The U.S. agriculture sector is facing many headwinds at the outset of 2017 — a strengthening of the relative value of the U.S. dollar, falling commodity prices and rising labor costs are squeezing crop budgets. These factors, combined with looming increases in interest rates and the prospect of significant changes being made to U.S. immigration and trade policy, have the potential to materially influence some segments of the nation’s agriculture sector this year and beyond.
For the fourth consecutive year, the Economic Research Service (ERS) of the U.S. Department of Agriculture forecasts a reduction in net farm income in 2017. In nominal terms, net farm income is expected to fall 8.7 percent to $62.3 billion. The projected decrease from 2016 is largely attributable to a decline in the value of inventory adjustment, which is expected to drop by $9.3 billion, mainly from lower commodity prices. Cash receipts from crops and animal products and direct farm payments are expected to remain relatively unchanged from 2016 because, in general, lower average prices are expected to be offset by higher crop yields.
If achieved, the 2017 net farm income forecast would be 50 percent lower, in nominal terms, than the $123.7 billion achieved in 2013. Farm sector equity is forecast to drop 2.1 percent, or $51.2 billion in nominal terms, to $2.4 trillion in 2017. In real terms, the value of equity is forecast to decline 10.3 percent, or $278.9 billion, from its peak value of $2.7 trillion in 2014.
The ERS forecasts farm real estate debt will reach a record high of $240.7 billion in 2017, which would be an increase of $16.4 billion, or 7.3 percent, in real estate mortgage loans, while non–real estate debt is forecast to increase $3.0 billion, or 2 percent, to $154.4 billion in 2017.
The NCREIF Farmland Index shows the more than 700 properties it tracks posted a total return of 7.1 percent for the year. The nearly 500 properties in the NCREIF Annual Cropland Index posted a total return of 4.7 percent in 2016, with income returns of 3.6 percent and capital returns of 1.1 percent. The NCREIF Permanent Cropland Index, tracking 251 properties, posted a total return of 10.1 percent, with income returns of 7.2 percent and capital returns of 2.8 percent.
A paradigm shift has occurred in the agriculture sector. In 2017, net farm income is expected to be half of what it was in 2013. In terms of cash receipts, the two leading U.S. crop commodities (corn and soybeans) experienced significant price declines between 2012 and 2016. The nominal price of corn fell 51 percent from $6.89 per bushel in 2012 to $3.40 per bushel in 2016. The nominal price of soybeans fell 34 percent from $14.40 per bushel to $9.50 during the same period.
Despite a less than optimistic outlook, there are still strong investment opportunities in agriculture outside of the corn, soybean, wheat and rice crop segments. While nut and fruit prices have fallen from historical highs, permanent cropland investments continue to generate relatively strong income returns.
The article was excerpted from the AgIS Capital State of the Market report. The full report can be read at this link: http://bit.ly/2niuMZB