 29). A farm DRCU of 110 percent indicates
that current farm operator debt exceeds the ability of current farm financing
by 10 percent, thus requiring some other means to service farm debt.
The 1981 peak in farm DRCU was the result of double-digit interest rates
combined with large farm debt loads. Declining interest rates and farm debt
loads since helped bring the farm DRCU down to a fairly stable level since
the latter 1980s. Given an expected small increase in farm business debt and
its cost along with a large expected rise in net cash farm earnings before
37
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 29
Trends farm operators’ ability to service current farm debt solely out
of net cash farm income over 7-year period (DRCU), 1970-2007
Percent
120
100
80
Farm DRCU
60
40
20
0
1970
75
80
85
90
95
2000
05
Note: 2007 forecast.
Farm DRCU = Debt Repayment Capacity Utilization for farm debt.
Source: USDA, ERS.
interest and taxes, farm DRCU is expected to decline from 57 percent in
2006 to about 48 percent by the end of 2007.
Farm-level Data Allow Classifying
Farm Operators’ Total DRCU
Farm DRCU relied on farm sector data and was restricted to farm debt and
farm earnings. Farm-level data can be used to show the total DRCU for
different farm typologies, types of production, and ERS resource regions for
total farm debt and income (farm plus nonfarm). For the farm-level analysis
for total DRCU, nonfarm income, family withdrawals for living expenses,
and payment of estimated income taxes are now included in the calculation
of net cash income available for total debt coverage.
By the end of 2006, family farm operators were carrying about 37 percent of
the farm and nonfarm debt they could service with after-tax, net cash income
from their total or farm plus nonfarm earnings (fig. 30). Farms with higher
sales and where farming is the operators’ major occupation made the greatest
use of their debt repayment capacity, retirement farm operators the least.
About one out of every five family farm operators were classified in the high
risk category; i.e.; DRCU > 120 percent (fig. 31). Among the different farm
typologies, farm operators in the higher-sales category had the greatest risk
exposure in terms of their ability to cash flow their total debt.
Dairy farm operators made the greatest use of their debt repayment capacity
while those specializing in other field crops the least in 2006 (fig. 32).
However, farm operators specializing in hog and those specializing in poultry
production had the greatest share of farms exceeding the high-risk threshold
(fig. 33). Family farm operators in the Northern Great Plains made the
greatest use of their debt repayment ability out of their net cash flows (fig.
34) and also had the highest share of their farm operators in the high-risk
DRCU category (fig. 35).
38
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 30
Total Debt Repayment Capacity Utilization (DRCU) percentages
by family farm typology, 2006
Farm typologies
Retirement
Residential
Lower sales
Higher sales
Large
Very large
All family farms
0
10
20
30
40
Total DRCU (percent)
50
60
Note: Total DRCU includes farm and nonfarm debt and income.
Source: USDA, Agricultural Resource Management Survey.
Figure 31
Percent of farms with total Debt Repayment Capacity Utilization
(DRCU) > 120% by family farm typologies, 2006
Farm typologies
Retirement
Residential
Lower sales
Higher sales
Large
Very large
All family farms
0
5
10
15
20
Percent U.S. farms
25
30
Note: Total DRCU includes farm and nonfarm debt and income.
Source: USDA, Agricultural Resource Management Survey.
Figure 32
Total Debt Repayment Capacity Utilization (DRCU) percentages
for farm production specialties, 2006
Production specialties
Cash grain & soybean
Other field crops
High-value crops
Beef cattle
Hogs
Poultry
Dairy
General livestock
0
10
20
30
40
50
60
70
Total DRCU (percent)
Note: Total DRCU includes farm and nonfarm debt and income.
Source: USDA, Agricultural Resource Management Survey.
39
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 33
Percent of farms for different farm production specialties with total
Debt Repayment Capacity Utilization (DRCU) percentages > 120%, 2006
Production specialties
Cash grain & soybean
Other field crops
High-value crops
Beef cattle
Hogs
Poultry
Dairy
General livestock
0
5
10
15
20
25
Percent U.S. farms
30
35
40
Note: Total DRCU includes farm and nonfarm debt and income.
Source: USDA, Agricultural Resource Management Survey.
Figure 34
Total Debt Repayment Capacity Utilization (DRCU) percentages
for ERS resource regions, 2006
Resource regions
Heartland
Northern Crescent
North Great Plains
Prairie Gateway
Eastern Uplands
Southern Seaboard
Fruitful Rim
Basin & Range
Mississippi Portal
0
5
10
15
20
25
30
35
40
45
Total DRCU (percent)
Note: Total DRCU includes farm and nonfarm debt and income.
Source: USDA, Agricultural Resource Management Survey.
Figure 35
Percent of farms in ERS resource regions with total Debt Repayment
Capacity Utilization > 120%, 2006
Resource regions
Heartland
Northern Crescent
North Great Plains
Prairie Gateway
Eastern Uplands
Southern Seaboard
Fruitful Rim
Basin & Range
Mississippi Portal
0
5
10
15
20
25
30
Percent U.S. farms
Note: Total DRCU includes farm and nonfarm debt and income.
Source: USDA, Agricultural Resource Management Survey.
40
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Income, Debt Use, and Financial
Performance of Farm Businesses
Net cash income for farm businesses in 2007 is projected
to be 21 percent higher than 2006
U.S. agriculture is a diverse sector represented by a complex mix of business
enterprises. This section focuses on farm businesses (See box, “Defining Farm
Businesses” for definition), which generate the majority of economic activity
in the sector. Since 1986, the annual ARMS survey and its predecessor
surveys have been used to establish estimates of farm financial position,
considering both net income and the degree of indebtedness. Results reported
here highlight the diversity of financial problems faced by farm businesses.
Farm Business Income Prospects
Average net cash income for farm businesses (intermediate and commercial
operations, including non-family farms) is projected to be $66,100 in 2007.
This represents a 21-percent increase from 2006 and is 23 percent higher
than the previous 5-year average. The projected change in income prospects
for farm businesses will not affect all farm operations in the same manner
or to the same degree. There is considerable variation in business structure,
including the extent to which assets are owned, the mix of crop and livestock
produced, the contribution of government payments to gross income, and
the relative importance of energy inputs and borrowed capital to production
costs. Several classifications of farms—including commodities produced and
geographic location—reflect this diversity.
Farm businesses that specialize in the production of mixed cash grains,
wheat, and corn in 2007 are projected to have their highest average net
cash incomes of this decade, with expected increases ranging from 48 to
60 percent (table 14). Average net cash income for farm businesses that
specialize in either soybean or peanut production is projected to increase by
60 percent over 2006 and would be the second highest of the decade behind
2004. In contrast, net cash incomes are forecast to decline by 30 percent for
farm businesses that specialize in either cotton or rice production and by
much lesser magnitudes for specialty crop (minus 8 percent) and other field
crop farm businesses (minus 5 percent). Among crop farm businesses with
lower income in 2007, only specialty crop farm businesses are expected to
have higher net cash incomes than the previous 5-year average.
