Net Farm Income, Subsidies and the Consumer

The following summaries from the Economic Research Service of the USDA provide a snapshot of estimated 2007 Farm Income at both the macro and the household level.


2007 Net Farm Income Is Forecast To Be $66.6 Billion

In 2007, net farm income is forecast to be $66.6 billion in 2007, up $6 billion from 2006 and $9 billion above its average for the previous 10 years. Market prices for corn, wheat, and soybeans are forecast to remain above 2006 levels. In addition, prices for sorghum and hay are projected to be higher in 2007 as higher prices for corn result in increased demand for these commodities as feed substitutes. The farm income forecast reflects an expected increase in the production of corn and declines in the production of soybeans and sorghum as high corn prices encourage farmers to switch production to corn. The value of livestock production is forecast to be $125.7 billion, up $3.1 billion from 2006. Government payments to farmers are expected to total $12.4 billion in 2007, down from the $16.3 billion paid out in 2006.

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Farm Operator Households' Income Up in 2007

In 2007, average farm operator household income (farm and off-farm earnings) is projected to be $81,588, up 2.2 percent from the income level forecast for 2006, and 8.1 percent above the 5-year average for 2002-06f. On the farm, increases in crop cash receipts, livestock cash receipts, and other farm income are projected to be partially offset by declines in government payments. When higher farm expenses are factored in, average net cash farm income is projected to be $17,271 in 2007, up 2.1 percent from the 2006 forecast. However, not all this income is realized by the primary operator as household income. Income from any farm may be shared by other households. With adjustment for depreciation and additional earnings to the household from other farms, average operator household income from farm sources is projected at $11,488. Income from farm sources, projected at 3.4 percent above the 2006 forecast, would be 11.7 percent above the prior 5-year average. Average household income from off-farm sources is projected at $70,101, a 2-percent increase above the 2006 forecast and 7.6 percent above the prior 5-year average. Income from off-farm sources is expected to be 85.9 percent of household income in 2007.

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The significant projected increase in Total Farm Income of $6 billion is a reflection of the market impact of ethanol production on corn prices. This approximately 10% increase in income created a 24% decrease in Farm Subsidy payments. That's the positive side. The increased demand and consequent higher prices for corn have resulted in a ripple effect throughout the feed crops market that has impacted livestock operations. Higher feed costs have forced a market adjustment that also results in higher livestock prices. These higher livestock prices enhance revenue projections at the farm level but have eroded feeding margins at the feedlot level. The resulting market dynamics will continue to place upward pressure on food prices at the retail level.

Note that the decrease in Farm Subsidy payments will be offset in the energy sector through price incentives for alternative energy production. Specifically a 51 cent per gallon tax credit for each gallon of ethanol blended with gasoline. With 4.9 billion gallons of ethanol produced in 2006 this translates to a cost to the taxpayer of approximately $2.5 billion to offset the savings in Farm Subsidy payments of $3.9 billion. The net savings to the taxpayer is approximately $1.4 billion. This seems like a good trade off to me on the surface. However, when you factor in the net increase in food prices, the consumer loses. The ERS projects a 3.5-4.5% increase in food prices for 2007. U.S. food expenditures for 2006 were $1,082.5 billion. Using a 4% figure, that translates to a $43.4 billion impact to the consumer. Suddenly it doesn't look like such a good trade off to me.