AG-ECO NEWS
Jose G. Peña
Vol. 22, Issue 27
Professor and Ext. Economist-Management
August 23, 2006
U.S. Net Farm Income Down 23%, Even with Improved Markets, Drought and
High Energy Costs Will Make 2006 a Difficult Year for Agriculture
Jose G. Peña, Professor and Extension Economist-Management
USDA’s initial, April ‘06, forecast of U.S. net farm income for 2006 at $56.2 billion is
down $16.4 billion (22.6%) from $72.6 billion in net income in 2005. (See Figure 1). While
livestock and grain markets have improved significantly and the outlook appears good, the
continuing severe drought and high
energy costs indicate that 2006 will be a
difficult year for agriculture. Also, USDA’s
initial estimate of total U.S. agriculture
production costs, at $229.2 billion, is up
3.7 percent from last year and up 17.5
percent from a 1996-2005 average of 195.1
Figure 1: U.S. Net Farm Income and
Direct Government Payments
1996-2006F
Billions
$90
82.5
$80
13.3
$70
Direct Government Payments
$60
59.5
55.5
56.2
50.5
7.0
$50
7.5
$40
45.6
46.8
47.9
21.5
22.9
$20
increased financial risk, and while market
15.7
36.6
42.3
11.2
43.0
48.5
55.7
18.5
17.2
20.7
33.2
30.8
25.3
49.6
40.0
37.7
25.4
25.0
Net Farm Income from Production
$10
billion. (See Figure 2). This means
51.5
69.2
12.4
$30
72.6
23.0
$0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005F
2006F
19962005
Average
F = Forecast
Source: USDA-ERS Farm Income and Costs: Farm Sector Income Report, May 30, 2006
prices are up, the estimate of farm
program payments is down, meaning
more risk.
Figure 2: U.S. Total Farm Expenses
Billion dollars
240
229.2
230
221.1
USDA will probably reduce the
220
209.8
210
estimate of net farm income as the
drought in a major portion of the U.S. is
causing increased crop failures/reduced
yields, and high energy costs are
200.3
200
1996-2005
Average
$195.1
193.4
190
180
170
2002
2003
2004
2005F
F = Forecast
Source: USDA-ERS Farm Income and Costs: Farm Sector Income Report, May 30, 2006
2006F
increasing production costs.
Both farmers and ranchers face major crop failures this year as a result of the
continuing drought. Crop agriculture is experiencing increased irrigation requirements at a
critical time of record high energy costs.
Initial loss estimates for Texas indicate that agricultural producers will lose about $4.1
billion due to the drought. Dr. Carl Anderson, Professor Emeritus, recently estimated crop
losses in Texas at $2.5 billion and livestock losses at $1.6 billion.
Most of the Central U.S. region and especially the southwest region of Texas is
experiencing a severe drought. The southwest Texas region, which probably closely
mirrors the moisture situation in over 50 percent of state, has only received about 7.2 inches
of scattered rainfall in 365 days, from August 21, 2005 through August 21, 2006. This 365 day
period is the driest on record. Unseasonably hot temperatures are aggravating the dry
spell.
The drought really started in June ‘05 when cumulative rainfall dropped 27 percent of
the long term average. Since then the rainfall situation has continued to deteriorate,
dropping cumulative
rainfall during the last 20
months (January ‘05-August
21, 2006) to about 50
Figure 3: Current Rainfall as Percent Long Term Average Rainfall by Month
and Current Cumulative Rainfall as Percent of Long Term Cumulative Rainfall,
Uvalde, Jan. ‘05-Aug. ‘06
150%
percent of the long term
100%
average. (See Figure 3).
50%
drought as a period when
75% or less of the long term
average yearly rainfall has
been received.
0%
-50%
-100%
Ja
n05
Fe
b05
M
ar
-0
5
Ap
r-0
M 5
ay
-0
5
Ju
n05
Ju
l-0
5
Au
g05
Se
p05
O
ct
-0
5
No
v05
De
c05
Ja
n06
Fe
b06
M
ar
-0
6
Ap
r-0
M 6
ay
-0
6
Ju
n06
Ju
l-0
6
Au
g06
Weathermen define a true
Rainfall as % of long term
Cumm. as % of long term
The moisture situation is actually worse than records indicate. For example, since
from an agronomic point of view, rainfall in a day should equal to or exceed one-quarter of
an inch to be economically significant, if we eliminate the days with less than one-quarter of
an inch, only 4.52 inches of usable rainfall have been received during 365 days. The
moisture situation is rapidly approaching the multi-year drought of record in Texas of the
50's.
Agricultural producers should prepare in-depth financial plans which cover short and
long term goals and objectives and take into account the effects of a potential continuing
drought over the next few years.