Impact of COVID-19 on Agriculture

2020 Farm Profitability: A False Positive

Net Farm Income Rises to $120 Billion in 2020

Market Intel / December 3, 2020

Credit: Getty Images 

Most agricultural economists and policy wonks saw this coming. USDA’s September 2020 farm income projections suggested net farm income (a broad measure of farm profitability across the entire farm sector) would reach $103 billion this year, up 23% from the prior year and the highest level since 2013’s record high.

That was before the second $14 billion Coronavirus Food Assistance Program and before new crop inventories began to shrink as the outlook for U.S. agricultural exports improved, i.e., China and Phase 1. Assuming those export sales are realized, USDA’s December 2020 Farm Income Forecast confirmed what many expected -- nominal net farm income in 2020 will reach nearly $120 billion, up 43% from 2019 and the second-highest of all time. Yet, farm cash receipts from crop and livestock sales are down $3 billion and the lowest since 2016. Today’s article reviews USDA’s most recent farm income projections.

Expand Image

2020 Farm Income and Expenses

While farm profitability will certainly be higher in 2020, it’s a false positive. Farm cash receipts from the sales of all crop and livestock commodities are now projected at $367 billion, down $3 billion, or 1%, from 2019. Cash receipts this year will be the lowest since 2016 and they remain $57 billion less than the $424 billion in cash receipts received during 2014. There has been some relief in production expenses, which, at a projected $344 billion, are down $5 billion, or 1%, from 2019 and the lowest since 2011.

Expand Image

Driving farm income in 2020 is $46.5 billion in federal payments including those provided through farm bill and conservation programs, as well as ad hoc support related to Chinese retaliatory tariffs, natural disasters such as wildfires and hurricanes and now the COVID-19 pandemic.

Importantly, Congress authorized many of these ad hoc disaster programs well before the late-season rally in commodity prices driven by the improved outlook for U.S. agricultural exports to China, e.g., U.S. Census data shows China bought a record $4.8 billion in agricultural products during October 2020. It is clear this federal support has helped agricultural producers and the multiplier effect will also likely help boost rural economies and may contribute to a decline in family farm bankruptcies during 2020.

Expand Image

When removing federal support from net farm income (for demonstration purposes only), farm-related net farm income totals $73 billion, which is up $12 billion from 2019, but $40 billion below 2013’s record high. Federal support as a percentage of net farm income in 2020 is now projected at 39%. Federal support as a percentage of gross income is now projected at a record 10%. The obvious question many are asking is: “What’s next?”

Expand Image

Farm Income for 2021 is Very Uncertain

To boost farmers and ranchers’ net income next year, two things must happen. First, current export commitments not only must continue to increase but also must be realized as export inspections. Continued strength in demand for U.S. agricultural products will help tighten supplies and boost farm-level prices. Second, any future disruptions due to COVID-19 must be minimal and, more importantly, as a vaccine becomes available COVID-19 restrictions must be lifted. Should these circumstances be realized, the U.S. agricultural sector will be on a stronger footing in 2021.

Still, several factors could roil the farm economy moving into 2021. While export commitments are record-high, the cancellation of outstanding sales is possible. This would ultimately lower exports, boost inventory levels and put downward pressure on prices. An improving South American crop could also put downward pressure on U.S. prices. And additional COVID-19 lockdowns could create farm price volatility like it did in the spring.

USDA’s first projection for 2021 farm income and expenses will be released in February. One thing is certain, net farm income (profitability) in 2021 will be lower. Without additional financial support of some sort, federal assistance in the form of traditional farm program and conservation program payments are likely to return to historic levels of $10 billion to $12 billion. Assuming the strength in commodity prices continues and removing a large portion of recent ad hoc support, net farm income is likely to drop down to the $90 billion to $100 billion range, significantly below our current level -- proving that farm income in 2020 is indeed a false positive.

Contact:
John Newton, Ph.D.
Chief Economist
(202) 406-3729
jnewton@fb.org
twitter.com/@New10_AgEcon
 

Share This Article

Credit: Getty Images 

Capital gains taxes are based on the change in the value of an asset, such as farmland, livestock or timber, when that asset is sold. Currently, the top capital gains tax rate is 20%. To reduce the capital gains tax, farmers and ranchers use stepped-up basis, which provides a reset for the basis during intergenerational transfers. In effect, upon the transfer of assets following a death, the basis is reset to the market value at the date of death. Following the adjustment, taxes can be levied only on gains realized by the individual during his or her ownership, not on gains realized prior to the step up in basis.

Full Article
Credit: iStockPhoto 

USDA’s annual Prospective Plantings report, released on March 31, is the first look at the 2021 planting intentions farmers have for principal crops in 2021. The survey-based report estimates that as of March 1, U.S. farmers intend to plant 91.1 million acres of corn and 87.6 million acres of soybeans in 2021. Combined, corn and soybean acres would be an estimated 178.7 million acres, the second-highest acreage on record, behind only 2017, when more than 180 million acres were planted. But with tightening supplies rapidly driving commodity prices higher over the last month, it’s hard to believe farmers would not consider this incentive to plant more acres of both corn and soybeans and surpass the 2017 record.

Full Article