All posts by David B. Oppedahl

The Midwest Feels the Sting of an Extended Agricultural Downturn

On November 29, 2016, the Federal Reserve Bank of Chicago will hold a conference to examine the agricultural downturn in the Midwest and discuss future directions for farming, concluding with a panel discussion on the evolution of agricultural lending. (Check https://www.chicagofed.org/events/2016/ag-conference for more details on the conference, including the agenda, and to register.) Experts from academia, industry, and policy institutions will explore the implications of the downturn for both the farm sector and the broader regional economy. The goals of the conference include understanding key trends in farm income, product prices, and input costs; assessing the primary factors behind the sector’s downturn; examining policies that provide support to farm operations and promote risk management; and discussing the role of agricultural lending under these challenging circumstances, as well as in the next phase for agriculture.

Bountiful harvests since 2012’s drought have replenished crop stockpiles to such an extent that supply has outstripped demand, leading to significant reductions in crop prices for midwestern farmers (see charts 1 and 2). Moreover, livestock product prices have tumbled in recent years (see chart 3). Depressed revenues for crop and livestock operations have translated into lower profits as costs of production have been slower to adjust, particularly for crop farms. This downturn in farm profitability followed on the heels of historically high levels of real net farm income[1] (see chart 4). In addition, diminishing income for farm households and operations negatively affected businesses on the Main Streets of towns across the Seventh Federal Reserve District (all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin).

This latter point was reinforced through a special question included in the Chicago Fed’s latest Agricultural Land Value and Credit Conditions Survey, to which banks responded during October (results were recently released in AgLetter). Bankers were asked: “Is a weakening agricultural economy leading to weaker Main Street business activity in your area?” In all five states of the District the consensus answer was “Yes,” with varying degrees of certainty—30% said definitely and 43% probably, while only 12% did not agree with this take on current business activity in their areas (15% were not certain of any impacts). Based on these observations, the downturn in farm country appears to have slowed the economy of the rural Midwest on Main Street as well.

As for farm households and farm operations themselves, the U.S. Department of Agriculture (USDA) forecasted real net farm income for 2016 to be $64.3 billion, a decrease of 12% from 2015 and the lowest result since 2009 (the most recent reading that was below the median of $66.9 billion from 1950 to 2016).[2] In 2009 dollars, net farm income for the U.S. averaged $95.2 billion over the previous five years, dipping down from the prior five-year period ($95.7 billion, a level that was the highest since the period from 1949 to 1953). With farm incomes even higher than during the 1970s farm boom, the just-concluded era of high farm incomes looks likely to have set the bar quite high for the current generation of farmers.

Furthermore, looking at the District, farm incomes were even bleaker. Real net farm income for each state is available through 2015. Using these USDA data, we estimate that the net farm income for the five states of the Seventh Federal Reserve District was $9.1 billion in 2015, a decrease of 31% from 2014 and the lowest outcome since 2003. The District’s value was also below that of the median year from 1950 to 2015 of $12.8 billion. District states accounted for only 12.4% of U.S. net farm income in 2015, after hitting 22% as recently as 2013.

The spillover impacts of farm income declines on Main Street activity in the region can be attributed to the relatively large role played by farmland rentals in the District—39% of net rent received by non-operator landlords nationwide. Such rental transactions provided $5.5 billion for non-operator landlords in 2015, down 27% from a peak of $7.5 billion in 2013 (adjusted for inflation). These payments lift the direct economic impact of agriculture on the District, although some landlords reside elsewhere. Also, $3.1 billion in 2015 was paid out to hired labor by farms in the District (down 8.8% from $3.4 billion in 2014). Additionally, District agricultural operations spent $23.5 billion in real terms on purchased inputs that did not originate on farms in 2015 (declining 10% from 2013’s peak of $26.1 billion), implying that farms reduced their purchases from cooperatives, equipment dealers, and other businesses. These negative effects on income and business activity reinforce a pullback in spending by farm households. Hence, the economic fortunes of agriculture radiate out into communities and the businesses of the District, which are sharing the pain of the current downturn.

