Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Will the Wild Ride for U.S. Agriculture Continue in 1997?

Academic journal article Economic Review - Federal Reserve Bank of Kansas City

Will the Wild Ride for U.S. Agriculture Continue in 1997?

Article excerpt

U.S. agriculture formally entered a new era in April 1996 when a new seven-year farm bill was signed into law overturning 60 years of commodity programs. The new bill set agriculture on a new course where markets, not government programs, will determine agriculture's products and its bottom line. The new path was underscored by one of the wildest years in commodity markets in recent memory. Grain prices soared to new heights, while cattle prices sank to new lows. The market swings pointed to the variations in income that agriculture may experience under the new farm bill. Nevertheless, a new record for U.S. agricultural exports also suggested that the market trend for the industry is decidedly up.

For most of U.S. agriculture the year just past was a good one. Crop producers had a banner year, with high prices and the first year of transition payments under the new farm bill. In contrast, livestock growers had a difficult time due to high feed costs, with problems especially pronounced for cattle producers. In the end, the boost to crop producers prevailed and U.S. farm income was up sharply, while increasing much less in the district due to the cattle situation.

The year ahead should be another good one for U.S. agriculture, though probably not as good as 1996. A bigger than expected 1996 harvest will weigh on crop markets, keeping prices below 1996 levels. Still, the 1997 harvest will have a major bearing on prices since grain stocks remain low by historical standards. The lower crop prices will help fatten livestock profits, and the livestock industry could have its best year in the past four. Overall, farm income will probably decline in the nation but remain relatively strong. In the district, where cattle profits are particularly important, farm income will probably rise. With export markets staying strong and commodity markets more settled, agriculture will generally have smooth sailing in the new market era.

I. A WILD RIDE FOR AGRICULTURE IN 1996

The year just past for U.S. agriculture was remarkable for its wild swings in prices. Grain prices soared to record highs by midyear, only to plummet as farmers brought in a bigger than expected fall harvest. Cattle prices plunged midyear, yet staged a strong comeback. For the year as a whole, grain producers had strong earnings. However, the high grain prices and a severe drought in the Southwest led to a big cattle liquidation, sending cattle prices in late spring to their lowest point in many years. The low prices left some cattle producers with losses for the year. Other livestock producers, meanwhile, managed thin profits due to relatively stronger prices for poultry and pork. On balance, the high crop prices and abundant harvest led to a sharp jump in farm income in the nation. In the Tenth District, where cattle production is much more important, the gain was more modest.

Improved farm finances

U.S. net cash farm income, a broad income measure which nets cash expenses from cash receipts, climbed almost $10 billion to $57.4 billion in 1996 (Chart 1). The gain came almost entirely from record receipts from crop production. Livestock receipts also rose, although livestock profits fell due to the losses among cattle producers. In nominal terms, net cash income is within $1.5 billion of the record set in 1993. Adjusted for inflation, farm income also posted a sizable gain in 1996 but remains well below the levels of the mid to late 1980s. Net farm income, another measure of farm income which takes into account changes in farm inventories, surged ahead 49 percent due a big buildup in grain stocks.

Farm income rose modestly in the Tenth District on average, but some farmers posted big gains while others suffered sizable losses. Crop producers in the district had one of their best years in memory. After a poor wheat crop, district farmers harvested excellent fall crops and many marketed their crops at favorable returns. …

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