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Rate of Drop for Net Farm Income to Slow Down
USAgNet - 02/23/2016

USDA's Economic Research Service recently released its Farm Income forecast for 2016. Net cash income and net farm income (which includes the value and costs of items like depreciation, home consumption of farm goods, and unsold inventory) are both expected to fall slightly compared to 2015, but by much less than last year.

USDA Chief Economist Dr. Robert Johansson says net cash income is expected to fall by 2.5%, or about $2.3 billion, and net farm income by 3%, or about $1.6 billion. Last year net cash income fell by 27% and net farm income by 38%.

A large portion of the forecast decline is from lower livestock receipts, expected to be down by about $7.9 billion. Crop receipts are also forecast to be lower by $1.6 billion. On the other hand, input costs are forecast to be down by $3.8 billion, and government payments are expected to be $3.3 billion higher.

The cost of production relative to projected sales remains tight for most commodities. Returns over variable costs leaves very little additional revenue to cover cash rent or pay the operator.

As a result, it is likely farmers will continue to rely on reserves built up when farm incomes were record high and to lower costs wherever possible, including renegotiating rental contracts, minimizing input costs, and possibly taking out more operating loans.

A slightly higher debt (mostly from operating loans) and lower assets (from some erosion in land values) will result in a slight increase in the debt-to-asset level in 2016. While such an increase indicates rising financial pressures, those ratios still remain near historic lows.

The lowest debt-to-asset ratio we have seen for decades was 11.3% in 2012, and the highest was 22.2% in 1985 during the farm financial crisis. This year the ratio is forecast to be 13.2%, compared to 12.7% in 2015.

The higher the debt is relative to assets (the lower the equity), the greater the indication of financial stress in the sector.

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