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•
FEDERAL RESERVE BANK OF CHICAGO
ISSN 0002 - 1512
September 18, 1981
Number 1560
S
4.\\0
FARM INCOME ESTIMATES were recently`
following the USDA's normal midyear revi
evidence of the past four years. Estimates
.c5c me
for 1977 through 1979 were raised slight!
er, the
A better perspective of the financial condition of
farm operator families takes account of the long-term
decline in the number of farms and the uptrend in offfarm earnings of farm families. The farm income picture,
estimates for 1980 were scaled baskO7row levels
previously forecast and the pr;:•1.5er
hhis year were
cut to comparably low lev
iti
rospects for 1982,
adjusted for these trends, is still bleak, but clearly much
brighter than in the Depression. On a per farm basis, for
moreover, are not opti L.Catzt the pending record
crop harvest weighs
prices and the chances of
any significant r pu
n farm earnings.
1980 was triple the annual average during the Depres-
The USA
trends in aggre
vides several measures for gauging
to farm earnings of farm operator families. Three of the more common measures-net cash
income, and net income before and after inventory
adjustment-are depicted in the table below. The revised
estimates show net cash income fell 13 percent last year
and may decline another 5 percent this year. Net farm
income before inventory adjustment-which includes
noncash income and expenses-fell 20 percent in 1980
and is projected to decline perhaps another 9 percent
this year. Net income after inventory adjustmentwhich incorporates the sometimes large swings in inventory values-is estimated to have declined 40 percent in
1980. Because of an anticipated upturn in inventory
instance, the purchasing power of net farm income in
sion, but still nearly 40 percent below the annual average
of the 1970s. With the exception of 1964, real net farm
income per farm in 1980 was also the lowest since the
latter half of the 1950s.
Inclusion of income earned by farm operator families from nonfarm sources makes the historical comparisons less ominous but still dismal. The comparisons are
somewhat distorted since a change in the definition of a
farm in 1977 lopped off a proportionately large amount
of off-farm earnings from the historical series. In general, however, off-farm earnings of farm families have
risen faster than inflation, although 1980 was an excep1981 will likely mark the second consecutive
year of depressed farm earnings
1976
1977
values-largely reflecting the record crops now
forecast-this measure of net income is expected to
register an inconsequential rise of about 10 percent in
1981.
In terms of current dollars, all three measures depict
the conditions of this year and last as the worst since
1977. Obviously, an even gloomier picture is portrayed
when the various measures are adjusted for inflation. For
instance, the 1980 measure of net income after inventory
adjustment, deflated by the consumer price index, is the
lowest for any year since the Depression and 45 percent
below the annual average of the 1970s. This year's outturn is not likely to be any better since the rise in consumer prices will offset most, if not all, of the current dollar
rise forecast for net farm income.
1978
1979
1980
1981•
(billion dollars)
Cash receipts
Crops
Livestock
94.8
48.7
46.1
96.3
48.7
47.6
112.9
53.7 59.2
131.9
63.4
68.5
136.4
69.0
67.4
144
70
74
Government payments
Other cash income
Total cash income
.7
1.4
96.9
1.8
1.6
99.7
3.0
1.7
117.6
1.4
2.1
135.4
1.3
2.2
139.9
1
3
148
Nonmoney income"
Total farm income
7.3
104.2
8.0
107.7
9.3
126.9
11.1
146.5
12.6
152.5
14
162
Cash expenses
Noncash expenses•••
Total expenses
68.8
14.3
83.1
74.4
15.9
90.3
83.2
17.9
101.1
98.9
20.3
119.2
108.2
22.5
130.7
117
25
142
Net cash income
28.1
25.3
34.4
36.5
31.7
30
Net farm income before
inventory adjustment
Value of inventory change
Net farm income after
inventory adjustment
21.1
17.4
25.9
27.4
21.9
20
- 2.4
1.0
0.6
5.3
- 2.0
2
18.7
18.4
26.5
32.7
19.9
22
•Figures for 1981 represent midpoints of forecast ranges.
••Imputed value of dwellings and farm products consumed on the farm.
•••Includes depreciation of farm capital and perquisites to hired labor.
SOURCE: U.S. Department of Agriculture.
2
tion. As a result, inflation-adjusted total earnings per
farm operator family in 1980—including income from
farm and nonfarm sources—was at least a fourth higher
Real income of farm families, on a per farm basis,
fell to a ten-year low in 1980
thousands of 1967 dollars
than the annual average of the 1960s, but still at a tenyear low. Official forecasts for total earnings of farm
families for this year are not yet available. The inflationadjusted final outturn, however, is not likely to be much
higher than in 1980.
