98-743: U.S. Farm Income: Recent National
and Regional Changes and the Federal Response

Updated December 15, 1998

Jerry Heykoop and Jean Yavis Jones

Environment and Natural Resources Policy Division

Summary

Major segments of U.S. agriculture are experiencing declining farm income and financial difficulty. The degree of decline, however, differs among regions and commodities. In 1996, the overall farm sector experienced record high income that declined 6.7% in 1997, and is forecast to decline by another 3.6% in 1998. Several factors are responsible for the recent drop in farm income. Reduced export demand and large global supplies have reduced crop prices. A strong dollar relative to other currencies makes U.S. exports less competitive. Natural disasters such as droughts, floods, and disease have reduced crop production and caused sharp drops in farm income in some regions. The Congress and the Administration took several actions in the late summer and early fall of 1998 to address farm problems. This report describes these actions and compares the current farm income situation with recent years. It finds that, although financial conditions are serious for producers of certain crops in certain regions of the nation, and natural disasters and low commodity prices have severely depressed farm income in these regions, the overall patterns of aggregate farm income have not changed dramatically. The report will be updated with developments.

Background

Several regions of the country have experienced severe crop losses and/or low commodity prices that have had the effect of significantly reducing farm income. Both the Administration and Congress have taken actions responding to this situation. In order to raise wheat prices by an estimated 13 cents per bushel, the U.S. Department of Agriculture (USDA) is buying $250 million worth of wheat for donation to developing countries. Legislation has been enacted to release $5.5 billion in 1999 contract payments to farmers several months early (P.L. 105-228). Additionally, Congress approved FY1999 agriculture appropriations legislation (H.R. 4101) that contained a $4.2 billion assistance package for farmers. This bill was vetoed by the President because it did not contain the $7.3 billion farmer aid package proposed by Senate Democrats. The major policy disagreement was over how much money to spend, and whether removing the cap on loan rates established by the 1996 farm law will help or harm farm prices. The finally enacted omnibus appropriation measure (P.L. 105-277) contained $5.9 billion in emergency aid for farmers, along with tax relief for them. The marketing loan caps remained unchanged.

In 1996, the Federal Agriculture Improvement and Reform (FAIR) Act (P.L. 104-127, the 1996 farm bill) significantly modified federal support policy for the major crops for the years 1996-2002. Farmers were given nearly total control over production decisions. Annual income support payments were provided on a fixed but declining schedule instead of being tied to market prices. The marketing assistance loan program was continued, with loan rates capped at 1995 levels. Agriculture policy shifted away from price stabilization through supply management to more market-oriented decision- making by farmers. It was anticipated that farmers would assume greater responsibility for risk management decisions in return for greater planting flexibility. Critics of the FAIR Act were concerned that its market oriented features and fixed payment schedule would not provide a sufficient safety net for farmers, leaving them vulnerable to low prices. On the other hand, proponents contended that the FAIR Act gave farmers transition payments and adequate tools to use for risk management, including crop insurance, diversified production, forward contracting, and hedging. There also was an expectation that transition payments to farmers in high market price years (such as 1996 and 1997) would provide a cushion for future downturns in prices.

Large Supplies and Weak Demand

Several major agricultural commodities have experienced declining prices from the 1995 and 1996 period when they reached nearly record high levels. Farmers responded to the high prices by increasing production. Supplies quickly caught up with utilization and declining prices signaled the improved balance between supply and demand. What happened in the United States was repeated in much of the world. Exporting countries in South America (Argentina, Brazil) and Europe increased their output levels in response to strong price signals. Even as output and stock levels increased, there was optimism that growing global demand, especially in Asia, would keep prices at profitably high levels.

In the summer of 1997, the Asian financial crisis hit. Southeast Asia has been a large market for U.S. agricultural exports (both grains and livestock products), taking 37% of the total value in 1996. However, global competition brought alternative sources of supply, and U.S. farmers discovered that a strong dollar relative to other currencies made this country's exports less competitive. The USDA now forecasts a 25% drop in agricultural exports to Asian markets from 1996 to 1998. This decrease in exports to the Pacific Rim Asian region is an important reason for the current low level of prices for the major export commodities (i.e., wheat, corn, soybeans, and meat).

