All indications are that 2011 will be a record-setting year for farm income. A new report from the U.S. Department of Agriculture forecasts net farm income will top $100 billion for the first time ever, according to Matt Erickson, an economist with the American Farm Bureau Federation.
“I think all in all the U.S. ag economy is very healthy and that’s a good thing,” Erickson said. “However that’s one part of the story and production expenses have also increased. Net farm income is actually supposed to increase 28 percent this year, but on the other hand, production costs are also supposed to increase too. From year-over-year, production expenses exceeded $300 billion for the first time and are expected to be at $320 billion or 12 percent year over year increase.”
The phenomenon, know as margin compression, occurs when prices soar and even though there’s more money involved, the profits can actually be less at the end of the year. Ronnie Anderson, president of the Louisiana Farm Bureau, said ag exports are critical to Louisiana farmers, but worries the risks are catching up with them.
“As a cattle producer myself, I’ve seen firsthand how feed costs have spiked right along with livestock prices,” Anderson said. “Better prices are good for us, of course, but they also mean bigger loans for next year and more risk if the market goes south.”
Erickson agreed that livestock production is an expensive business to be in these days.
“In the livestock production arena we’ve seen a 28 percent increase in feed costs, which is the No. 1 input for just about every producer,” he said. “I think we’re seeing higher livestock prices primarily because of increased exports to countries like China. We expect that demand will continue as the middle class continues to grow in developing nations. For farmers it means better prices, but unfortunatelyfor consumers, meat prices as the supermarket are going to remain higher in the foreseeable future.”
Erickson said high commodity prices, high demand and tight stocks have all added up to the big year, but the USDA report shows it will also be a costly one, too.
“The report also said overall expenses for the ag sector in 2011 increased 23 percent,” Erickson continued. “Fertilizer costs were up 28 percent, while fuel costs were up 27 percent. So any additional profits farmers made on commodity sales were tempered by those increased input costs. And the cost of energy also had the same affect on consumer goods. The more it costs to manufacture and transport goods to market, the more those items will cost at the retail level.”
Erickson said despite a drop in housing prices and values across the country in 2011, farmland values were bucking the trend. In some cases farmland was selling for triple what it was just 20 years ago.
“Most consumers would love to say their homes tripled in value since the early 1990s, but we know that’s not the case,” he said. “For many farmers trying to expand their operations, the cost of land in some areas was prohibitive. It’s a tough juxtaposition. The more farmers produce, the greater the supply. But when land prices stand in the way of production, that’s just another input cost that we all pay for down the line.”