At our conference on November 29, the first session will dig deeper into the impacts of the agricultural downturn, especially on farm operations and rural economies. The second session will explore trends in agricultural financing, with a particular focus on bankruptcy research. Following the keynote address by Bill Northey, the Secretary of Agriculture and Land Stewardship for Iowa, there will be a session devoted to the role of farm policy during the downturn and potential directions for future legislation. Finally, a panel discussion will look into the evolution of agricultural financing as distress in the sector builds, as well as innovations in response to the changing farm environment. These sessions should enhance our understanding of the agricultural downturn and provide clues about potential changes that will affect the sector’s future. Visit https://www.chicagofed.org/events/2016/ag-conference for more information and to register.

Chart 1.

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 Chart 2.

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 Chart 3.

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Chart 4.

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[1] Net farm income is a standard way to measure the size of returns from agricultural operations. Basically, net farm income equals the value of agricultural production and net government transactions minus purchased inputs, capital consumption, and payments to stakeholders. See www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances.aspx for details.

[2] See http://www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/data-files-us-and-state-level-farm-income-and-wealth-statistics/ for data.

Upcoming Chicago Fed conference: Labor Issues Facing Agriculture and the Rural Midwest

On November 17, 2015, the Federal Reserve Bank of Chicago and the Upjohn Institute will hold a conference to explore labor issues affecting agriculture and the rural Midwest. The conference will be preceded on November 16, 2015, by the performance of a play that deals with immigrant experiences in agriculture, followed by a policy discussion. Visit www.chicagofed.org/events/2015/annual-agricultural-conference for more details and to register. Feel free to contact David Oppedahl at 312-322-6122 with any questions about these events.

Concerns about population losses, work force vitality, employment skills, health issues, and economic growth that lags that of urban areas have persisted for years in the rural Midwest and throughout the U.S. This has led to much discussion of a rural/urban divide in the nation (see an example from Governing).

Manufacturers often complain that a skills gap prevents them from expanding and hiring additional workers. Agricultural businesses also face challenges to meet their labor needs, and sometimes rely on immigrant workers. There are implications for rural areas not only due to a shortage of U.S. workers, but also to matters related to worker compensation (see, for instance, a recent Department of Labor ruling). Moreover, non-farm employment can be vital for the livelihood of many agricultural families, even as farm employment remains a key component of rural income in the Midwest. In addition, health insurance coverage continues to be a critical factor for farm households and rural workers.

At the upcoming conference, experts from academia, industry, and policy institutions will discuss work force trends, labor challenges, and ways to improve living standards in the rural Midwest. The goals of the conference include understanding key issues related to rural and farm labor; describing the effects of labor challenges in rural areas; examining policies that affect rural and farm jobs; and discussing possible strategies to position the midwestern economy and agriculture for a prosperous future.

In the final panel discussion of the day, moderator Bill Testa will provide an overview of trends in skilled worker location. As skilled workers, especially younger workers, gravitate toward large metropolitan areas and their central cities, smaller metropolitan areas, towns, and rural areas increasingly struggle to develop, attract, and retain the skilled work force they need for existing and new businesses and investment. And from an individual worker’s perspective, the choice to work outside of a large labor market area may result in a narrower set of career and skills acquisition opportunities, as well as a loss of wage income. The panelists will address: (1) how communities can best address these challenges; and (2) how workers can choose a smaller town or rural location without unduly sacrificing career opportunities and high wages.

 

The Contrasting Fortunes of Crop and Livestock Producers—A conference takeaway

On November 17, 2014, the Federal Reserve Bank of Chicago held a conference which examined the role of farm income in the Midwest economy. (Check https://www.chicagofed.org/events/2014/agriculture-conference to see the agenda and download presentations.) The conference explored both the decline in agriculture’s role over the longer term and the marked increase in the level of agricultural income over the past decade. Within this context, an interesting aspect of the composition of farm income has been the battle between crop and livestock producers for the larger share of the value of agricultural production.

