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

Agriculture Rides out the Storm

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

Agriculture Rides out the Storm

Article excerpt

Harsh weather pummeled U.S. agriculture in 1993, destroying crops and threatening a downturn in the farm economy. But while the rough weather took a large toll from many farmers, others prospered. Overall, the industry ended the year in solid financial condition.

Agriculture is well-positioned for a better year in 1994. With a return to normal weather, crop production should rebound. Higher crop prices, pushed up by lean crop inventories, may reward farmers for bringing larger crops to market. But higher crop prices will also push up feed costs for livestock producers. Overall, prospects for farm earnings are relatively bright, although little change is expected in the industry's already strong balance sheet.

AGRICULTURE WEATHERS A HARSH YEAR

Agriculture will long remember 1993 as a year of weather extremes. Winter storms temporarily crippled the Great Plains cattle industry, wet weather and floods washed out crops in the Midwest, and drought seared crops in the Southeast. In the end, farm income held up surprisingly well, despite the severe weather. Livestock producers notched solid profits, as meat production hit another record. Higher crop prices created a financial windfall for many crop producers who sold grain stored from last year's bumper crop or who harvested near-normal crops this year. While the harsh weather of 1993 created financial hardship for many farmers, solid balance sheets enabled most to ride out the rough year.

UNEVEN FARM FINANCIAL CONDITIONS

The flood commanded a lot of attention in 1993, sparking fears that it jeopardized the farm recovery. But as is true with most weather developments, the flood created both losers and winners. Once the flood waters receded and the pluses and minuses could be weighed, it became clear that farm financial conditions were steady to slightly improved for the nation and the Tenth District.

Farm income inched ahead in 1993 despite substantial crop losses. Net cash income, a measure that subtracts cash expenses from cash receipts, totaled $59 billion in 1993, a new record in nominal terms (Chart 1). (Chart 1 omitted) Adjusted for inflation, net cash income was unchanged from 1992. Looking back over recent years, farmers have kept incomes on a high plateau, although there has been some erosion after adjusting for inflation. Net farm income, which takes account of fluctuations in farm inventories, showed more impact from the flood. Due to a $3 billion drop in farm inventories--the biggest drop since the 1988 drought--net farm income fell 10 percent to $44 billion. Much of that drop will be recovered in the coming year when farm inventories are expected to accumulate.

Several factors accounted for the record 1993 net cash income in the wake of the flood. Livestock producers, which account for roughly half of total farm receipts, had strong earnings for the year. Many farmers were able to sell crops held over from 1992 at prices pushed higher by the flood. Moreover, most of the reduced 1993 crop will not be sold until the 1994 calendar year, postponing much of the impact on farmers' income statements. Farm expenses increased just 1.3 percent, helping to maintain profit margins. Finally, government payments were up more than $2 billion in 1993, helping to offset the flood's adverse impact.

Notwithstanding the slight overall gain, the farm financial picture was unusually uneven across the Farm Belt, due mostly to the flood and, to a lesser extent, a drought in the Southeast. The loss in the 1993 corn crop is a good indicator of where farm finances suffered the most. Minnesota and Iowa saw their 1993 corn crops cut roughly in half, compared with average production in recent years (Table 1). (Table 1 omitted) South Dakota, Missouri, and Wisconsin suffered cuts of about a third. Nebraska saw a 21 percent drop, and a 1 percent decrease occurred in Kansas.

For the Tenth District as a whole, farm income probably increased in 1993. …

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