Among farm businesses specializing in livestock production, dairy is
expected to have the largest year-to-year increase in net cash income.
Overall demand for dairy products was surprisingly strong during most
of 2007. As a result, prices for fluid milk, butter, cheese, and other dairy
products have been much higher than in recent years. The price gains are
projected to more than offset the 23-percent increase in feed costs resulting
in substantially higher average net cash incomes for 2007. Average net cash
incomes are also projected to increase for farm businesses that produce hogs
and poultry. In comparison with other livestock, cattle receipts for 2007 are
not expected to achieve similar gains. They are forecast to rise by 5 percent
compared with a projected 9-percent increase in expenses. As a result, the
41
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Defining Farm Businesses
The official USDA farm definition (an operation with $1,000 of gross
agricultural sales or the potential to generate such sales) encompasses a
widely diverse 2.1 million operations.In order to concentrate analysis of
farm business performance on those farms with significant labor allocation to farming and household dependence on business income, several of
the farm typology classifications are excluded. These include retirement
farms and residential/lifestyle farms (see box, “Farm Types, 2006”). A
majority of these farms have negative business income and depend on
off-farm sources of income to support their households. Farm businesses,
for purposes of performance analysis in this section, include the nearly
800,000 remaining family and nonfamily farms.
Table 14
Change in net cash income by type of farm business operation, 2007
Commodity
specialization
Percent change
in net cash
income
Key determinants of change
Program crops
Mixed grain
48
Crop receipts up 29 percent, government payments down by 18 percent. Cash expenses
12 percent higher. Fertilizer was largest expense item, forecast to increase by 20 percent.
Wheat
60
Crop receipts up 33 percent. Cash expenses forecast 12 percent higher, Fertilizer was
largest expense item, forecast to increase by 20 percent.
Corn
48
Crop receipts up 28 percent, government payments down by 23 percent. Cash expenses
12 percent higher, with fertilizer and seed largest expense component increases.
Soybeans and peanuts
60
Crop receipts up 30 percent, government payments down by 20 percent. Cash expenses
12 percent higher. Fertilizer and seed forecast to have the largest increases.
Cotton and rice
-30
Nonprogram crops
Other field crops
-5
Crop receipts up 9 percent, government payments down by 29 percent. Cash expenses
13 percent higher, with fertilizer, seed, fuel, and labor increasing the most.
Specialty crops
-8
Crop receipts 5 percent higher. Cash expenses 9 percent higher, with fertilizer (20
percent) and fuels (10 percent) increasing more than other expnse components.
Livestock
Beef cattle
-9
Livestock receipts up by 5 percent. Cash expenses 9 percent higher. Feed was the
largest expense item increase at 23 percent.
Hogs
4
Livestock receipts up by 8 percent. Crop receipts up by 30 percent. Cash expenses 13
percent higher. Feed was the largest expense item increase at 23 percent.
Poultry
10
Livestock receipts up by 23 percent. Cash expenses 11 percent higher. Feed was the
largest expense item increase at 23 percent.
Dairy
116
Livestock receipts up by 37 percent. Cash expenses 14 percent higher. Feed was the
largest expense item increase at 23 percent.
Other livestock
-40
Livestock receipts up by 3 percent. Cash expenses 10 percent higher. Feed was the
largest expense item increase at 23 percent.
Crop receipts forecast to increase by 12 percent. Government payments down by 16
percent. Cash expenses forecast to increase by 11 percent.
Notes: Farm businesses exclude residential/retirement farms whose operators rely primarily on nonfarm income.
Source: USDA, Agricultural Resource Management Survey.
42
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
current projection is for net cash income of cattle farm businesses to be 9
percent below 2006 levels.
Geographic concentration of commodity production explains much of the
regional variation in the income outlook for farm businesses (table 15). In
2007, local drought impacts, particularly in the Southeast and portions of
the West, could further exacerbate regional differences in income. Regions
with a relatively high concentration of grain, soybean, and dairy production
such as the Heartland and the Northern Crescent are forecast to have the
largest increases in average net cash incomes. The only region forecast to
have a decline in average net cash income for farm businesses from 2006 is
the Southern Seaboard (down nearly 5 percent). Poultry and hogs account
for a large share of commodity production in this region and most of this
production takes place under contract arrangements where the farm operator
receives a fee for raising the animals. Despite a projected higher net cash
income for farm businesses than 2006, the Prairie Gateway could join the
Southern Seaboard as the only two regions where farm businesses’ 2007
average net cash income remains below the previous 5-year average.
Debt Use and Farm Business Financial Ratios
Farm solvency, typically measured using the debt-to-asset ratio, provides
an indicator of a farm’s ability to weather fluctuations in market conditions.
Debt levels and solvency are often cited as strong predictors of long-term
success. Farm asset values also influence solvency measurement. Land values
comprise the majority of farm assets and have risen dramatically in recent
years. Over 90 percent of reporting farm businesses in 2006 had healthy
debt-to-asset ratios of less than 30 percent (table 16). Interestingly, within
the range of debt-to-asset ratios below 40 percent, there are differences in
profitability and efficiency that may seem counterintuitive. For example, the
implied capital turnover timeframe for operators with debt-to-asset ratios
between 11 percent and 40 percent is 3.9 years, calculated by dividing the
asset turnover ratio into 100 percent. Farm business operators with the lowest
debt-to-asset ratios turn over capital in approximately 7.1 years. The operating
Table 15
Change in net cash income of farm businesses by ERS resource region, 2007
ERS resource region
Percent change in
net cash income
Key commodities
Heartland
40
Corn (30%), soybeans (23%), and hogs (18%)
Northern Crescent
59
Dairy (35%), cattle (14%), and nursery or greenhouse (9%)
Northern Great Plains
20
Cattle (49%), wheat (14%), and soybeans (12%)
Prairie Gateway
11
Cattle (55%), corn (12%), and wheat (8%)
Eastern Uplands
8
Poultry (39%), cattle (37%), and dairy (8%)
-5
Poultry (49%), cattle (15%) and hogs (8%)
Southern Seaboard
Fruitful Rim
6
Fruit (29%), nursery or greenhouse (14%), and dairy (14%)
Basin and Range
13
Cattle (43%), other crops (15%), and dairy (14%)
Mississippi Portal
1
Cotton (27%), soybeans (19%), and poultry (17%)
Notes: Farm businesses exclude residential/retirement farms whose operators rely primarily on nonfarm income.
Source: USDA, Agricultural Resource Management Survey.
