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Agriculture
AN EIGHTH DISTRICT PERSPECTIVE
FALL 1987

Do Income Trends Contradict the Farm Crisis?
The “farm crisis” of the 1980s is well documented.
Newsmagazine covers have indelibly etched it into popular
awareness. Farm-Aid concerts, featuring well-known musical
performers, have raised relief funds in a manner akin to
fundraising efforts for the starving in Africa. Hollywood
also has immortalized the plight of America’s family farmers
on film. The farm sector is widely acknowledged to have
been “in crisis” since 1981 when agricultural exports and
farmland values began to fall.
Given this backdrop, one would have expected that
measures of financial performance, such as net farm income,
would have registered dramatic declines during the crisis.
It is, therefore, surprising to find that net farm income has
reached record levels in the past three years. It rose from
its recent low of $12.7 billion in 1983 to near-record levels
of $32 billion in 1984 and 1985. In 1986, it rose to a record
of $37.5 billion; forecasts for 1987 project another record
of more than $41 billion. This article uses net farm income
data for the nation and the Eighth District1 to investigate
the unlikely combination of a crisis in the midst of record
earnings.

Net Farm Income - A Measure of
Profitability

A Long-Term Perspective
The combination of widespread declarations of a “farm
crisis” and the sharp increases in net farm income over the
past three years appears to be a contradiction. The apparent
contradiction is largely due to a reliance on only short-term
farm income trends that have not been adjusted for the effects
of inflation.
The chart on the following page presents net farm income,
adjusted for inflation, since 1949 for the nation and the
District. The graph tells a number of stories. First, the “farm
crisis” of the 1980s is not a phantom. In 1983, real net farm
income fell to its lowest point since the 1930s in both the
District and the nation. Thus, even after three years of
increases to record levels, farm income in 1986 was not high
by historical standards, after correcting for inflation.
Secondly, while the crisis is real, the data suggest that rather
than starting in the 1980s, the downturn began in the 1940s
with only a brief respite of rising income in the 1970s.
This secular decline since the 1940s can be interpreted
to mean that the profitability of the farm sector has been
falling. Falling profitability of the farm sector has been
associated with the characteristics of the supply and demand
for food and farm products. The demand for food is generally
inelastic. This means that the amount of food purchased does
not vary much when the price of food changes. The supply
of farm products, however, has expanded greatly due to
increased productivity and increased worldwide production.
This increased supply has resulted in lower prices. The result
of the inelastic demand and the increasing supply of farm
products is lower total revenue. Furthermore, farm resources
such as farmland do not routinely flow out
of the farm sector as they might out of other
sectors experiencing falling profitability.

Net farm income is a comprehensive measure of the net
profit of farm production in a given year. It is calculated
as the difference between gross farm income (including
government payments and inventory changes) and total
expenses (including interest payments and depreciation). Net
farm income is generally regarded as a long­
term measure of the viability of a farm
business because it includes the influence of
depreciation and adjusts for inventory
THE
changes. It is also aggregated to measure the
FEDERAL
RESERVE
profitability of the entire farm sector.
'The Eighth District includes all of Arkansas and parts of
Illinois. Indiana, Kentucky, Mississippi, Missouri and
Tennessee. This article uses data for all of these seven states
in representing the District.




RANK of
ST. 11)1 IS

Government Payments to
Farmers
One of the most important factors in the
recent farm income growth has been direct
government payments to farmers. These

FALL 1987

FEDERAL DESERVE BANK OF ST. LOUIS
U S. AND DISTRICT REAL NET FARM INCOME

u.s.