Over the past decade, there has been a shift in the relative balance between the crop and livestock sectors of agriculture. In only two years from 2002-13 did the production value of the livestock sector exceed that of the crop sector (see chart below). Yet, during the previous era, the sectors regularly traded places—every several years, if not annually— as the biggest source of production value for U.S. agriculture. Even earlier, until 1974, livestock producers held sway for decades as the top contributors to farm output.

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What disrupted the long term hegemony of the livestock sector? In the periods of crop ascendency from 1974-77 and from 2007-13, there were sharp drops in the per capita consumption of meat and poultry in the U.S., as shown in a chart from Chris Hurt’s presentation (available from the conference website). The starts of these periods coincided with relatively deep recessions in the overall economy, which resulted in shifting food consumption patterns as household budgets shrank. In particular, the restaurant industry tends to suffer during recessions, pulling down meat consumption as well. Moreover, changing perceptions about the health of animal products has impacted meat consumption, particularly in recent decades.

Hurt, from Purdue University, went on to illustrate the see-saw effects of high feed costs on the livestock sector. Since feed is the largest cost of animal agriculture, sharply higher feed costs contributed to a decrease in the meat supply, as producers exit or trim their herds to minimize costs. With lower availability of animal products, the prices for these products move up over time to bring markets back toward equilibrium. This process was triggered around 2007 by the rising demand of corn for ethanol production and higher exports, particularly of soybeans to China. Of course, higher prices for corn and soybeans also pushed up the production value of crops, even as the production value of the livestock sector was dipping.

The most recent period of crop supremacy was also extended by drought. Persistent drought in certain regions of the country battered the livestock sector, especially cattle operations. With longer gestation times, cattle take longer to rebuild herds than for other animal breeds. The livestock sector was forced to cut output, not only from the lack of water but also from the subsequent spikes in feed costs (made worse by the drought of 2012 that impacted key corn and soybean production states in the Midwest). Soaring crop prices boosted their production value, even as crop output was cut due to drought. The crop sector was riding high from 2007 to 2013, but the bumper crops of 2013 and 2014 ended the ride.

In order to estimate farm incomes, the revenues from crop and livestock operations get combined to provide the value of agricultural production. Net farm income is a standard way to measure the size of returns from agricultural operations. Basically, net farm income equals the value of agricultural production and net government transactions minus purchased inputs, capital consumption, and payments to stakeholders. 1 The latest U.S. Department of Agriculture forecast of net farm income for 2013 was $126.5 billion for the nation, but net farm income was projected to fall to $96.9 billion for 2014. 2 This decline stemmed primarily from a drop in crop revenue of $33 billion, as crop price decreases more than offset increased yields from the fall harvest. However, revenue from animal production was expected to rise by $24 billion from 2013 to set a new record in 2014, as prices for many animal products moved higher. This would result in yet the latest reversal in the continuing saga of the fortunes of the livestock and crop sectors of U.S. agriculture.

Given the opposite movements of production value for the crop and livestock sectors, this decline in net farm income will have disparate effects across the Seventh District. The importance of livestock production varies a lot across the geography of the District. From Hurt’s calculations, the 2012 portion of farm production value from animals was 16% for Illinois, 31% for Indiana, 37% for Michigan, 44% for Iowa, and 65% for Wisconsin. With these very different intensities of animal agriculture, the downturn in income from crop farming will be offset to a greater extent in areas that see a boost from an increase in livestock income.

For additional highlights from the Chicago Fed conference on farm income and its impact on the Midwest economy, see the conference summary.

Farm Income’s Impact on the Midwest — A Conference Preview

Agriculture is a vital building block for the economy of the Midwest, producing raw materials for food and biofuels manufacturing, as well as stimulating demand for farm equipment, trucks, and more. Income produced by agricultural operations is a key component of personal income in rural areas. This income from farm households supports businesses on the Main Streets of rural towns. However, there has been a decline in the number of farms over the decades,1 which raises concerns about the role of farm income in the future of the rural Midwest.

On November 17, 2014, the Federal Reserve Bank of Chicago will hold a conference to examine the role of farm income in the Midwest economy. (Check www.chicagofed.org/webpages/events/2014/agriculture-conference.cfm for more details on the conference, including the agenda, and to register.) The conference will explore both the decline in agriculture’s role over the longer term and the marked increase in the level of agricultural income over the past decade. This phenomenon contrasts sharply with the troubled fortunes of the broader economy of the Midwest during and after the Great Recession.

