September 16, 2021

Key Trends Impacting Farm Income in 2021

The September 2021 USDA Farm Income Forecast yields an overall positive outlook for American farmers and ranchers.

Despite continued challenges ranging from pandemic-induced supply chain bottlenecks, Western drought, and widespread labor shortages, both net farm income and net cash farm income are expected to increase in 2021 from their 2020 levels. These challenges are coupled with increased production expenses and decreased government payments. Regardless, American farmers and ranchers have yet again proven their ability to persevere through immense hardships and fuel our nation.

Understanding the expected changes impacting net farm income is important when planning for the year ahead. With any business, making precise and proactive decisions in response to a changing environment are essential for longevity and operational resilience. Agriculture is no different.

As you review our report highlights, you will observe how factors such as industry volatility, commodity pricing, and production expenses have a direct correlation to earnings.

Report Highlights: 2021 Farm Income Forecast

According to the USDA report, net farm income is expected to increase by 19.5 percent or $18.5 billion, reaching $113.0 billion. If reached, this will be the highest net farm income since 2013, when projections were up due to increased corn and livestock cash receipts. Likewise, farmers are expected to see an increase of 21.5 percent or $23.8 billion in net cash farm income, carrying it to $134.7 billion.

While similar, it is important to note that these two measurements differ by what they encompass. According to the USDA, net cash farm income includes cash receipts from farming and farm-related income minus cash expenses. On the other hand, net farm income is a broader measure and includes some noncash income sources such as changes in inventories and economic depreciation.

Other key projections impacting farm income in 2021 can be seen below:

Cash receipts from agricultural commodities are projected to increase by 18.0 percent to $421.5 billion;

Total production expenses are expected to increase by 7.3 percent or $26.1 billion, reaching $383.5 billion; and

Direct government payments are expected to decrease by 38.6 percent or $17.7 billion by moving from $45.7 billion in 2020 to $28.0 billion in 2021.

In contrast to 2020, the largest contributor to the increase in net cash farm income and net farm income is the increase in cash receipts from the sale of agricultural commodities. Conversely, in 2020, federal payments were a central contributor to farm income. One challenge farmers continue to face is reliance on government payments more than agricultural output. As extremely independent and hardworking individuals, reliance on income sources outside of their own labor and land is less than ideal. Therefore, the shift to a greater reliance on their own agricultural production is a welcomed change for many American farmers.

Key Factors Impacting Farm Income in 2021

Each year the agriculture industry experiences economic shifts that impact every farmer differently. In addition to the changes in farm income, there are various contributing factors that are important to understand including increased cash receipts and production expenses as well as decreased direct government payments.

Cash Receipts

Total cash receipts for both crop and livestock commodities are the largest contributors to the projected farm income increase. However, the amount of increase varies by commodity. Some projections for crop cash receipts include:

Total crop cash receipts are expected to increase by 19.7 percent or $37.9 billion to $230.1 billion;

Receipts for corn, soybeans, and wheat account for most of the increase in total crop cash receipts. Their combined increase is expected to reach $36.8 billion.

Corn receipts are expected to increase by 43.0 percent, making them one of the largest contributors to the overall increase in total crop cash receipts.

Some projections for livestock cash receipts include:

Total animal/animal product cash receipts are expected to increase by 16.0 percent or $26.5 billion to $191.5 billion;

Receipts for hogs, cattle and calves, and broilers are the largest driver of this increase; and

Hog cash receipts are expected to increase by 48.9 percent.

According to the report, the increases to crop and animal/animal product cash receipts are attributed to both higher prices and greater quantities sold. Therefore, price and quantity are the central independent variables driving the change in cash receipts. It is important to note that higher prices have the greatest effect on these projected increases. These high prices have been a focal point in the agriculture industry this year and have both benefitted and challenged producers.

Production Expenses

With a 7.3 percent increase, production expenses are expected to reach the highest that they have been since 2016 in inflation-adjusted terms. Specifically, all major expense categories except for pesticide are forecast to increase. Feed, livestock, and poultry purchases are expected to see the largest dollar increase. To those invested in the agriculture industry, this comes as little surprise, as rising production expenses have been a central concern for today’s farmers.