At the same, some farmers have been hit by natural disasters that have had short term and long-term consequences Farmers in parts of North Dakota endured heavy rains and floods, which for many caused diseases that further decreased their wheat and barley crops. In the southeast, and particularly in Texas, farmers experienced drought that this year severely damaged their non-irrigated cotton crop and reduced forage availability for cattle grazing. The affected cattlemen put their herds on the market, further depressing beef prices. The drought conditions through the southeast contributing to forest wildfires in Florida also affected that region's crops. Ordinarily, production losses are accompanied by price increases. In 1998, however, large domestic and large global supplies mean that farmers with little to sell because of disasters also are receiving low prices.

Farm Income and Cash Receipts

From 1996 to 1997, national net farm income dropped 6.8% (from $53.4 billion to $49.8 billion). USDA economists forecast a 15.7% drop from 1997 to 1998 (to $42.0 billion). While these declines are dramatic and imply contraction and even hardship for some farmers and their suppliers, 1996 was a record high year. Over the 1990-95 period, average annual net farm income was $43.1 billion. In contrast, the 1996-98 average is $47.4 billion --9.8% above the preceding six-year average. The major revenue components of net farm income are crop cash receipts, livestock cash receipts, government payments, and other farm-related income. According to USDA data, and as Figure 1 shows, total cash income increased steadily from $186.9 billion in 1990 to $228 billion in 1997, and are projected to decline slightly to $219 billion in 1998. Crop receipts are projected to decline 6.5% from 1997 to 1998, while livestock receipts are projected to decline 2.3%. Under the 1996 farm law, government payments have averaged $7.7 billion annually, compared to a $9.2 billion annual average from 1990-95. On the cost side, cash expenses have climbed largely parallel with receipts, going from $134.1 billion in 1990 to an estimated $165.8 billion in 1998.

What the national data and averages disguise are the range of circumstances among states and regions. State-by-state data are not available for 1998, but the numbers comparing 1997 with 1996 clearly show the geographic disparities. At the extremes, North Dakota experienced a 92% drop and Maine a 73% drop in net farm income, while Wyoming increased 99% and Oklahoma increased 97% (Table 1).

Table 1. Change in Net Farm Income, by State, 1996-97

Source: Calculated from USDA preliminary data published July 17, 1998.

Comparing changes in farm income from just one year to another may not give an adequate view of economic conditions, especially since the farm sector is characterized by volatile prices and 1996 was the year of record high income. Table 2 compares annual net farm income for all regions under previous farm policy (years 1990-95) with net farm income under the first two years of the current farm bill (years 1996-97). Average annual net farm income for the entire U.S. was 19.8% higher during 1996-97 as compared to average annual net farm income over 1990-95. Again, some regions gained much more than that (i.e., Corn Belt, +88.1%; Delta, +70.9%) while three regions each had reduced net farm income during that time period (Mountain, -16.5%; Southern Plains, -6.7%; Northeast, -5.8%). Figure 2 shows the same information for individual states.

Table 2. Change in Average Annual Net Farm Income, by Region

Although comparisons have been drawn between the current farm situation and the agricultural crisis of the 1980s, there are significant differences between the two periods. The crisis during the 1980s was national and related largely to credit. Interest rates were high and farms were going bankrupt because of excessive debt loads. The current situation is more regional, and although foreign financial crises do have an influence they do not appear to threaten the national agriculture industry. The guaranteed and stable future contract payments authorized by the FAIR Act have improved the borrowing capability of farmers otherwise often viewed as marginal credit risks by banks. Credit availability does not seem to be a problem in the near future. According to some experts, the Farm Credit System, a private, government sponsored enterprise that lends primarily to farmers, appears very well capitalized and is willing to lend to creditworthy farm borrowers. Moreover, interest rates and inflation are low, and land values were increasing in 1997.

