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U.S. Ag Economy Should Remain Fundamentally Sound

Farm Futures Economic Editor John Otte is attending the 83rd USDA Agricultural Outlook Forum in Virginia this week.

Despite many commodity prices collapsing 40% to 50% off their summer 2008 highs, USDA chief economist Joe Glauber projects a considerably smaller decline in farm income. But it will still be a decline.

Economists with USDA's Economic Research Service forecast 2009 net cash income at $77.3 billion, down $16.1 billion or 17.2% from 2008.

Crop receipts are forecast at $162.4 billion, down $18.7 billion from last year, Glauber explained at USDA's annual outlook forum in Washington, D.C. Livestock receipts are projected at $132.2 billion, down $10.9 billion from 2008.

Lower input costs such as feed, fuel and fertilizer will trim cash expenses. ERS forecasts total cash expenses at $246.8 billion.

Farm balance sheet. The farm financial picture going into 2009 remains favorable with total farm debt equal to 9.1% of total assets. In the mid 1980s the farm debt-to-asset ratio topped 20%. That measure has declined steadily from 15.2% in 1998. For an extended period, land values, agriculture's biggest asset were rising faster than farmers were taking on debt.

ERS forecasts farm assets to rise by 1.6% in 2009. That would be the smallest rise since 1991. How much overall asset values rise when land values are softening will remain to be seen. A Federal Reserve Bank of Chicago survey showed land values in the Chicago district fell 4% in 2008's fourth quarter. The district includes lower Michigan, parts of  Indiana, Wisconsin, Illinois and all of Iowa.

Huge uncertainties persist. Confidence in world financial markets is shaken. The global economy is in the worst recession since World War II. Those forces cast a pall of uncertainty over agriculture. Most aggregate economic performance measures are forecast to be down from the record highs reached last year.

"Concerns with deflationary pressures remain, particularly if lower farm receipts persist over the longer run," says Glauber. "This could adversely affect farm real estate values and undermine what has been to date a relatively strong financial position.

"That said, the outlook is for a return to higher prices as many of the pressures that drove last year's price increases—high energy prices, the Renewable Fuels Standard and strong economic growth in emerging markets—will return to play a major role," he adds. Plus, while other sectors of the economy may be credit constrained, many farm lenders appear to be in good financial shape and access to credit for farmers appears to be sufficient."

World growth anemic. The International Monetary Fund is projecting global economic growth for 2009 at 0.5%. This would be the lowest growth rate in the post war era.

Output of the advanced economies is projected to decline by 2%. Emerging and developing countries are projected to grow by just 3.3%. In 2008, the world grew about 3.5%. Developed countries grew about half a percent. Growth in emerging countries topped 6%.

Glauber expects world trade in goods and services to decline 2.8%, the first decline in world trade since 1982. Imports by emerging and developing countries are projected to fall 2.2% in 2009, after annual rises of 14.5% in 2007 and 10.4% in 2008.