Initial prospects for 1982 are not optimistic, although
conditions may change significantly in the months
ahead. Export demand for U.S. grains has been sluggish
since spring and domestic inventories of hogs and cattle
on feed are below year-ago levels. These developments
suggest utilization of crops in the year ahead will fall short
of the record harvests expected this fall, holding prices
and earnings of crop farmers in check. Earnings of livestock producers, which were substantially depressed in
1960
'65
'70
'75
**
'80
*Because of a change in the definition of a farm, data for years
since 1976 are not strictly comparable to earlier years.
**1981 estimates partially based on USDA forecasts.
1980 and the first half of this year, will likely improve next
year. But unless inflation slows considerably, it seems
doubtful that real farm earnings will rise significantly in
to farm capital. The residual return to equity in agricultu-
1982.
ral assets in 1980 fell to a low unprecedented since the
1930s. With the chances of an equally low return this year
The possibility of three consecutive years of
depressed earnings has raised questions about the
impact on farm debt and farm asset values. Farm lenders
will have little choice but to be cautious in their lending
and prospects for low earnings again next year, the rise
in farm asset values will no doubt be held in check. In
1980 the rise was less than inflation, implying a loss in the
purchasing power of the value of agricultural assets. That
growth in off-farm earnings, the depressed farm earn-
pattern could be repeated this year and next. Two or
three years of real capital losses, however, are not
ings encumber farmers' ability to repay debt. Most
farmers are backed by substantial equity in their assets.
unprecedented for the agricultural sector. Similar situations occurred in the late 1940s, the early 1950s, and
Highly leveraged farmers, however, are vulnerable to
again in 1969-70. Hopefully, the current period will
the liquidity squeeze that has accompanied the down-
prove to be just as temporary as the past experiences,
turn in farm earnings and record-high interest rates.
leaving the favorable long-run outlook for agriculture
practices. Although supplemented with significant
intact.
Net farm earnings represent the return to farm
operators' labor and management, as well as the return
FEDERAL MARKETING ORDERS have long been a
part of U.S. agricultural policy. In 1980, 47 federal milk
marketing orders and 48 marketing orders on fruits,
vegetables, and specialty crops were in force. About
two-thirds of the milk marketed in the United States
went to handlers—processors—regulated by federal
Gary L. Benjamin
ing orders in view of the Administration's intent to
reduce government involvement in business activities.
Several pieces of legislation were enacted during
the 1930s to relieve the depressed economic conditions
in the U.S. agricultural sector. Among these was the
milk orders. About 95 percent of fresh fruit production
and 13 percent of the fresh vegetable production moved
to handlers affected by market orders. The costs and
benefits of marketing orders to consumers and farmers
Agricultural Marketing Agreement Act (AMAA) of 1937.
This act was designed to promote orderly marketing
conditions so as to improve prices, incomes, and market
power of agricultural producers and assure more stable
have been debated for years. Recently a task force was
formed to specifically review fruit and vegetable market-
supplies. The AMAA provided for the creation of marketing orders which prescribe the marketing activities
3
S
r a commodity. Commodities eligible for regulation by
over the season and reduce gluts. In the process prices
marketing orders are largely limited to milk, fresh fruits
and vegetables, tobacco, hops, nuts, and a few pro-
are more stable throughout the season. Market alloca-
cessed fruits and vegetables. If imposed, orders are prepared for each commodity separately and are binding
on all the handlers of the commodity within the order
area. The order may be limited to a small geographic
region or it may comprise several states.
tion provisions also are used to provide producers
with higher returns. These provisions involve the diversion of excess supplies away from primary markets—
domestic, fresh markets—and into secondary markets,
such as process or export markets, or carryover stocks.
By doing so, producers realize higher prices in the primary markets and higher overall returns for their crops.
The process for instituting a marketing order begins
initially with producers. Producers or cooperatives—
producer associations—send a proposal for a marketing
order based on their appraisal of supply and demand
conditions to the USDA. The proposals are opened to
public hearings and, if endorsed by the Secretary of
Nearly a third of the fruit and vegetable market orders
specify the flow of supplies and a fifth use market allocation schemes. In addition, some orders provide for product inspection, promotions, or other aggregate
activities.
Agriculture, submitted as a referendum to all producers.
Marketing orders have been challenged by consu-
The marketing order is enacted if approved, in most
cases, by two-thirds of the producers or those who
account for two-thirds of production within the order
mer groups and farmers. Consumers argue that higher
area.
The provisions enacted under a marketing order
prices result whenever supplies of commodities are controlled or restricted. While marketing orders no doubt
improve the producers' incomes and returns, they also
lead to more stable prices and supplies of commodities
since producers' marketing risks are reduced. They may
vary in accordance with the objectives of the producers.