43
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 16
Farm business financial ratios by debt/asset ratio category, 2006
Debt/asset ratio category
Item
No long-term debt
Below 0.10
0.11 to 0.40
0.41 or higher
All farm
businesses
Dollars per farm
Farm assets
Current assets
Non-current assets
Farm liabilities
Current liabilities
Noncurrent liabilities
Farm equity
1,328,008
101,201
1,226,807
2,041,985
191,583
1,850,402
1,517,781
207,438
1,310,343
1,126,847
203,051
923,795
1,464,043
147,376
1,316,667
6,058
6,058
0
87,766
25,483
62,283
314,060
100,482
213,578
687,644
236,515
451,128
141,138
48,184
92,954
1,321,950
1,954,218
1,203,721
439,203
1,322,905
Select financial ratios
Ratio value
Liquidity:
Current ratio
16.71
7.52
2.06
0.86
3.06
Solvency:
Debt/asset ratio (percent)
0.46
4.30
20.69
61.02
9.64
Profitability:
Return on assets (percent)
Return on equity (percent)
Operating profit margin (percent)
0.85
0.72
7.40
1.92
1.54
13.71
2.98
1.88
11.39
5.77
5.36
10.59
1.87
1.26
10.38
6.90
na
2.92
1.73
4.47
Financial efficiency:
Asset turnover ratio
0.12
Operating expense ratio (percent)
73.52
Economic cost—output ratio (percent) 105.54
0.14
73.32
102.36
0.26
80.14
101.36
0.55
83.92
98.06
0.18
77.69
102.15
113,543
14.7
15.2
2,454
187,071
24.1
36.1
4,737
55,432
7.2
19.0
1,871
774,929
100.0
100.0
15,444
Repayment capacity:
Term debt coverage ratio
Number of farms
Percent of farms
Percent of value of production
Sample size
418,883
54.1
29.7
6,382
na = Not available.
Note: Farm businesses exclude residential/retirement farms whose operators rely primarily on non-farm income.
Source: USDA, Agricultural Resource Management Survey.
expense ratios all exceed 70 percent and generally increase across the range
of debt-to-asset ratios. Already tight cash margins are further squeezed by
interest payments on debt, which can add as much as 10 percent to the operating expense ratio.
Comparing solvency to profitability measures also provides some interesting
results as the return on assets and the return on equity both increase with
larger debt-to-asset ratios despite the fact that farm businesses in each category hold significant equity. Farm businesses with low equity positions can
have large returns on equity. Finally, the operating profit margin is slightly
healthier at 13.7 percent and 11.4 percent for those reporting farms businesses with debt-to-asset ratios less than 40 percent than for farm businesses
carrying zero debt in 2006. In summary, the results suggest that a higher
debt-to-asset ratio does not necessarily imply poor performance, efficiency,
or profitability of the farm business operation.
44
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
More than half of all farm businesses (54 percent) had no year-end notes
payable at the end of the year, though many did have lines of credit or
production loans that were repaid during the year. Access to credit and its
use in the operation of the farm business depends on both the willingness and
abilities of borrowers and lenders. Access to credit has direct implications
for household welfare and business performance, since credit can be used
to increase the equity in the business over time. A farm operator may also
benefit from mere access to credit. Access to credit helps avoid risk-reducing,
but inefficient, income diversification strategies or engaging in precautionary
savings that reduces overall returns.
In 2006, very few farm businesses (3.2 percent) were denied credit or did not
apply for additional credit because of fear of denial (fig. 36). Those that were
turned down, on average, had higher debt-to-asset ratios, lower farm equity,
and lower farm earnings when compared with farm businesses that had no
problems borrowing or did not have debt. Credit-constrained farm businesses
account for about 4.5 percent of total production by farm businesses and
were more heavily concentrated in poultry production and capital intensive
crops such as cotton and wheat. Almost half of credit constrained farm businesses did not have a line of credit and 46 percent reported using off-farm
income to support the farm business.
Overall Financial Performance
of Farm Businesses
The distribution of farm businesses by overall financial performance mirrors
the sector-wide trends during 2002-06 (fig. 37). The highest share of farm
businesses categorized as financially vulnerable (5.4 percent) and the lowest
proportion considered financially favorable (58.3 percent) occurred in 2002
(See box, “Classifying Overall Financial Performance”). This was the only
year during this period when the share of farm businesses with a favorable
financial performance fell below 60 percent. The highest percentage of favorable farm businesses (70 percent) occurred in 2005, while the lowest share of
Figure 36
Number of farm businesses, production, and average debt/asset
ratio by credit access and use, 2006
Percent
60
Farm businesses
50
Production
Avg. debt/asset ratio
40
30
20
10
0
No credit
constraint
Did not apply
for credit
Obtained credit
on second
attempt
Did not apply
for fear of
denial
Turned
down
Credit access and use group
Source: USDA, Agricultural Resource Management Survey.
45
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Classifying Overall Financial Performace
The overall financial performance of farm business operations can be
evaluated by considering their combined net income and solvency positions. Both the debt/asset ratio (a measure of business solvency) and net
farm business income (a measure of business profitability) have limitations when considered independently. A high debt/asset ratio may be
acceptable if a farm business generates enough income to service debt
and meet other financial obligations. Periods of low or negative income,
similarly, may not pose major financial difficulties if the farm business
operation is carrying a low debt load and can either borrow against assets
or use other sources of income outside the farm business. To reflect this
range of financial situations, we use a framework based on the combined
income and debt/asset ratio position of each farm business.
Favorable = Positive income and a debt/asset ratio less than 0.40. These
profitable, low-leverage farm business operations are able to retain earnings, putting them in a position to take advantage of investment and expansion opportunities.
Marginal income = Negative incomes and a debt/asset ratio of 0.40 or
less. These farm businesses generally face an earnings problem that could
be overcome with increased borrowing or sales of assets, both of which
convert equity to cash.
Marginal solvency = Positive income and debt/asset ratios above 0.40.
Farm businesses in this category generate positive returns, despite higher
debt service requirements. While not experiencing earnings difficulties at
the present time, they are susceptible to economic changes that may erode
incomes and prevent them from meeting future cash commitments. At
current asset values, equity on these farm businesses may be insufficient to
serve as security for additional borrowing to meet short-run cash needs.
Vulnerable = Negative income and debt/asset ratios above 0.40. Many
of these farms are highly leveraged and have income deficiencies that
diminish the viability of their business operations. They do not generate
sufficient income either to meet current expenses or to reduce existing
indebtedness.
vulnerable farm businesses was for 2004 (2.8 percent) confirming the favorable financial conditions in agriculture during those 2 years. The first decline
since 2002 in the share of favorable farm businesses occurred in 2006. The
decline occurred when farm businesses that were classified as in a favorable
financial position in 2005 shifted into the marginal income category having
relatively low debt, but negative net farm income.
Not all regions followed this pattern of performance during 2002-06. In most
regions the highest proportion of vulnerable farm businesses occurred in
2002. Two exceptions were the Eastern Uplands region and the Basin and
Range region where the highest share of vulnerable farm businesses occurred
in 2003 (fig. 38). The Basin and Range region had the highest share of
vulnerable farm businesses in 2005 at 5.2 percent and the Mississippi Portal
46
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 37
Percent of distribution of farm businesses by overall financial
performance, 2002-06
Percent
100
80
60
40
20
0
2002
Favorable
03
04
Marginal income
05
Marginal solvency
06
Vulnerable
Source: USDA, Agricultural Resource Management Survey.
