AG-ECO NEWS
Jose G. Peña
Vol. 23, Issue 8
Professor and Ext. Economist-Management
March 21, 2007
Initial Forecast of U.S. Net Farm Income Up $6 Billion
Consumers and Farmers Financing Attempt at Energy Independence
Production Costs Up $9.3 Billion
Jose G. Peña, Professor and Extension Economist-Management
USDA’s initial, February 14, 2007, forecast of U.S. net farm income for 2007 at $66.6
billion is up $6 billion (9.9%) from $60.6 billion in net income in 2006 and $9 billion above
the 10-year average of $57.4
billion. (See Figure 1).
Livestock and especially
grain markets have improved and
Figure 1: U.S. Net Farm Income and
Direct Government Payments
1996-2007F
$90
Billions
85.4
$80
the outlook appears good. Ethanol
production is the single most
significant activity affecting
agricultural production. U.S.
13.0
$70
$60
$50
Direct Government Payments
7.0
50.5
45.6
7.5
12.4
48.5
46.8
47.9
boomed in the last year and a half.
16.5
40.2
12.4
43.9
49.5
33.2
57.4
17.0
43.0
$20
12.4
72.4
22.9
30.8
25.3
54.2
44.3
40.4
27.8
25.0
$10
interest in renewable fuels has
60.6
16.3
51.5
20.7
21.5
66.6
24.3
60.4
55.5
$40
$30
73.8
Net Farm Income from Production
$0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006P
2007F
19962006
Average
P = Preliminary; F = Forecast
Source: USDA-ERS Farm Income and Costs: Farm Sector Income Report, February 14, 2007
Price bids for corn have almost
doubled since last year and the outlook appears good as demand continues to increase. The
improvement in the corn market has had a positive impact in most grain markets. It appears
that corn prices will continue to improve as more ethanol plants become operational and
world demand for grains continues to increase.
Consumers Financing Energy Independence
While prices for grains have increased substantially, it appears clear that consumers
are sharing the costs of this recent move towards energy independence. Most consumers
have noted a recent sharp increase in food prices. While we consume only a small amount
of corn directly in the form of cereal, corn chips, etc. corn forms the basis of our food. Corn
constitutes the primary feed source for most of the food we eat, i.e., beef, poultry, pork,
lambs, fish, etc. and even pet food. High fructose corn syrup is the principle sweetener for
almost everything we eat or drink, from soft drinks to chewing gum.
The Department of Labor’s (DOL), mid-March, Crude Foodstuffs and Feedstuffs
report showed the February ‘07 crude foodstuffs and feedstuffs price index at 139.5, up 18.7
percent from 117.5 in February 2006. Also, wholesale consumer food prices were 6.8%
above last year. The DOL’s February index was actually 25.3 percent higher than the 111.3
index in May ‘06, its lowest point of 2006 and appears to have the potential of getting worse
as demand for corn for ethanol production continues to increase. Most of the increase in the
crude foodstuffs and feedstuffs index is the price consumers are paying for trying to buy
energy independence with our corn crop. It is difficult to visualize that American
agricultural resources will be depended upon to help off-set decades of unbridled energy
consumption and to try to end our dependence on tenuous foreign crude oil sources.
With ethanol production in 2006 averaging about 13 million gallons a day, production
for use as a gasoline additive (oxygenator) replacement for MTBE might be feasible. But,
with U.S. petroleum consumption of about 21 million barrels/day (one barrel=42 gallons),
this attempt to use current agricultural systems to gain energy independence appears futile.
A serious attempt to develop cellulose ethanol (production from a wide variety of plants,
including cornstalks, poplar trees, switchgrass, etc.) may be required.
Increased Production Costs
Even with an estimate of increased net income, the continuing lingering drought,
high energy and other costs indicate that 2007 will be a challenging year for agriculture.
USDA’s initial estimate of total U.S. agriculture production costs for 2007, at $263.3 billion, is
up 5.9 percent from last year
Figure 2: U.S. Total Farm Expenses
and up 26.6 percent from a
1996-2006 average of $207.9
300
billion. (See Figure 2). This
250
means increased financial risk,
Billion dollars
Purchased Inputs
Manufactured Input Expenses
248.7
Other Expenses
235.5
206.3
200
150
the estimate of farm program
100
In the end, it appears
56.1
47.5
1997-2006
Average
$207.9
39.0
and while market prices are up,
more risk.
60.2
215.8
53.3
198.0
47.8
46.4
payments is down, meaning
263.3
37.8
35.5
28.5
28.5
31.7
164.1
136.6
154.8
130.0
146.7
123.1
2002
2003
2004
2005
2006P
2007F
50
0
P = Preliminary; F = Forecast
Source: USDA-ERS Farm Income and Costs: Farm Sector Income Report, February 14, 2007
that consumers and the
agricultural sector are being held accountable to finance long neglected energy policy.