The U.S. farm economy in 2022
Despite rising uncertainties and continued volatility in the global economy and agricultural sector, the U.S. farm economy is well positioned in 2022/2023 according to the latest outlook from the USDA.
Net farm income forecast shows gains despite higher costs
December’s USDA 2022 Farm Sector Income Forecast calls for net farm income to reach $160.5 billion this year, its highest level since 1973 (when adjusted for inflation), based largely on higher volumes sold at higher prices, despite a continued decline in direct government payments and strong inflation in input costs. Crop cash receipts are forecast to gain 19% in 2022, supported by strong gains in row crops and small gains in permanent crops. Prices for corn, soybeans, and wheat were pushed higher due to supply disruptions resulting from Russia’s ongoing conflict with Ukraine and adverse weather conditions in the United States, placing additional pressure on the U.S. supply. Meanwhile, shipping challenges for some permanent crops held export volumes captive in the domestic market, pushing inventories higher and prices lower. The impact of the rise in crop cash receipts on net farm income is expected to be tempered by a near 36% decline in direct government farm payments as pandemic-related government support for the farm sector is wound down. Further tempering the impact of the rise in cash receipts is the expected 19% increase in production expenses, with widespread and persistent inflationary pressures driving input costs higher across all categories.
Net farm income is a yardstick for measuring the profits of U.S. farms and includes net income from farm production as well noncash items such as depreciation, rental income from operator dwellings, and inventory changes. Net farm income is forecast to increase 13.8% to $160.5 billion in 2022, its highest point in the past two decades on a nominal basis. This year’s projected increase in net farm income follows the record growth of 49.0% experienced last year, which was supported by strong export markets and high crop prices. Net cash income, which measures cash earned from farm and related activities, including government payments minus cash expenses, is forecast to increase at an even faster rate of 26.5% to $188.0 billion in 2022. At this level, inflation-adjusted net cash income will reach its highest level since 1929, the year when the Economic Research Service’s inflation-adjusted series began.
Direct government payments to farmers have trended markedly lower since hitting a historic high in 2020 at the height of the global pandemic. Government support nearly halved in each of the following two years, dropping from the record high of $45.7 billion in 2020 to $25.9 billion in 2021, and is forecast to slide another 36% to $16.5 billion in 2022. After reaching the highest and second highest levels in history in 2020 and 2021, respectively, government support is expected to drop considerably lower in 2022, accounting for only 10% of net farm income, due to lower ad hoc disaster and supplemental aid to farmers and ranchers during COVID-19.
Net farm income moderately increased in 2022 as higher cash receipts offset higher costs
U.S. net farm income ($ billions) vs. direct government payments share of net farm income
Total production costs are estimated to increase again in 2022 as farmers’ trepidation around gathering inflationary pressures toward the end of last year proved warranted, with costs across nearly all expense categories on the rise. Total production expenses, including operator dwellings, are forecast to increase by 19% or $70 billion to $442 billion in 2022, which would be a record increase in input costs. The strong inflationary pressures on costs are widespread, with supply-side disruptions lingering from the pandemic exacerbated by the sanctions and trade barriers imposed on Russia for its invasion of Ukraine. Energy, fuel, and fertilizer are also pushing costs higher, and structural challenges in the labor market are hampering labor availability and placing upward pressure on wages. Fertilizer expenses are forecast to show the largest gain, up $14.0 billion or 47% to $43.4 billion. Fuel and oil costs are also expected to rise 47%, but from a lower base, up $6.0 billion to $19.8 billion in 2022, compared with $14.0 billion in 2021. The hawkish pivot by the U.S. Federal Reserve (Fed) in an attempt to tamp down inflation has pulled interest rates higher and is expected to drive interest expenses up 41%, or $8.0 billion, during the year. Additionally, pesticide expenses are forecast to rise by 36%, labor by 6%, and electricity by 9%. This rapid acceleration in input costs should serve to moderate gains in net income for 2022.
