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Source: by Brent Glory, Agricultural Economic Insights

It's the time of year where we get questions about where the farm economy might be headed. Right now, many are enjoying new optimism fueled by high commodity prices and demand - a stark contrast from a year or two ago. So, just how good are things?

To provide context and insights about how good things might be looking for the farm economy in 2021, this week's post reviews earlier farm incomes estimates, along with commodity prices.

But remember: while the calendar is half over, much time - and uncertainty - remains for the growing season. Furthermore, USDA's next projection for net farm income will not be released until September.

Farm Income and Direct Government Payments
Looking at sector-level income trends shows that both earnings before income, taxes, and capital consumption (EBITC) and net farm income have rebounded considerably since bottoming in 2016 (Figure 1). Regardless of how bleak things may have seemed in the early months of the pandemic, EBITC climbed to its fourth-highest level since 2000, and real NFI reached the third highest in that time frame.

These good conditions come following four years - 2016, 2017, 2018, and 2019 - in the bottom half of incomes for the last 20 years. Given how dismal things looked, this is a remarkable comeback. It has also gone a long way toward stabilizing farm financial conditions, which we will discuss in more detail in forthcoming articles.

At present, the USDA Economic Research Service (ERS) is forecasting slightly lower incomes for 2021 when compared with 2020. This is largely due to the reduction in direct government payments from levels that set a new all-time record.

In real terms, 2020's $47 billion in payments was by far the largest ever seen in U.S. agriculture, exceeding the previous record (2000) by a massive $12.7 billion. In 2021, these payments are expected to fall by about $21 billion to $25 billion. To put that in perspective, direct payments ranged from $10 to $15 billion prior to the trade war. Further, the decline exceeds the annual level of payments made in each year from 2006 to 2018. To say direct government program payments have been, and continue to be, large is an understatement.

Figure 1. Real Earnings Before Interest, Taxes, and Capital Consumption and Real Net Farm Income, U.S. Farm Sector 2020-2021f.

Strong Commodity Prices
Market year average (MYA) prices are an important metric in the farm economy. Not only does it count toward the USDA's estimate of net farm income, but it is also used for farm bill program payments, such as ARC and PLC. Figures 2 and 3 show the market year average prices for corn and soybean since 2000.

For 2020 and 2021, we included the current estimates. While the 2020/21 marketing year is nearly closed and unlikely to change significantly, the 2021/22 market year could still move significantly based on prevailing commodity markets. Overall, soybean prices are relatively higher than corn prices today than compared to the 2011-2013 era.

These data are helpful in providing context for current prices. First, the estimated price for corn in the 2020/21 marketing year is $4.40 per bushel, a significant improvement over the $3.50 levels the markets seemed trapped in from 2014-2019. For 2021, current future prices suggest an MYA price of nearly $5.60. Again, these are very strong prices but fall short of the past highs of $6.22 (2011) and $6.89 (2012).

For soybeans, the 2020/21 MYA price was $11.05. At present, the outlook for 2021/22 is $13.70. Historically, MYA prices hit highs of $11.30 (2010), $12.50 (2011), $14.40 (2012) and $13.00 (2013).

Figure 2. Market Year Average Farm Price Received for Corn, 2000 - 2021. Data Source: USDA's NASS.

Wrapping it Up - Farm Income in 2021
While farm income in 2021 will likely be among the highest in recent history, it is important to step back and consider the factors at play.

Figure 3. Market Year Average Farm Price Received for Soybeans, 2000 - 2021. Data Source: USDA's NASS.

First, direct payments have been a significant source of financial improvements. In 2020, direct payment reached record highs. For 2021, these payments are expected to fall dramatically but remain historically high. Beyond 2011, government payments could fall another $10 billion in 2022.

Second, commodity prices have significantly improved but remain lower than highs observed between 2011-2013. Taken together, the farm economy is navigating the offsetting effects of higher commodity prices and lower government payments.

Finally, it's worth mentioning that in this post we've only considered the income side of the financial situation. When prices soared in 2011-2013, the farm economy was in a strong position in terms of the balance sheet and working capital. While the recent upturn has been beneficial, some of the profits were needed to shore up balance sheets due to higher input costs.

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