Net farm income is a standard way to measure the size of returns from agricultural operations. Basically, net farm income equals the value of agricultural production and net government transactions minus purchased inputs, capital consumption, and payments to stakeholders.2 The latest U.S. Department of Agriculture forecast of net farm income for 2013 was $131.3 billion for the U.S., an increase of 15% from 2012 and the highest result since 1973 (adjusted for inflation).3 In 2009 dollars, net farm income has averaged $115 billion over the past three years, a level that was previously exceeded only during the period from 1943 to 1948 (going back to 1929). Moreover, the latest decade has seen the highest levels of net farm income since the 1950s, even higher than during the 1970s farm boom. However, net farm income is projected to fall to $113.2 billion for 2014, as crop price decreases will more than offset increased yields from this fall’s harvest.

In addition, net farm income for each state is available through 2012. Using this data, one can estimate the net farm income for the five states of the Seventh Federal Reserve District.4 The District states accounted for 19.5% of U.S. net farm income in 2012 ($22.16 billion). Due to the relatively large role played by farmland rentals in the District, 43% of net rent received by non-operator landlords nationwide was in the District’s states ($6.7 billion). These payments boost the economic impact of agriculture on the District, although some landlords reside outside the region. Another $3.4 billion in 2012 was paid out to hired labor by farms in the District. Furthermore, District agricultural operations spent $26.9 billion on purchased inputs that did not originate on farms. So, the economic benefits of agriculture reach out into communities and the businesses of the District.

Net cash farm income is a somewhat different measure of agriculture’s cash flow.5 It provides helpful information to understand the financial positions of farm operations. Moreover, the 2012 Census of Agriculture provided data on net cash farm income by county.6 Combining this data with personal income by county7 allows computation of the share of personal income generated by net cash farm income. Using these sources to compute a total for just counties in the District, I find the District generated $23.9 billion of net cash farm income in 2012. This represented 1.5% of the District’s total personal income.

Also, one can categorize counties by how rural they are.8 For the nonmetropolitan counties of the District, $15.96 billion in net cash farm income represented 5.8% of total personal income. For the metropolitan counties of the District, $7.95 billion in net cash farm income represented 0.6% of total personal income. These numbers reinforce the greater dependence of nonmetropolitan counties on agriculture, as one would expect, yet they also demonstrate that even metropolitan counties have significant farm operations. The map below provides the spatial distribution of District counties in terms of the shares of net cash farm income relative to total personal income. Notice that counties in northwest Iowa tend to have the greatest dependence on farming operations, with four having over 30% of personal income from agriculture in 2012.

While such trends and patterns are illuminating, there are many channels between agriculture and the Midwest economy. Please join us on November 17 as experts from academia, government, and business take a deeper dive into Midwest agriculture and its impacts.

 

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  1. See www.ers.usda.gov/data-products/chart-gallery/detail.aspx?chartId=45012 for a chart and details.
  2. See www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances.aspx for details.
  3. See www.ers.usda.gov/data-products/farm-income-and-wealth-statistics/us-and-state-level-farm-income-and-wealth-statistics-(includes-the-us-farm-income-forecast-for-2014).aspx for data.
  4. The Seventh Federal Reserve District comprises all of Iowa and most of Illinois, Indiana, Michigan, and Wisconsin.
  5. Net cash farm income “represents the amount of cash available to service debt, pay family living expenses, and make investments. It is not a comprehensive measure of profitability, however, since it does not account for changes in inventory, accounts payable, accounts receivable, and depreciation.” See www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/farm-business-income.aspx for details.
  6. Census of Agriculture data are available via www.nass.usda.gov/Quick_Stats/index.php for 2012 and earlier.
  7. See bea.gov/regional/index.htm for data under “Local Area Personal Income & Employment.”
  8. See www.ers.usda.gov/topics/rural-economy-population/rural-classifications.aspx for details.