Inflation and other economic factors led to a rise in all input expenses in 2022
Total agricultural sector farm production expenses ($ billions)
Rising demand spurs rising commodity prices
Cash receipts for agricultural products are forecast to display remarkable growth in 2022, increasing by $106 billion (24%) to $542 billion. Field crop cash receipts were up by $45 billion (19%) to $286 billion in 2022, with wheat, soybeans, and corn increasing by 24%, 30%, and 28%, respectively. The robust growth expected for cash receipts for soybeans can be attributed to volume gains associated with acreage switching from corn to soybeans to avoid higher fertilizer costs and to take advantage of the lower usage for soybean farming. Additionally, soybean demand remains bolstered by feed demand for livestock, which has helped push soybean prices upward. This switch from corn to soybean production is expected to push corn production lower, despite higher yields; however, stable demand and constrained supply have pushed corn prices high enough to offset negative drags on revenue due to the decline in total production volume. Meanwhile, wheat prices have spiked higher due to the supply disruptions from Russia’s war in Ukraine and subsequent protectionist trade policies to secure wheat supply in countries such as India. These higher prices are anticipated to be easily sufficient to compensate for lower volumes.
Total crop cash receipts reach record high
U.S. crop cash receipts ($ billions)
Among these feed crops, corn and soybeans are expected to experience the largest increases in value for crop receipts for the second consecutive year: Cash receipts for corn are forecast to expand by 28% to $91.0 billion in 2022, as the price of corn increased from $5.5 to $6.8 per bushel in 2022. Cash receipts for soybeans are forecast to increase 30% to $64.0 billion in 2022 due to forecasted growth in both prices and quantities sold as prices increase 19% to an estimated $15.0 per bushel in 2022. Meanwhile, wheat crop receipts are expected to gain 24% to $14.7 billion in 2022, supported in large part by the anticipated 60% price increase over 2021.
Commodity prices rise in 2022 for most crops
Commodity crop prices ($/bushel)
Source: USDA National Agricultural Statistics Service, September 2022.
The USDA forecasts that cash receipts for fruit and tree nuts are expected to show a much more modest increase of 4%, to $31 billion in 2022. Growth in these cash receipts is expected to be moderated in part by lower tree nut production values due to suppressed prices for crops such as almonds and walnuts, stemming from the negative impact of waning export demand and ongoing shipment challenges, as well as declining yields due to weather and climate-related factors.
Based on the USDA supply-and-demand outlook and on price forecasts for the remainder of 2022, farm net income and net cash income are expected to grow at a more moderate pace compared with the robust growth experienced in 2021 but are forecast to show gains of 14% and 27%, respectively, in 2022. Strong gains for most crop prices, particularly row crops, are expected to outpace the marked increase in input costs, allowing net profits to remain positive. In aggregate, U.S. crop export volumes to China were down, while total value was up through September 2022 as shipping challenges, the weaker Chinese renminbi, and deteriorating economic conditions in China tempered demand and shipments, and constrained supply supported elevated prices. While higher prices will increase interest in planting corn next year, the highly anticipated global economic slowdown is likely to weigh on ethanol consumption and, by extension, on corn demand (as fuel usage declines due to slower economic activity). However, global supply of most farm products is expected to remain constrained without a near-term resolution to Russia’s invasion of Ukraine on the horizon, and row crop inventory levels are expected to remain low, which should keep these markets tight heading into next year. The outlook isn't nearly as constructive for permanent crops, with excess supply expected to carry over into the following year and demand remaining uninspiring as the global economy slows.