While factors outside of the agriculture industry certainly affect production expenses, commodity prices also play a role. In fact, the increase in feed purchase is related to the increase in feed commodity prices. Although higher commodity prices benefit the producers that sell them, they contribute to higher input costs for those that purchase them to run their operations.

While most expense categories are expected to increase, the percentage of increase varies by category. See below for the expected increases in each expense category:

Labor expenses: 6.6 percent increase;

Feed expenses: 11.0 percent increase;

Livestock and poultry purchases: 14.1 percent increase; and

Fuel and oil expenses: 27.1 percent increase.

Even though cash receipts are expected to increase, farmers and ranchers will need to factor in increased production expenses when planning purchases, repairs, and overall business plans for the coming year.

Direct Government Payments

While 2020 saw record direct government payments, 2021 is expected to see a sharp decline as pandemic payments are reduced. The 38.6 percent expected decrease comes on the heels of a 103.5 percent increase in 2020. As the pandemic response shifts, the primary cause of this decrease is lower COVID-19 supplemental and ad hoc payments. However, it is important to note that while payments declined from 2020, they are still historically high in comparison with other years.

As a result of this decrease, farmers will have to adjust to reduced government assistance. Fortunately, the expected increase in cash receipts should help to offset this reduction in government aid. However, it is important to recognize that these numbers refer to the overall economy and do not necessarily describe the experiences of individual farmers. Therefore, it is possible for some farmers to receive less cash receipts even when the cumulative data points towards higher cash receipts. This makes considering the financial needs of your unique operation essential when planning for the future.

Off-Farm Income

In addition to examining the effects of increased farm income from a macro-level, it is also important to examine them from a micro-level and consider the effects it has on individual farm households.

The report revealed that the median total farm household income is expected to decrease in 2021 by 0.5 percent, falling to $79,909. However, after adjusting for inflation, it is a 4 percent decline.

Because most farms have off-farm income, it is important to break down farm income and off-farm income. While median farm income is expected to decrease in 2021, median off-farm income is expected to increase by 2.5 percent to $68,461. It will be interesting to see how this affects the delicate balance that many farm families juggle between working on and off their farm.

Interestingly, median farm income is expected to fall to -$1,387 in 2021. Between 1996 and 2018, median farm income was consistently negative, indicating that farms often operate at a loss and depend on their off-farm income. Both of these factors point towards the fact that many American farmers are farming out of a passion for agriculture. Even when the returns are low, they are still working to fuel our nation and contribute to the agriculture industry.

Farm Sector Equity, Assets, and Real-Estate Values

Some additional variables discussed in the report include farm sector equity, assets, and real-estate values. An increase of 2.9 percent in 2021 is expected for farm sector equity, bringing it to $2.81 trillion. Furthermore, due largely to rising real estate values, farm assets are also expected to increase by 2.5 percent to $3.25 trillion. Not surprisingly, real estate debt is expected to increase also. This is yet another reminder of the stability of farmland investments and its growing interest amongst investors seeking stable yet high-yielding investments.

Finally, the farm sector debt-to-asset ratio is expected to decrease for the first time since 2012 to 13.64 percent.

AgAmerica’s Flexible Loans Help Farmers Adapt to Changing Industry Trends

Overall, this report points towards the constant evolution and change associated with the agriculture industry. We understand that, like any businessperson, American farmers and ranchers need to adapt their operations in response to and also in anticipation of changes that affect them.

This year, deciding which areas to invest in with increased cash receipts will be top-of-mind for many producers. Likewise, factoring in increased input costs and decreased government payments will also be a central focus.

AgAmerica’s flexible land loans are designed to help you take action and steer your operation towards resiliency. Whether seeking to refinance, increase your working capital for expansion, or purchase new farmland, our loans meet you where you’re at.

Explore AgAmerica’s flexible loan spectrum to learn how we can partner with you as you adapt your operation and carry it into the future.