AG-ECO NEWS
Jose G. Peña
Vol. 22, Issue 38
Professor and Ext. Economist-Management
December 12, 2006
Drought and High Energy Costs Will Make 2006 a Difficult Year for Agriculture
U.S. Net Farm Income Down 20%
Jose G. Peña, Professor and Extension Economist-Management
While grain markets have improved significantly and the market outlook appears
good, the severe drought and high energy costs indicate that 2006 will go down in history as
a difficult year for agriculture. USDA’s November 30, 2006, forecast of U.S. net farm income
for 2006 at $58.9 billion is down $14.9
billion (20.1%) from $73.8 billion in net
Figure 1: U.S. Net Farm Income and
Direct Government Payments
income in 2005, but slightly above the 10year average of $57.2. (See Figure 1).
1996-2006F
$90
Billions
85.4
$80
A drop in the estimated value of
13.0
$70
$60
livestock production and an estimated
$50
reduction in direct government payments
$30
55.5
7.5
$40
60.4
58.9
51.5
50.5
7.0
46.8
45.6
16.1
72.4
21.5
22.9
40.2
12.4
43.9
43.0
$20
57.2
16.5
16.5
47.9
20.7
12.4
48.5
73.8
24.3
Direct Government Payments
49.5
33.2
30.8
25.3
42.4
41.1
2006F
19962006
Average
27.8
25.0
combined with an increase in the cost of
Net Farm Income from Production
$10
$0
1996
purchased inputs, appear as primary
1997
1998
1999
2000
2001
2002
2003
2004
2005
F = Forecast
Source: USDA-ERS Farm Income and Costs: Farm Sector Income Report, November 30, 2006
reasons for the reduced net income
Figure 2: U.S. Total Farm Expenses
estimate.
USDA’s initial estimate of total U.S.
agriculture production costs, at $249.8
billion, is up 6.1 percent from last year
and up 21.6 percent from a 1996-2005
Billion dollars
300
200
This means increased financial
198.0
46.4
150
28.5
206.3
215.8
249.8
56.5
53.3
47.5
38.0
47.8
28.5
35.5
31.7
100
50
average of 195.7 billion. (See Figure 2).
Manufactured Input Expenses Purchased Inputs
Other Expenses
235.5
250
136.6
155.3
130
146.7
123.1
2002
2003
2004
2005F
2006F
0
F = Forecast
Source: USDA-ERS Farm Income and Costs: Farm Sector Income Report, November 30, 2006
1996-2005
Average
$195.7
risk, and while market prices are up, the estimate of farm program payments is down,
meaning more risk. The estimate of total direct government payments for 2006 at $16.5
billion is down 32.2 percent from an estimate of $24.4 billion received in 2005.
Both farmers and ranchers experienced major crop failures this year as a result of the
severe drought. Crop agriculture experienced
increased irrigation requirements at a critical
time of record high energy costs. The index of
Figure 3: Prices Paid Index for Fuels,
1996-2006
prices paid for fuels is now twice the value of
what it was just four years ago, in 2002. (See
Figure 3).
Dr. Carl Anderson, Professor Emeritus,
recently estimated crop losses in Texas during
2006 at about $4.1 billion ($2.5 billion crop; $1.6
billion livestock) due to the drought.
Going into 2007 will require special financial planning. Early estimates indicate that
while energy cost dropped this past fall, costs will continue to increase this winter and into
2007. Also, most of Texas is going into the 2007 crop year with a completely dry soil profile.
While a large part of Texas received some rain this fall, the drought continues in a
large part of Texas. The southwest Texas region, which probably closely mirrors the
moisture situation in a large part of state, only received about 9.7 inches of scattered rainfall
in 455 days, from September 1, 2005 through November 30, 2006, compared to a long term
average of over 31 inches for the same period. The last 20 month period, from April 1, 2005
through November 30, 2006, was the driest period on record in Uvalde, Texas with only 16.8
inches of scattered rain compared with over 24 inches in 1934, the 2nd driest same period.
(See Figure 4).
Figure 4: Current Rainfall as Percent Long Term Average Rainfall by Month
and Current Cumulative Rainfall as Percent of Long Term Cumulative Rainfall,
Uvalde, Jan. ‘05-Nov. ‘06
150%
100%
50%
0%
-50%
Ja
n05
Fe
b0
M 5
ar
-0
5
Ap
r05
M
ay
-0
5
Ju
n05
Ju
l-0
Au 5
g0
Se 5
p05
O
ct
-0
No 5
v0
De 5
c05
Ja
n0
Fe 6
b0
M 6
ar
-0
6
Ap
r06
M
ay
-0
Ju 6
n06
Ju
l-0
Au 6
g0
Se 6
p06
O
ct
-0
No 6
v06
-100%
Rainfall as % of long term
Cumm. as % of long term
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 and high energy costs over the next few years.