Figure 38
Percent of farm businesses classified as financially vulnerable
by farm resource region, 2002-06
Percent
Heartland
Prairie Gateway
Fruitful Rim
9
8
7
6
5
4
3
2
1
0
2002
03
Northern Crescent
Eastern Uplands
Basin and Range
04
Northern Great Plains
Southern Seaboard
Mississippi Portal
05
06
Source: USDA, Agricultural Resource Management Survey.
the lowest at 2.3 percent. Except for 2005, the share of farm businesses in
the Basin and Range region classified as financially vulnerable has exceeded
5 percent during each year from 2002-06. Many parts of this region have
endured prolonged drought during the period.
As was the case across production regions, most crop production specialties had the highest proportion of farm businesses classified as financially
vulnerable in 2002 (fig. 39). The lone exception was other crop farm businesses where the highest share of vulnerable farms was in 2003. In 2006, the
highest share of vulnerable farm businesses was for cotton and rice farms
47
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
at 4.6 percent. A year earlier, wheat farm businesses had the highest share
among crop farm business producers at nearly 6.1 percent. During 2002-06,
most farm businesses that specialized in livestock production had the highest
proportion of vulnerable farms in 2002 (fig. 40). The only exception was for
those that specialized in other livestock. They had the highest share of farm
businesses classified as vulnerable in 2006, and along with poultry had the
highest percentages in that category.
Figure 39
Percent of farm businesses that specialize in crop production
classified as financially vulnerable, 2002-06
Percent
Other cash grain
Soybean and peanuts
Specialty crops
9
8
7
6
5
4
3
2
1
0
2002
03
Wheat
Cotton and rice
04
05
Corn
Other crops
06
Source: USDA, Agricultural Resource Management Survey.
Figure 40
Percent of farm businesses that specialize in livestock production
classified as financially vulnerable, 2002-06
Percent
20
18
16
14
12
10
8
6
4
2
0
Beef cattle
2002
03
Hogs
Poultry
04
Dairy
05
Other livestock
06
Source: USDA, Agricultural Resource Management Survey.
48
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Farm Household Income Rebounds in 2007
Household income from farm sources forecast to increase
by 30 percent in 2007
Average farm household income of principal farm operators—from farm
and off-farm sources—is forecast to be $83,622 in 2007, up 7.7 percent from
2006 and 11.4 percent higher than the 2002-2006 average (table 17). (See
Boxes, “How Does USDA Define Farm Operator Households?” and “How
is Household Income Defined?”) The size of the 2006-07 increase reflects
the fact that average farm household income in 2006 was down compared to
the previous year. In 2006, average farm household income of $77,654 was
down 4.8 percent relative to 2005.
Median farm household income in 2006 was $54,835; in contrast to the
average household income, median household income actually increased in
2006, but by only 2.1 percent. (Median household incomes are not available
for 2007.) The median is the income level at which half of all households
have lower incomes and half have higher incomes. As a result, median
incomes are less influenced by very high and very low income households
than are averages; median income generally is lower than average income,
and is less variable.
Average household income from farm sources is forecast to increase by more
than 30 percent between 2006 and 2007, from $8,406 to $11,159; in contrast,
household income from off-farm income sources is forecast to increase by
less than 5 percent to $72,463. As a result, the average share of farm household income from farm sources is expected to increase from 11 percent in
2006 to 13 percent in 2007. Nonetheless, the long-term trend has farm operator households increasing their reliance on off-farm income. Approximately,
70 percent of farm operator households have either an operator or spouse of
an operator working at an off-farm job. Only for the households that operate
the largest 8 percent of farms (with sales of $250,000 or more) is average
farm income greater than off-farm income in a typical year.
As described earlier in this report, a variety of factors determines changes in
farm income. The 2006-07 increase is chiefly the result of high commodity
prices. High commodity prices resulted from strong demand, rather than
reduced supplies due to lower production. Consequently, the value of both
crop and livestock production are forecast to be at record highs in 2007. While
expenses have also increased and government payments were down in 2007,
the relatively large increase in the value of sales of commodities has resulted
in a significant increase in farm earnings for U.S. farm operator households.
Household Income Prospects Vary
by Commodity Specialization
While generally positive in 2007, market conditions differed across commodities and translated into differing rates of change in household income by the
type of commodity in which a farm operator household specializes (fig. 41).
Nowhere was this more evident than for households that operated dairies.
About 3 percent of all farm households specialize in dairy production, which
49
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 17
Average income to farm operator households, 2002-07
2007/
2006/ 2007/ 2002-06
2002
2003
2004
2005
2006
2007 2005 2006 avg.
————— Dollars per farm household —————
Net cash farm business income
Less depreciation
11,336
14,979
20,624
20,566
16,242 19,880
— Percent change —
-21.0
22.4
18.7
8,189
7,334
7,909
7,588
7,561
na
na
na
na
operator1
758
695
747
426
79
na
na
na
na
income2
621
864
806
955
1,040
na
na
na
na
Less adjusted farm business income
due to other household(s)
1,248
1,344
2,955
1,954
1,544
na -21.0
na
na
Less corporate retained income and
dividends paid to others
na
na
na
na
920
na
na
na
520
4,742
8,206
9,643
5,098
na -47.1
na
na
Less wages paid to
Less farmland rental
Equals adjusted farm business income
Plus wages paid to
operator1
na
758
695
747
804
439
na
na
na
na
1,278
5,437
8,953
10,447
5,537
na
na
na
na
2,199
2,447
5,363
4,414
2,869
na
na
na
na
Equals earnings of the operator
household from farming activities
3,477
7,884
14,317
14,860
8,406 11,159
-43.4
32.8
14.0
Plus earnings of the operator
household from off-farm sources4
62,284
60,713
67,279
66,738
69,248 72,463
3.8
4.6
11.1
Equals average money income to
farm operator households
65,761
68,597
81,596
81,599
77,654 83,622
-4.8
7.7
11.4
Median money income to farm
operator households
46,491
47,692
53,651
53,684
54,835
Equals farm self-employment income
Plus other farm-related
earnings3
na
————— Dollars per U.S. household —————
2.1
na
na
— Percent change —
U.S. average household income
57,852
59,067
60,466
63,344
66,570
na
5.1
na
na
U.S. median household income
42,409
43,318
44,334
46,326
48,201
na
4.0
na
na
————————— Percent —————————
— Percent change—
Average farm operator household
income as percent of U.S. average
household income
113.7
116.1
134.9
128.8
116.7
na
na
na
na
Median farm operator household
income as percent of U.S. median
household income
109.6
110.1
121.0
115.9
113.8
na
na
na
na
5.3
11.5
17.5
18.2
10.8
13.3
-40.6
23.3
5.3
Average operator household earnings
from farming activities as percent of
average operator household income
Note: 2007 is a forecast. na = not available.
1Net
cash farm business income is net of wages paid to operators if the farms are organized as corporations. For other types of organizations,
wages paid to operators, or a draw, are not expensed, therefore, an adjustment is made to net cash farm business income equal to these wages,
or draw. For all organizations, the wages, or draw are included as farm income to the household.