billions of 1986 dollars

DISTRICT

YEAR

payments have risen sharply in the 1980s; this rise, however,
is not unprecedented. When adjusted for inflation, direct
government payments in the late 1960s were as high as
payments in 1986 both in the District and the nation. The
late 1960s were a period for the farm sector similar to the
current situation of large grain surpluses.
The price support programs that offer farmers a guaranteed
price if they agree to reduce acreage account for most direct
government payments. In recent years, this “target price”
has been well above market prices. Other direct government
payments are made for programs that pay farmers to remove
resources from farming. The dairy Whole Herd Buyout and
the Conservation Reserve are two examples of programs that
do this. The relative importance of the payments has been
increasing as well. In 1981, direct payments amounted to
only 7 percent of net farm income. By 1987, direct payments
of more than $15 billion are expected to account for 37
percent of net farm income.
In addition to direct payments, farmers benefit from a wide
array of other subsidies that support farm income. These
other subsidies include price support loans and subsequent
crop storage costs, government purchases of milk to support
prices, government payments to enhance exports of U.S.
commodities and foreign aid shipments of commodities. In
1986, for example, the value of all government subsidies for
farmers amounted to $26 billion, while direct payments to

farmers were $12 billion.
The significance of government payments is large. Many
analysts believe that the crisis has “bottomed out” as farm
land values stabilize. A major reason for the stabilization,
however, is that farm income has increased due to
government payments. The level of these payments currently
is under public scrutiny. Actions to reduce payment levels
could lead to lower agricultural asset values.
The other important reason for recent strength in nominal
farm income is an unprecedented large drop in production
expenses. Lower feed and input prices, lower interest
expense, government programs and farmers’ decisions to use
fewer inputs have lowered the cost of producing crops. Feed
costs have declined substantially as grain prices have fallen
in recent years. Lower oil prices directly affect the cost of
fertilizers and other chemical inputs. Farmers also have been
more frugal with the application of chemical inputs. Reduced
interest expense is due to both lower interest rates and a
reduction in farmers’ use of debt. Farmers’ participation in
government price support programs is contingent upon
reducing acreage which directly lowers costs. In coming
years, cost savings from lower input costs may not be as
large as in the last two years, as both oil prices and interest
rates have risen.
—Kenneth C. Carraro

Agriculture—An Eighth District Perspective is a quarterly summary of agricultural conditions in the area served by the Federal
Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department.
Federal Reserve Bank of St. Louis, P.O. Box 442. St. Louis, Missouri 63166. Views expressed are not necessarily official
positions of the Federal Reserve System.
2



FEDERAL RESERVE BANK OF ST. LOUIS

FALL 1987

EIGHTH DISTRICT AGRICULTURAL DATA
Percent Change
Prices and Costs1

Ju n .
1987

Ju l.
1987

A ug .
1987

0.3%
- 0 .5

0.5%
-0 .1

A v e ra g e
fo r 1 9 8 6

Y e a r-T o -D a te
19872

S a m e M o n th
Y ear Ago

3.4%
2.0

4.5%
3.2

CONSUMER PRICE INDEX (% change)
Nonfood
Food

0.3%
0.9

PRODUCTION COSTS FOR FARMERS (% change)
Agricultural machinery and equipment
Mixed Fertilizers
Other Agricultural chemicals
Gasoline

0.1
0.3
1.0
3.1

0.0
0.8
0.1
2.6

- 0 .2
0.5
0.4
3.5

0.1
- 0 .3
0.4
- 4 .3

0.0
4.9
1.3
35.8

0.3
2.1
0.8
38.2

PRICES RECEIVED BY FARMERS (% change)
All products
Livestock
Crops

1.6
1.4
1.8

- 2 .3
- 0 .7
-4 .5

- 2 .3
0.7
- 7 .6

- 0 .5
0.3
- 1 .4

3.3
6.4
- 1 .0

0.0
0.7
- 3 .0

FEEDER CATTLE
Wholesale price - Kansas City ($/cwt.)

$74.00

$76.20

N.A.

$62.79

17.2

24.9

FEEDER PIGS
Wholesale price - So. Missouri ($/head)

$45.89

$45.60

$48.05

$45.61

0.8

-1 5 .2

0.1%
0.3

BROILERS
Wholesale price - 12-city (C/lb.)

45.33$

46.85$

52.63$

56.90$

5.4

-2 4 .5

TURKEYS
Wholesale price - New York,
8-16 lb. young hens ($/lb.)

55.72$

56.04$

55.97$

71.92$

-1 8 .0

-3 0 .4

CORN
Wholesale price - No. 2, yellow - St. Louis ($/bu.)