Legislation

The Emergency Farm Financial Relief Act (P.L. 105-228), enacted on August 12, 1998, allows the early release of FY1999 production flexibility contract payments to wheat, feed grain, cotton, and rice farmers. Participating farmers will receive their final FY1998 contract payments ($2.9 billion) in September 1998 and will be able to get all of their FY1999 contract payments ($5.5 billion) the following month, if they choose, rather than wait until December 1998 and September 1999. Since this did not alter the amount of funds required to be spent on contract payments for FY1999, it did not need budget offsets or a determination of a fiscal emergency, both of which might have delayed passage. There is some concern about what will happen to those farmers taking all of their FY1999 contract payments at the beginning of the year if they run into financial problems later on and about the precedent this might set for subsequent accelerations of payments.

The Congress also approved a conference agreement on a $59.9 billion FY1999 agriculture appropriations measure (H.R. 4101) that included $4.2 billion in emergency payments to farmers. About $1.65 billion (or 40%) of this amount was to supplement the $5.5. billion in regularly scheduled FY1999 contract payments for farmers; $1.5 billion was for general disaster relief; $175 million for livestock feed assistance; and $650 million for farmers experiencing multiple-year disasters. The President vetoed this legislation because it did not contain the $7.3 billion farm aid package favored by Senate Democrats. The Democratic package contained a provision that would have removed for one year the cap on USDA marketing loan rates for wheat, rice, feed grains, and cotton. Costing an estimated $5 billion, the loan rate proposal was rejected twice when it was offered as a floor amendment both to Senate agriculture appropriations (S. 2159) and to an Interior Department appropriation bill. Proponents contended that this would give farmers more funding and flexibility to withstand unfavorable price conditions. Opponents were concerned that it would increase carry-in stocks next year, and thereby depress prices and further postpone recovery in farm income. There also was concern that this would signal a reversal of market-driven farm policy and a return to government supply management and uncontrollable federal spending on farm programs.

FY1999 agriculture appropriations were wrapped into a year-end omnibus appropriations measure (H.R. 4328, P.L. 105-277). This measure funded the USDA at a total of $55.9 billion for FY1999 and contained an additional $5.9 billion in emergency aid for farmers. Enacted October 21, 1998, this measure did not contain changes to the marketing loan caps that were sought by the Administration and Senate Democrats. Of the $5.9 billion in aid for farmers, $3.05 billion is for "market loss" payments ($2.85 billion for grain and cotton farmers and $200 million for dairy farmers); $1.5 billion is for 1998 crop loss payments; $875 million is for multiple year disaster relief, $200 million is for livestock feed assistance, and $31 million is to cover the cost of some $440 million in additional farm operating loans. The omnibus law also contained special tax provisions for farmers providing them some $606 million in tax relief over the next 9 years.

Another avenue to get more money to farmers was the early release of some $1.3 billion in FY1999 Conservation Reserve Program (CRP) payments in October 1998. This was done administratively by the USDA and did not require legislation similar to that enacted for the early release of farm contract payments. The CRP is designed to encourage farmers not to plant crops for 10 years on land that is highly erodible or environmentally fragile. In return farmers receive government payments. The USDA has been asked to look into expanding the CRP by enrolling acreage affected by wheat scab but has not made a decision as of this date. Advocates contend that giving CRP payments to farmers for letting land producing wheat with scab go unplanted for 10 years might help bring the scab problem under control, and the payments would help affected farmers' income. Some, however, fear that using a chronic crop disease as an eligibility factor for CRP will undermine the program's environmental and conservation emphasis.

Other related CRS products: CRS Report 98-744, Agricultural Marketing Assistance Loans and Loan Deficiency Payments, CRS Report 98-682 ENR, Farm Disaster Assistance: USDA Programs and Legislative Issues, and CRS Issue Brief 97050, Food and Agriculture Issues in the 105^th Congress.