2Gross
rental income is subtracted and net rental income from the farm is added below to income received by the household.
3Wages
paid to other operator household members by the farm business and net income from a farm business other than the one being surveyed.
In 2002 only, also includes the value of commodities provided to household members for farm work. Starting in 2003, this category includes net
income from farmland rental.
4Only
in 2002, also includes net cash income from farm land rental.
Sources: USDA, Agricultural Resource Management Survey and U.S. Census Bureau, Current Population Survey.
50
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Figure 41
Average farm household income varies by farm type
by specialization in 2007
All family farms
General cash grain (3.2%)
Wheat (1.2%)
Rice (0.1%)
Corn (4.9%)
Soybean (3.2%)
Cotton (0.6%)
Other field crops (24.1%)
High value crops (5.6%)
Beef cattle (34.3%)
Hogs (0.9%)
Poultry (1.7%)
Dairy (2.7%)
General livestock (17.4%)
-20
0
20
40
60
80
$1,000
Farm income
100
120
140
160
Off-farm income
Note: 2007 is forecast. The share of U.S. family farms in each type is in parentheses.
Source: USDA, Agricultural Resource Management Survey.
is less than half the share two decades earlier. For the first time in recent
history, these households were forecast to have the highest average income
of all farm specialties—$148,159. Dairy households have the least reliance
on off-farm sources of income because of the extensive time commitment
involved in operating a dairy farm. In addition, dairy receipts in 2007 are
forecast to be the highest on record and represent the largest increase of any
commodity. Consequently, household income for those specializing in dairy
production is forecast to more than double in 2007.
Households that specialize in hogs are also forecast to have relatively high
household income of $147,226 in 2007. These households have experienced
steady growth in both farm and off-farm income over the last 5 years. Hog
production has consolidated on fewer farms over time and currently only 1
percent of farm households specialize in hog production.
Households that specialize in high-value crops (defined as greenhouse,
nursery, fruits, nuts and vegetables, and also referred to as specialty crops),
are also forecast to have relatively high household incomes in 2007, of
$120,976. About 6 percent of farm operator households specialize in highvalue crops, and like many livestock producers, receive little in the way of
farm program payments. Though they incur nearly half of all hired labor
expenses in agriculture, households that specialize in high-value crop production have had consistently higher household incomes during the 2002-06
period, so the 2007 forecast does not represent a major change from the
recent past.
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Agricultural Income and Finance Outlook / AIS-85 / December 2007
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How Does USDA Define Farm Operator Households?
The farm operator household population includes all persons who share the
dwelling unit with a principal operator of a family farm. (It also includes
students away at school supported by the principal operator households
who, if not otherwise away at school, would be sharing a dwelling unit
with the principal operator.) To understand this definition, requires an
understanding of the definition of a family farm and a principal farm operator. A farm is defined as any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been
sold, during the year. Since the definition allows farms to be included even
if they did not have at least $1,000 in sales, but normally would have, a
system has been developed by USDA’s National Agricultural Statistics
Service for determining how much a farm normally would have sold in
a given year. If a place does not have $1,000 in sales, a “point system”
assigns dollar values for acres of various crops and head of various livestock species to estimate a normal level of sales. Point farms are farms
with fewer than $1,000 in sales but have points worth at least $1,000.
More than one-quarter of farms have no sales in a typical year, and at least
another 30 percent have positive sales of less than $10,000.
The current definition of a family farm for the 2005 and 2006 estimates
based on the Agricultural Resource Management Survey is one in which
the majority of the business is owned by individuals related by blood,
marriage, or adoption. In 2005, 94 percent of farms were classified as
family farms, as were 96 percent in 2006.
The farm operator is the person who runs the family farm, making the
day-to-day management decisions. In the case of multiple operators, the
respondent for the farm identifies who the principal farm operator is during
the data collection process. USDA provides financial information for principal farm operators of family farms and their households, referred to as
farm operator households in this publication. For farms where there is
more than one operator and the multiple operators do not share a housing
unit, detailed household data and off-farm income are not collected for the
additional operators on either the Census of Agriculture or the ARMS—
household data is only collected for a single principal operator. In addition, USDA does not provide information on the financial position of farm
operator households who operate nonfamily farms.
Households specializing in cash grains are expected to see double-digit
rates of increase in average household income in 2007. Again, it is largely
a story of strong commodity prices for cash grains in 2007, due to strong
domestic and international demand. The 5 percent of households specializing in corn production are forecast to have the highest household income
in 2007 of all the cash grain producers. Their forecasted 2007 household
income was $116,314.
In sharp contrast, households specializing in cotton production are forecast to
experience a 29.6 percent drop in average household income in 2007 because
of a decline in cotton cash receipts. In part, the decline in 2007 farm returns
52
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
How is Household Income Defined?
USDA’s definition of farm household income parallels that of the U.S.
Census Bureau’s definition of household income for all U.S. households
in the Current Population Survey (CPS). The CPS definition includes
all cash income of the household, except in the case of self-employment
income (like farming) the definition departs from a strictly cash concept
by deducting depreciation, a noncash business expense, from the income
of self-employed people.
There are several factors that affect how much of the farm business income
is earned by the household of the principal operator, including:
• Some farms have multiple operators who do not share a single household. In such cases, household income is calculated only for the principal farm operator’s household and includes only that household’s
share of farm business income.
• Also, if a farm is organized as a C-corporation, the profit that the
firm generates is retained by the business until the business pays out
those earnings in the form of dividends. In 2006, for C-corporations,
farm business dividends paid to the principal operator household are
included in household farm income. (The remaining profit of C-corporations is retained by the farm business or paid to other shareholders
and not reflected in the principal farm operator household income.)
• Operators of C- and S-corporations may also pay themselves a wage
for operating the farm and those payments are included both as an
expense to the business and an income to the farm household when
they are paid.
In addition, other farm-related earnings, such as rental income from another
farming operation, are included as income in the calculation of earnings of
the operator household from farming activities. Earnings of the operator
household from farming activities as defined in the USDA measure are
not a complete measure of the returns provided by the farm. It leaves
out some resources the farm business makes available to the household.
For example, depreciation is an expense deducted from income that may
not actually be spent during the current year. Increases in inventories are
excluded from the earnings measure, but they could be sold to raise cash.
Nonmoney income, such as the imputed rental value of a farm-owned
dwelling, represents a business contribution to household income because
it frees up household cash that would otherwise be spent on housing.
Finally, farm losses, or negative farm earnings, of the operator household
can reduce the income taxes paid on off-farm sources of income.
In order to calculate total operator household income, the earnings of the
operator household from farming activities is added to the income from
off-farm sources. Off-farm income may come from a variety of sources,
including wages and salaries, off-farm self-employment, interest, dividends, private pensions, Social Security, veteran benefits, and other public
programs.
53
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
for households that specialize in cotton is the result of the drop in the yields
and harvested acres in the 2006-07 crop year from the previous August-July
marketing year. In addition, U.S. cotton producers are greatly affected by the
world market since the United States is the leading exporter of raw cotton.