$ 1.92

$ 1.79

$ 1.65

$ 2.08

- 2 .4

- 1 .2

SOYBEANS
Wholesale price - No. 1, yellow - Central Illinois ($/bu.)

$ 5.63

$ 5.47

N.A.

$ 5.23

10.3

2.6

WHEAT
Wholesale price - No. 1, hard winter Kansas City ($/bu.)

$ 2.70

$ 2.59

$ 2.65

$ 2.93

-1 .1

6.9

LONG-GRAIN RICE
Wholesale price - Arkansas ($/cwt.)

$11.75

$11.75

N.A

$13.78

-1 .1

- 9 .6

31.1

16.6

COTTON
Average price received by U.S. farmers ($/lb.)

71.50$

71.70$

N.A.

54.67$

Percent Change
U.S. Exports
Corn (mil. bu.)
Soybeans (mil. bu.)
Wheat (mil. bu.)
Rice (rough equivalent, mil. cwt.)
Cotton (thou, bales)




Ju n.
1 987

Jul.
1987

A ug.
1987

A v e ra g e
fo r 1 9 8 6

121.0
37.9
125.7
3.6
468.0

135.0
54.3
166.2
N.A.
575.0

N.A.
N.A.
N.A.
N.A.
N.A.

89.8
65.3
82.1
6.3
288.6

Y e a r-T o -D a te
19872

21.6%
-3 8 .4
186.1
-2 1 .7
0.9

S a m e P erio d
Year Ago

200.0%
104.1
50.5
-4 4 .6
2400.0

3

Non-Real-Estate Farm Debt Outstanding
P C A s1
3
2

Banks
O u ts ta n d in g

United States
Eighth District4
Arkansas
Kentucky
Missouri
Tennessee

P ercen t Change

O u ts ta n d in g

P e rc e n t C h an g e

($ m illio n s)

6 /8 6 - 6 /8 7

6/8 5 - 6 /8 7

($ m illio n s)

6 /8 6 - 6 /8 7

$30,435
2,278
467
423
1,027
287

-1 1 .0 %
-1 5 .0
-8 .0
-2 9 .6
-14.1
-1 1 .5

-2 3 .7 %
-2 2 .7
-1 0 .7
-3 1 .9
-28.1
-2 2 .3

$10,649
NA
176
181
123
205

-16.20/0
NA
-2 6 .0
-2 5 .6
-5 0 .5
-1 6 .0

6 /8 5 - 6 /8 7

- 36.2%
NA
-4 7 .5
-4 5 .5
-6 5 .5
-36 .1

Agricultural Bank Loan Performance 5

6 /8 7

United States
Eighth District4
Arkansas
Kentucky
Missouri
Tennessee

2.7%
3.9
2.2
4.8
3.5
3.6

P e rc e n t of Farm Loans

P e rc e n t o f N et

O ve rd u e at

Loan L o sses at

A g ric u ltu ra l Banks

A g ric u ltu ra l B anks

6 /8 6

6 /8 5

3.9%
4.3
1.7
5.4
3.8
1.4

3.6%
4.3
3.8
3.6
4.6
3.5

6 /8 7

6 /8 6

.980/0
.60
.39
.44
.91
.56

.57%
.42
.22
.34
.62
.35

Agricultural Production Loan Interest Rate 6
Banks

Eighth District Average

PCAs

8 /8 7

8 /8 6

10.0%

10.2o/o

9 /8 7

11.1%

9 /8 6

11.1%

1 The consumer price index components are seasonally adjusted. All other data are not seasonally adjusted.
2 Percent change from December of previous year, based on the most recent month available.
3 Source: Farm Credit Banks of Louisville and St. Louis, Farm Credit Administration.
4 Includes all of AR and parts of IL, IN, KY, MO, MS and TN.
5 Agricultural banks are defined as those with more than 25 percent of total loans in agricultural loans.
6 Interest rate data are for different dates. PCA rates are weighted averages for Arkansas and Missouri, not adjusted for stock purchase requirements.
Source: Farm Credit Banks of St. Louis.




6 /8 5

.820/0
.59
.41
.39
1.18
.55


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102