Farm financial metrics are sound
Forecasted growth in net income together with an increase in equity and asset values is expected to offset a modest gain in debt and allow for stronger financial liquidity and solvency ratios. Farm sector equity is expected to rise by 10.4% to $3.34 trillion in 2022, and the value of assets by nearly 10.0% to $3.84 trillion, driven higher in large part by the rise in real estate values, as real estate accounts for 83.0% of the total value of farm assets. Meanwhile, farm debt is projected to increase at a slower rate of 5.9% to $502.00 billion in 2022, which will result in the debt-to-equity ratio of the farm sector falling from 15.7 in 2021 to 15.0 in 2022—a level that’s below the historic average and well below the highs witnessed during the 1980s farm crisis. Finally, working capital, measured as cash available to fund operations after paying off debts, is forecast to fall by 2.6% in 2022 as modest net income gains are offset by higher interest payments that chip away at the cash available to fund operations.
Debt-to-equity ratio has decreased below average of 1990-2022F.
Debt-to-equity ratio: the average debt-to-equity ratio from 1990-2022F was 15.7%
Near-term risks and uncertainties
Both the global economy and the United States are facing historically high inflation that has seen central banks, including the Fed, raising interest rates in an attempt to combat inflation. The Fed is presented with the difficult challenge of trying to raise rates and tame inflation without pushing the economy into recession—a challenge made more difficult by the fact that adjusting interest rates is a blunt demand-side tool, while current inflationary pressures are largely a supply-side phenomenon. This economic backdrop presents both challenges and opportunities for the farm sector. Farm product commodity prices, specifically row crop products, have historically trended higher along with inflation, and we believe this is likely to be the case going forward, which should be supportive of cash receipts; however, the potential growth in cash receipts could be tempered and potentially offset as input costs also rise and demand eases lower during the impending economic slowdown.
Supply chain disruptions
The ongoing conflict between Russia and Ukraine has extended the pandemic-fueled supply chain disruptions that have driven input costs higher, including fertilizers, oil, and fuels, and constrained supply by limiting the availability of wheat and corn. While Russia is expected to achieve record supplies of wheat in 2022/2023, with production up by 20% due to much improved weather, this may not translate fully into a greater supply in global markets due to ongoing shipping challenges and trade flow adjustments.1 Ukraine, on the other hand, faces continued logistical constraints on its exports. Supply chains remain limited by lingering pandemic-related disruptions and extreme weather events coupled with the ongoing war that create additional uncertainty for the global grain market. In addition, droughts in North America and Europe have dried up rivers, further hampering shipments of crops and food.
In the current economic environment, interest rates are expected to remain higher for longer. This will have a direct impact on capital investments, including land and real estate and large farm equipment, and will raise the cost of debt, affecting farming budgets and operating decisions. While higher interest rates will raise the cost of debt for farmers, the stronger financial position of farmers supported by rising net income, asset value, and equity, and still relatively low interest rates when compared historically, should help to mitigate the impact of rising interest rates.
The U.S. dollar has strengthened significantly in 2022 due to both interest-rate and inflation differentials and to safe haven demand as global economic activity slows. Exchange rates may remain volatile, but the dollar is expected to remain stronger on average than its prepandemic levels. A stronger dollar could temper export demand as it raises the price of U.S. dollar-traded farm products in foreign domestic currency terms and could make offshore imports to the United States more competitive.
There is an elevated—and rising—level of uncertainty surrounding the global economy and the agricultural sector that is anticipated to continue into 2023. However, while the risks of a global economic slowdown pulling demand and prices for farm products lower are real and rising, this doesn’t change the solid medium-to-longer term underlying market fundamentals that we believe underpin this sector. Continued population growth and rising incomes in emerging economies should bolster agricultural crop demand for use as food and feed, supporting row crops, while the longer-term trend of rising incomes enables the adoption of healthier eating habits that include a larger share of permanent crops, including plant-based proteins. Meanwhile, on the supply side, current elevated prices for row crops are supportive of supply growth despite high input costs and ongoing shipping challenges. The agricultural sector has historically proven to be resilient under challenging economic conditions, including rising inflation and interest rates, and the specific market characteristics that enable this resilience are expected to remain and should provide support in the current economic environment. Additionally, current high prices should support continued supply growth.
1 Grain: World Markets and Trade, Foreign Agricultural Service/USDA, September 2022.
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