The 2007 forecast represents the first time in recent history that households
that specialize in cotton had average household incomes below those of cash
grain producers.
Most farm operator households either specialize in beef cattle (34.3 percent)
or do not have a production specialty, and are classified as other field crops
(24.1 percent) or general livestock (17.4 percent). Combined, they account
for three-quarters of all farm operator households and generally operate
smaller farms that often lose money from their farming operation. For 2007,
households with these production mixes are forecast to experience a slight
decline in returns from their farming operations. However, they are forecast
to have high income from off-farm sources in excess of $70,000 for 2007.
The only other farm operator households with average off-farm sources of
income in that range are those specializing in high value crops.
Farm Household Net Worth
Equity, or net worth, is the difference between assets and debts, as of the
last day of the year. Many farm operator households generate low earnings,
or even lose money, from their farms in any particular year. Therefore, net
worth is a useful indicator of well-being. Net worth provides a longer term
perspective, since a net worth position at a point in time reflects the accumulation of wealth over time. In short, the typical farm operator household
is in a historically strong financial position (table 18). In 2006, the average
net worth of farm operator households was $895,756, and the median net
worth was $548,193. (USDA does not forecast farm operator household net
worth for 2007. The 2006 estimate is based on farm survey data, collected in
2007, for the end of the calendar year 2006.) The debt-to-asset ratio of farm
operator households in 2006 was 10 percent, with average assets of $982,672
and average debt of $98,625.
Farm assets represent about three-quarters of the assets, and net worth, of
farm operator households. Most of this is in the form of farm land, which has
experienced continual increases in value for the most recent 5-year period
and before. The remaining quarter of the net worth of farm operator households in 2006 was a very mixed portfolio. Retirement accounts represented
22 percent and real estate other than the farms they operated represented
21 percent of the average nonfarm assets of farm operator households. The
largest growth in the nonfarm assets portfolio has been in businesses other
than the farms they operate. Those businesses accounted 18 percent of their
nonfarm assets in 2006, on average.
Size of Farm Operated Is a Key Determinant
of Financial Well-Being
For those with knowledge of the financial well-being of farm operator households it is commonplace, and even clichéd, to describe the farm operator
household population as diverse. Nonetheless, it is true. This occurs because
54
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
Table 18
Financial balance sheet for operator households of family farms, 2002-06
Item
2002
2003
2004
2005
2006
—————— Dollars per farm household ——————
Assets
2006/2005
Percent
change
Total household assets--mean
Total household assets--median
630,840
401,875
779,644
484,463
818,190
508,325
904,672
564,322
982,672
602,750
8.6
6.8
Household farm assets--mean
Share of total assets
482,871
76.5
557,794
71.5
601,273
73.5
677,118
74.8
738,228
75.1
9.0
0.4
Household non-farm assets--mean
Share of total assets
147,969
23.5
221,850
28.5
216,917
26.5
227,554
25.2
244,444
24.9
7.4
-1.1
na
na
31.3
17.2
14.3
25.0
15.4
24.3
13.6
22.2
-11.7
-8.6
na
na
na
na
na
17.1
18.9
8.4
0.0
7.1
13.5
25.0
13.0
0.0
9.2
13.8
23.0
14.1
0.0
9.4
14.7
20.7
17.8
8.4
2.5
6.7
-10.1
26.2
0.0
-73.1
Total household debt
Total household debt--median
90,911
26,268
97,803
35,261
90,903
27,038
95,582
22,130
98,625
23,400
3.2
5.7
Household share of farm debt
Share of total debt
56,686
62.4
55,539
56.8
56,674
62.3
54,855
57.4
59,165
60.0
7.9
4.5
Operator household non-farm debt
Share of total debt
34,226
37.6
42,264
43.2
34,229
37.7
40,728
42.6
39,460
40.0
-3.1
-6.1
na
na
na
45.5
27.9
14.8
29.2
33.6
19.0
30.0
29.8
23.5
26.7
34.7
22.3
34.2
31.1
19.3
na
11.9
18.2
16.7
16.3
15.4
Operator household net worth
Operator household net worth--median
539,928
335,915
681,841
415,825
737,763
456,914
819,329
500,502
895,756
548,193
9.33
9.53
Operator household share of farm net worth
Share of total net worth
426,185
78.9
502,256
73.7
544,599
73.8
622,264
75.9
679,063
75.8
9.13
-0.18
Operator household non-farm net worth
Share of total net worth
113,743
21.1
179,585
26.3
193,165
26.2
197,065
24.1
216,692
24.2
9.96
0.58
0.14
0.13
0.11
0.11
0.10
-5.01
Composition of non-farm assets--percent
Financial assets held in non-retirement accounts
IRA, Keogh, 401k, and other retirement accounts
Operator dwelling, not owned by operation, and
other personal homes
Real estate--other farms, residential rental, and other
Business not part of this farm
All vehicles--household share
Other assets not reported elsewhere
Debt
Composition of non-farm debt
Mortgages on operators dwelling--if not owned
by operation
Mortgages on other real estate
Loans on businesses not a part of this operation
Personal loans--credit cards, auto loans, any other
debts not reported elsewhere
Net worth
Operator household debt to asset ratio
na = information not collected in 2002 ARMS.
Source: USDA Agricultural Resource Management Survey.
55
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
of USDA’s very liberal definition of a farm, which includes many small
farms that produce little, if any, agricultural commodities in a given year
along with farms that produce more than $10 million in product. (See, box,
“How Does USDA Define Farm Operator Households?”) Hence, the greatest
diversity in the farm operator household population is evident when farms
are disaggregated by farm size. Small farms are commonly defined to be
those with sales of less than $250,000 and large farms, also referred to as
commercial farms, have sales of $250,000 or more. In the ERS typology,
small farms include residence farms and intermediate farms. Intermediate
farms have a principal operator who indicated that farming was his or her
major occupation; the major occupation of residence farm operators was not
farming or the operator indicated that he or she was retired from farming.
Large-farm, or commercial-farm, households (8 percent of family farms) are
forecast to have an average 2007 household income of $205,654. They rely
more on farm income than other farm households; farm income is expected
to constitute 71 percent of their total 2007 household income. The positive farm sector returns for 2007 largely explains the 21-percent increase in
household income for commercial farm households in 2007 (fig. 42).
Operator households of intermediate family farms (27 percent of family
farms) receive a much smaller share of their household income from farm
sources than do commercial farm households. With farm income contributing
13 percent of total income in 2007, total household income for these households is forecast at $58,700, up 7.7 percent from 2006. Most family farms
(65 percent) are classified as residence farms. The total household income of
residence farm operators is forecast to reach $79,465 in 2007, an increase of
4.1 percent from 2006.
