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by Keith Collins

The U.S. farm economy caught a cold in 2002, but it is not reeling as we enter 2003. Some producers, especially those affected by weather, do face serious problems. However, because of structural diversity and preventive steps, not everyone in agriculture is ill. Prospects for 2003 look stronger for many producers, but a boom is not in sight.

Some details: In 2002, farm cash receipts for crops rose slightly, but livestock receipts fell $10.5 billion as prices fell sharply under the drought-driven increase in meat production, slower meat exports and lower milk prices. Another factor affecting farm income is the slow pace of farm program sign up, which has resulted in $4 billion in government payments being shifted from the fall of 2002 into 2003. These factors combined to reduce farm income in 2002 quite sharply and caused it to drop below the levels we forecast a year ago. Net farm income, which includes noncash items such as depreciation and inventory change, fell 29 percent in 2002 from 2001. Net cash farm income, which is gross cash income minus total cash expenses, fell 22 percent.

So what does this income drop mean for the state of the farm economy? Consider net cash income. I like to use this as a summary measure because it is the income an operator has left over to pay living expenses, capital costs and service debt. In 2002, net cash farm income was as its lowest level since the mid-1980s. The big drop indicates many producers faced tight budget constraints in 2002, particularly those in weather-affected areas. Income declines occurred in all regions and was especially pronounced for hog and dairy operations. The drop in income has resulted in more loan extensions and lower rates of loan repayments. This continues to pressure input markets such as machinery sales. Many bankers tightened collateral requirements as their unease grew during 2002. At USDA, our farm loan delinquencies rose in 2002. On the other hand, farm interest rates continued to decline, and banks remain in sound condition with loan-to-deposit ratios generally below desired levels.

Several factors contribute to the economic resiliency of many farm households. First, three out of four farm households earn the majority of their income from off-the-farm sources. This reduces the impact of farm income changes – either up or down – on their well being. Second, the farms most dependent on farm income are the 10 percent of farms that produce two-thirds of the output, and these farms, on average, have household incomes that are well above the national average and remained so in 2002. Third, the value of farm assets continues to grow, giving some financially stressed producers a chance to weather a down period by selling some assets or borrowing against them.

For 2003, net cash farm income is expected to rebound by 11 percent to more than $51 billion, as crop and livestock receipts grow and government payments rise. If government payments are excluded, net income from the market is expected to be little changed, as farm production expenses rise reflecting higher feed and feeder cattle costs and higher energy and fertilizer expenses. Farmland values remain strong, rising an estimated 4 percent in 2002, but are expected to rise at a slower 1.5 percent in 2003, reflecting the reduced cash income in 2002 and flat market income expectations in 2003. For 2003, with slow growth-in-asset values but another boost in debt levels, the farm debt-to-asset ratio is forecast to move up to 16 percent – a still healthy figure but the highest since 1998.

As always, these observations about the farm economy must be weighed in light of a number of uncertainties. There are many: a potential war and its impact on oil prices; investment, consumer spending and trade preferences by other countries; the global economy, whether it moves outside the expected ranges and the behavior of exchange rates; foreign nations’ farm and trade policies, especially China for crop imports and exports, and places like Russia and Japan for meat imports; and finally, the weather – here as well as abroad.

Keith Collins is the chief economist at USDA.