The Agricultural Sector For 2005
Pick a financial indicator for gauging the economic health of the agricultural sector. Virtually all show that agriculture (in the aggregate) has had two incredible years (2003 and 2004). One could focus on the balance sheet by examining levels of assets, liabilities or net worth or one could focus on the income statement looking at gross farm receipts or net income. All support the contention that the last two years have been outstanding from a financial perspective. It is unusual to find a combination of two consecutive years of high production levels matched by relatively high prices for most of the major commodities produced in this country. Forecasts suggest 2005 will be another strong year for farming!
The U.S. Department of Agriculture noted that 2004 net farm income was an estimated record $73.6 billion. Net income in 2005 is projected to decline $9 billion, but recognize this is from a record high level. In fact 2005 will likely be recorded as having the second highest net farm income on record (with 2003 representing the third highest). All three years would be well above the average $52 billion of the past decade.
No doubt, agriculture faces many risks and questions in the coming months—some known and certainly some that may not be anticipated. But the major known issues to monitor in the coming months, include:
- Growing conditions and disease outbreaks (as always). What are the prospects for another outstanding crop production year? Will soybean rust became a major problem this year (for example)? What would another case of BSE do to the cattle industry?
- What will be the impact of the tobacco buyout?
- Will there be changes in macroeconomic policy for dealing with the twin deficits—federal budget as well as trade? How will agriculture fare in this environment?
- Interest rates will remain under upward pressure as the year unfolds. Interest rate levels not only impact the cost of capital, but rates also influence the value of the U.S. dollar which has important implications for export markets.
- Energy prices will remain under upward pressure. The demand for oil is increasing rapidly not only in the U.S., but also in other countries, notably China. Energy prices impact input costs ranging from fuels to fertilizers/chemicals.
- The U.S. faces stiff competition in the export market. How will the sector maintain market share? How long will Asian markets remain closed to beef? When will the Canadian border be opened for beef and dairy?
- Government CCC payments are projected to increase 70% in 2005 to almost $25 billion. Combined with record cash receipts and rising land values, is there a risk of too much expansion in the sector?
For More Information
For additional information, please contact, Larry Jones.