Figure 42
Average farm and off-farm income of farm operator households by farm size, 2002-07
$1,000
250
200
150
100
50
0
-50
02 03 04 05
20
Small farms
(Residence)
65%
06 07 -06
02
Farm income
02 03 04 05 06 07 -06
02
Small farms
(Intermediate)
27%
20
Off-farm income
02 03 04 05 06 07 -06
02
Large farms
8%
20
2002-06 average farm income
2002-06 average off-farm income
Note: 2007 is forecast. Small farms have gross sales below $250,000.
Source: USDA, Agricultural Resource Management Survey.
56
Agricultural Income and Finance Outlook / AIS-85 / December 2007
Economic Research Service/USDA
02 03 04 05 06 07 -06
02
All family farms
100%
20
The size of a farm is closely linked to the off-farm income of a farm operator household. Since small farms require less farm labor, unless operators are retired, they are likely to work off the farm. Off-farm work can be
important because of its link to more affordable health insurance coverage.
Many Americans receive health insurance through their employers. As
with the general population, the most common source of health insurance
for members of farm households is employment-based. In fact, farmers are
almost as likely as the general U.S. population to receive their health insurance through an outside employer (fig. 43). Only about 6 percent of farmers
received their health insurance through the farm businesses they operated
in 2006. Farmers were more likely than the general population to directly
purchase their health insurance from an insurance company, and less likely
to receive health insurance from a Government-sponsored program, such as
Medicare, Medicaid, or the Veterans Administration.
The Importance of Government Payments to the
Income of Farm Operator Households
The majority of U.S. farm operator households do not receive government
payments under commodity or conservation programs. In 2006, 42 percent of
farm operator households received some type of farm payment. Since many
farm households that receive government payments operate large farms, they
are similar to all large farms in terms of receiving a relatively high share of
their household income from farming sources, and a relatively lower share
from working off the farm. Government farm program payments cannot
easily be described as a share of the farm operator household income because
payments and business farm income are sometimes shared by multiple
households—and are more likely to be for larger farms—and because
receipt of payments often requires that farms incur costs. For example,
receipt of conservation payments often requires farms to incur costs to adopt
Figure 43
Type of health insurance coverage for farm households
and all U.S. households, 2006
None
Government
Direct purchase
Employment-based
0
10
20
30
40
50
60
70
Percent
Farm
U.S.
Sources: USDA, Agricultural Resource Management Survey and the U.S. Census
Bureau, Current Population Survey.
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conserving practices. However, it is interesting to consider farm operator
household income sources by the farm program payment levels of the farms
they operate.
In 2006, most of the U.S. family farms that received farm program payments
received less than $10,000 in payments (fig. 44). Households operating farms
that received no payments actually had higher average household incomes
than farms that received less than $10,000 in farm payments. However, the
farm operator households operating farms that received $10,000 or more in
farm payments had above-average household incomes as a result of their
greater farm incomes. Most farm payments are commodity-related payments,
not conservation payments. Generally, farms with the highest payments
receive a higher share of payments under commodity programs, not conservation programs.
Commodity payments are designed to support production of cash grains, rice
and cotton and other crops, while conservation payments generally target
acres and/or production practices that will generate environmental benefits.
Hence, these programs have explicit or implicit national policy goals and
do not target benefits based on individual characteristics of farmers or farm
households. More recently, USDA has targeted farmer groups based on
personal characteristics of farmers, termed “limited resource farmers” and
“beginning farmers,” to receive special consideration for participation in
government farm payment and loan programs. USDA also has educational
programs focused on “socially disadvantaged farmers.” (See box, “How Are
the Targeted Farmer Populations Defined?”)
During the current policy debates regarding the redesign of farm programs,
there has been an increased emphasis on targeting government payments and
loans to these populations. Consequently, it is relevant to consider the size of
Figure 44
Sources of income for farm operator households
by farm payments, 2006
$1,000
200,000
150,000
100,000
50,000
0
No payment
Less than
$10,000
$10,000$29,999
$30,000 or
more
Government farm payment level to farming operation
Unearned off-farm income
Earned off-farm income
Farm income
Source: USDA, Agricultural Resource Management Survey.
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How Are The Targeted Farmer Populations Defined?
Beginning Farmer or Rancher—A farmer or rancher who has not operated a farm or ranch for more than 10 years. This 10-year requirement
applies to all operators, defined as members of an entity who will materially and substantially participate in the operation of the farm or ranch.
Different USDA programs, with differing goals, have additional criteria
placed on the definition of a beginning farmer or farm. In using the 2006
Agricultural and Resource Management Survey to identify beginning
farmers, the consecutive work experiences of up to three operators farming
their current or other farms was considered.
Limited Resource Farmer or Rancher—A farmer or rancher who: (a)
operates a farm with direct or indirect gross farm sales of not more than
$100,000 in each of the previous two years (to be increased beginning in
fiscal year 2004 to adjust for inflation using Prices Paid by Farmer Index
as compiled by NASS) and (b) has a total household income at or below
the national poverty level for a family of four, or less than 50 percent of
county median household income, in each of the previous two years (to be
determined annually using Commerce Department data). USDA’s Farm
Service Agency (FSA) uses a different definition in the implementation of
its loan programs. FSA’s definition focuses on the ability of a farmer to
cash flow the requested loan.
Socially Disadvantaged Farmer or Rancher—A farmer or rancher
who is a member of a group whose members may have been subjected
to racial or ethnic prejudices because of their identity as members of a
group without regard to their individual qualities. Socially disadvantaged
groups include, women, African Americans, Native Americans, Alaskan
Natives, Hispanics, Asians, and Pacific Islanders. Farmers in this category
have not necessarily experienced prejudices, although they have one or
more of these personal characteristics. In using the 2006 Agricultural and
Resource Management Survey, the personal characteristics of the principal operators were used to identify socially disadvantaged farmers.
these farmer populations. In 2006, 22 percent of family farms were considered as being operated by beginning farmers, 10 percent of family farms
were defined as limited resource, and 16 percent were defined as socially
disadvantaged (fig. 45). Of course, there is overlap among these groups;
combined, 39 percent of all family farms were classified as one or more of
these targeted groups in 2006. Those groups are less likely to participate in
government farm payment programs than other farm households and they
receive a relatively small share of the total payments. The three targeted
groups combined made up 39 percent of all U.S. farms in 2006, but 29
percent of farms that participated in farm payment programs. The combined
group received 16 percent of all payments in 2006.
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Figure 45
Farm populations targeted by USDA farm programs, 2006
Percent
45
40
35
30
25
20
15
10
5
0
Beginning
All farm households
Limited
resource
Socially
disadvantaged
Receiving payments
Combined
populations
All payments
Source: USDA, Agricultural Resource Management Survey.
Well-Being of Farm Households Compared
to the U.S. Population
In 2006, the income of farm households exceeded that of all U.S. households–median farm household income was 14 percent higher and average
farm household income was 17 percent higher.
Since the 1980s, ERS has reported a money income measure for farm operator households that is comparable to the measure of the U.S. Census Bureau
reports for all U.S. households. Farm household income is highly variable
through the years, primarily due to the year-to-year volatility of farm income.