Federal marketing orders for milk set the minimum
also provide incentives for the entry of new firms and
prices handlers in the market order area are required to
products for the consumer. Higher returns and price
stability may, however, prolong the exit of marginal
pay to producers. Higher prices are paid for Class I
milk—milk used in fluid products. Supplies in excess of
fluid milk needs receive lower prices. This milk is designated Class II and III and is used for perishable or storable manufactured products. The Minnesota-Wisconsin
manufactured grade milk price, determined in a nonregulated area, is the base upon which the class prices
are built. But supply-demand conditions, the amount of
milk purchased from nonmarket order processors, butter fat content, location, seasonality, and other factors
also enter into the price calculation. (The dairy support
program complicates price formulation further by setting a floor under the Minnesota-Wisconsin base price.)
Federal orders for fruits, vegetables, and nuts, in contrast to the milk orders, contain provisions that determine market supplies rather than price. By regulating
supplies, however, these orders have significant impacts
on prices. These provisions stipulate quality measures
and/or quantity measures. Nearly all marketing orders
include quality provisions which impose minimum
standards for grade or size of produce or else set stand(' ards for shipping cartons and packs. Since some of the
fruits and vegetables are also imported, the AMAA
requires that imports meet these standards, too.
encourage innovation and new technology—improved
producers.
Farmers, in some instances, cite the loss of "free
enterprise" since marketing orders spell out the rules of
trade. But in doing so, marketing orders help to balance
the marketing power between a large number of
producers and a few processors. Marketing orders also
improve trade practices through the coordination of
production and marketing, leading to more standardized products. Without marketing orders, the terms of
trade could be dominated by the very few processors
handling particular commodities.
A task force, formed by the USDA, is currently
reviewing the economic efficiency of fruit, vegetable,
and specialty crop marketing orders. The Administration
sought this special review more in light of its interest in
removing federal regulations that are not needed or
hamper productivity than in response to consumers' or
farmers' complaints. But the USDA's task force will
examine the probable effects of various administrative
and legislative changes in marketing orders on consumers, producers, and handlers and will report its findings this fall.
Quantity provisions include measures which limit
weekly sales in order to spread the supplies more evenly
Jeffrey Miller
4
Selected agricultural economic developments
Percent change from
Subject
Unit
Latest period
1972-73=100
1972-73=100
August
August
mil. dol.
mil. dol.
Value
•
Prior period
Year ago
233
268
+ 0.1
+ 0.3
+11
+6
July
July
22,449
4,609
+ 1.5
+ 1.4
+11
+11
mil. dol.
mil. dol.
July
July
2,560
555
- 6.5
-10.3
+18
+20
mil. dol.
mil. dol.
July
July
40,970
9,785
+ 1.7
+ 1.6
+20
+22
mil. dol.
mil. dol.
July
July
803
182
- 2.5
-16.6
+33
+23
percent
percent
percent
percent
percent
2nd Quarter
2nd Quarter
9/10-9/16
9/10-9/16
9/10-9/16
17.14
15.89
14.52
16.09
14.51
+ 1.2
+ 2.1
- 7.0
-11.5
+ 4.2
+10
+7
+41
+51
+29
Agricultural trade
Agricultural exports
Agricultural imports
mil. dol.
mil. dol.
July
July
2,842
1,200
-10.9
- 8.4
- 6
-16
Farm machinery salesP
Farm tractors
Combines
Balers
units
units
units
August
August
August
7,103
2,410
1,461
-39.0
-18.1
-52.8
- 6
+14
-17
Farm finance
Total deposits at agricultural bankst
Total loans at agricultural bankst
Production credit associations
Loans outstanding
United States
Seventh District states
Loans made
United States
Seventh District states
Federal land banks
Loans outstanding
United States
Seventh District states
New money loaned
United States
Seventh District states
Interest rates
Feeder cattle loanstt
Farm real estate loanstt
Three-month Treasury bills
Federal funds rate
Government bonds (long-term)
tMember banks in Seventh District having a large proportion of agricultural loans in towns of less than 15,000 population.
ttAverage of rates reported by District agricultural banks at beginning and end of quarter.
PPreliminary.
AGRICULTURAL LETTER
FEDERAL RESERVE BANK
OF CHICAGO
Public Information Center
P.O. Box 834
Chicago, Illinois 60690
FEDERAL RESERVE BANK Of CHICAGO
AP
FIRST-CLASS MAIL
U.S. POSTAGE
PAID
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Permit No. 1942
Tel. no. (312) 322-5112
HEAD-DEPT .OF AIR I C.ECON. AGL
I NST l TUTE OF AG:i I CUL TURE
UNIVERSITY OF MINNESOTA
ST. PAUL ,M I NNE SOTA
5101