Nonetheless, for every year since 1996, average income of farm households
has exceeded average U.S. household income (fig. 46). In fact, just the offfarm income component of average farm operator household income has
exceeded the average U.S. household income from all sources since 1998.
The average income of farm operator households in 2006 was $77,654
compared to the average income of all U.S. households of $66,570. The
respective median incomes are $54,835 and $48,201.
Starting in 2003, the sample size of USDA’s Agricultural Resource
Management Survey (ARMS) has been large enough to allow for statistically reliable estimates of farm and operator household income in 15 major
agricultural States. Family farms in California realized the highest average
farm household income of the 15 major agricultural States in 2006. They also
realized the highest average farm income. High-value crop farms comprised
more than half of California’s family farms, and crop production contributed about two-thirds of the State’s total value of production. Farm operator
households in California had average incomes above the average for all
households in the State. But, California is not unusual in that regard. Average
income of farm operator households exceeds the average income of all
households in each of the 15 States for which State-level estimates are avail60
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Figure 46
Average farm operator household income by source compared
to all U.S. household income, 1984-07
$1,000
90
80
70
60
50
40
30
20
10
0
Total income of all U.S. households
1984
86
88
90
92
94
Farm earnings of farm households
96
98
2000
02
04
06
Off-farm income of farm households
Note: 2007 forecast.
Source: USDA, Agricultural Resource Management Survey.
able. Because high incomes can have a strong impact on averages of a population, we also consider the median incomes of farm operator households
compared to all households in the state. Median incomes of farm operator
households in 2006 exceeded those of all households in the respective States,
except for California (fig. 47). In California, the median income of farm
operator households was very similar to the median income of all California
households in 2006.
For most U.S. households, the major share of net worth is in houses and
other real estate. In contrast, farm households have the major share of their
net worth in farm business wealth (including farmland). Consequently, as the
average net worth of farms has increased over time, so has the net worth of
farm operator households. The latest information available on net worth of
all U.S. families is for 2004 (Survey of Consumer Finances, Federal Reserve
System). The median value of net worth for all U.S. households was $93,100
in 2004, compared with $456,914 for farm households. Thus, the median net
worth of farm operator households was about five times the median net worth
of U.S. families. It is not surprising to find that farm operator households
have more net worth than the average U.S. household does because capital
assets, such as farmland and equipment, are generally necessary to operate
a successful farm business. In general, all households with self-employed
heads have greater net worth than the average U.S. household. Even so, farm
operator households also have greater net worth than all U.S. households
with a self-employed head do.
Although farm operator households have higher incomes and net worth, on
average, than the general U.S. population, there is also a large share of farm
households that have low incomes in any given year. Consequently, a singleyear indicator for assessing the well-being of farm operator households, and
for comparison to U.S. households, is a more informative indicator since
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Figure 47
Median income of farm operator households and all households, 2006
All
Arkansas
California
Florida
Georgia
Illinois
Indiana
Iowa
Minnesota
Missouri
Nebraska
North Carolina
Texas
Washington
Wisconsin
Other States
0
20,000
40,000
60,000
80,000
$1,000
All households’ income
Farm operator household income
Sources: USDA, Agricultural Resource Management Survey and the U.S. Census Bureau,
Current Population Survey.
it considers both income and net worth positions. To jointly consider both
income and net worth, farm households are divided into four groups, separated into low and high levels of income, and low and high levels of net
worth, with the median levels of U.S. household income or net worth as the
dividing lines between low and high. Median income (or net worth) is the
level at which 50 percent of households have greater income (net worth) and
50 percent have less.
In 2006, less than 5 percent of all farm households—in contrast to 50 percent
of all U.S. households—had net worth less than U.S. median household level
(fig. 48). The 96 percent of farm households with high net worth are split into
two groups, with 55 percent having income higher than the U.S. median and
41 percent having income lower than the U.S. median. The major difference
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Figure 48
Distribution of farm operator households by
joint income-wealth indicator, 2002-06
Percent
70
60
2002
2003
2004
2005
2006
50
40
30
20
10
0
Lower wealth
Higher wealth
Lower wealth
Lower income
Higher wealth
Higher income
Source: USDA, Agricultural Resource Management Survey.
appears to be that, on average, the low-income/high-net worth group tended
to have incurred farm losses during the year, and some portion or their offfarm income had to be used to offset these losses.
So who is in the small group of low net worth households? On average,
the low net worth group was younger (virtually none was retired), operated substantially fewer acres, and generated lower farm sales than the farm
operator population as a whole. They reported substantial losses in the offfarm component of household income. Among low net worth households, a
major factor differentiating the high-income subgroup from their low-income
counterparts is occupation: their primary occupation is disproportionately
“other than farming/ranching,” whereas the low-income group was more
evenly split between operators declaring farming/ranching or “other” as their
primary occupation.
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Information Contacts
Ted Covey: Coordinator; Distributing net value added; DRCU
(202) 694-5344 [email protected]
Mary Ahearn: Coordinator; Household income and wealth
(202) 694-5583 [email protected]
Jim Johnson: Branch Chief; Farm & Rural Business Branch
(202) 694-5570 [email protected]
Mitch Morehart: Financial performance of farm businesses
(202) 694-5581 [email protected]
Roger Strickland: Farm income outlook
(202) 694-5592 [email protected]
Steve Vogel: Government payments
(202) 694-5368 [email protected]
Larry Traub: Values of U.S. crop and livestock production
(202) 694-5593 [email protected]
Dennis Brown: Farm-related income; energy
(202) 694-5338 [email protected]
Chris McGath: Production expenses; farm-related income; energy
(202) 694-5579 [email protected]
Bob Williams: Financial performance of farm sector; farm debt
(202) 694-5053 [email protected]
Peter Stenberg: Internet access on U.S. farms
(202) 694-5366 [email protected]
Robert Green: Household income and wealth, government payments
(202) 694-5568 [email protected]
Ken Erickson: Farm assets
(202) 694-5565 [email protected]
Mike Harris: Financial performance of farm sector
(202) 694-5386 [email protected]
The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs
and activities on the basis of race, color, national origin, age, disability, and, where applicable, sex, marital status, familial status, parental status, religion, sexual orientation,
genetic information, political beliefs, reprisal, or because all or a part of an individual’s income is derived from any public assistance program. (Not all prohibited bases apply to all
programs.) Persons with disabilities who require alternative means for communication of
program information (Braille, large print, audiotape, etc.) should contact USDA’s TARGET
Center at (202) 720-2600 (voice and TDD).
To file a complaint of discrimination write to USDA, Director, Office of Civil Rights, 1400
Independence Avenue, S.W., Washington, D.C. 20250-9410 or call (800) 795-3272 (voice)
or (202) 720-6382 (TDD). USDA is an equal opportunity provider and employer.
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| File Type | application/pdf |
| File Title | Agricultural Income and Finance Outlook |
| Subject | Value added, farm income, farm costs, farm operator household, farm returns, financial performance, farm finance, wealth, net wo |
| Author | Ted Covey |
| File Modified | 2007-12-12 |
| File Created | 2007-12-12 |