Finances 2016 Outlook By Ryan Kuhns and Kevin Patrick March 16, - PowerPoint PPT Presentation

Farm Sector Income & Finances 2016 Outlook By Ryan Kuhns and Kevin Patrick March 16, 2016

Background The Economic Research Service forecasts the farm sector’s income statement and balance sheet Last released February 9 th Includes 2015 and 2016 forecasts of: – Income statement – Balance sheet – Financial metrics – Farm business-level outlook 2

Net cash income (NCI) forecast down 2.5% in 2016 3

Crop receipts drive the expected decline in NCI from 2013 to 2016 4

2016F crop receipts significantly lower than 2013, but flat from 2015 5

Animal receipts are also expected to fall for most categories in 2016 6

Government payments are forecast to rise over 30 percent in 2016 $ billion 14 12 10 8 6 4 2 0 2009 2010 2011 2012 2013 2014 2015F 2016F F= Forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics using FSA, NRCS, and CCC data. Data as of February 9, 2016. 7

Government payments based on price are a larger share in 2016 $ billion 14 12 10 8 6 4 2 0 2009 2010 2011 2012 2013 2014 2015F 2016F F= Forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics using FSA, NRCS, and CCC data. Data as of February 9, 2016. Fixed payments Crop price based payments All other payments Fixed direct payments and cotton transition PLC, ARC, ACRE, counter-cyclical Disaster relief payments, tobacco payments. payments, and other programs where transition payments, dairy program payments vary with market prices. payments, and conservation payments. 8

Cash expenses are expected to decline for the second consecutive year $ Billion 400 339 350 328 325 320 300 250 200 150 100 50 0 2009 2010 2011 2012 2013 2014 2015F 2016F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 9

Feed, fuel, fertilizer, and livestock expenses drive decline in 2016 $ billion 60 50 Decreased Increased 40 30 20 10 0 Feed Livestock & Fertilizer Fuels & Oils Pesticides Labor Net rent Seeds Interest Property poultry taxes/fees F = forecast 2014F 2015F 2016F Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 2015F 10

Since our first 2015 forecast the outlook for crop receipts improved, and animal and product receipts declined 8.7 3.7 93.2 89.4 6.5 -1.8 -13.4 2015 net cash income forecast increased $3.8 billion from February 2015 to February 2016 Net cash income Crop receipts Animals and Cash farm- Production Government Net cash income 2015F products receipts related income Expenses Payments 2015F All figures are in $ Billion 2014F Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 2015F 11

Improvement in 2015 crop receipt forecasts largely due to fruits/nuts $ billion 50 47 47 45 40 36 35 35 30 28 30 25 25 23 20 19 20 15 10 6 5 5 0 Corn Soybeans Feed, food, & oil Fruits & nuts Vegetables & Cotton crops* melons F= Forecast. * Excluding corn and soybeans. 2014F Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. February 2015 August 2015 November 2015 February 2016 Data as of February 9, 2016. 2015F 12

Decline in 2015 animal and product receipt forecasts broad based, but largely due to cattle/calves $ billion 100 86 90 77 80 70 60 50 38 40 35 32 29 30 18 20 16 10 0 Cattle and calves Dairy Broilers All other poultry F= Forecast Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. 2014F Data as of February 9th, 2016. February 2015 August 2015 November 2015 February 2016 2015F 13

Farm Sector Balance Sheet Outlook

Farm real estate* represents the majority of the sector’s assets 15

Forecast drop in net cash income drives lower farm real estate values* 16

Drop in 2016F farm real estate assets drive change in total assets Percent change 25 20 15 10 Total assets Real estate assets* 5 0 -5 1.2% decline in real estate -10 assets* from 2015F to 2016F -15 -20 1970 1975 1980 1985 1990 1995 2000 2005 2010 2016F F= Forecast. *Real estate includes the value of land and buildings Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 17

Farm real estate and nonreal estate debt approaching historic levels $ billion (2009 Dollars) 200 Real estate debt 150 Nonreal estate debt 100 50 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2016F F= Forecast. Values are adjusted using the chain-type GDP deflator, 2009=100. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 18

But below the late ‘70s – early ‘80s peak in inflation -adjusted terms $ billion (2009 Dollars) 200 Real estate debt 150 Nonreal estate debt 100 50 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2016F F= Forecast. Values are adjusted using the chain-type GDP deflator, 2009=100. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 19

Farm debt is forecast to grow rapidly from 2013 to 2016 20

Leverage increased since 2012, but remains low relative to historic levels 21

Rate of return on farm assets (ROA) expected to remain flat in 2016 4 3.7 3.7 3 2 1.6 1 1.0 0.9 Rate of return on assets from income 0 2000 2002 2004 2006 2008 2010 2012 2014 2016F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 22

Rate of return on farm assets (ROA) expected to remain flat in 2016 4 3.7 3.7 3 2 1.6 1 1.0 0.9 Rate of return on assets from income 0 2000 2002 2004 2006 2008 2010 2012 2014 2016F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. Decomposing the rate of return on farm assets (ROA) 𝑆𝑃𝐵 = 𝐵𝑡𝑡𝑓𝑢 𝑈𝑣𝑠𝑜𝑝𝑤𝑓𝑠 𝑆𝑏𝑢𝑗𝑝 ∗ 𝑄𝑠𝑝𝑔𝑗𝑢 𝑁𝑏𝑠𝑕𝑗𝑜 𝑆𝑏𝑢𝑗𝑝 Value of production Profit margin on that assets generate value of production 23

Rate of return on farm assets (ROA) expected to remain flat in 2016 4 3.7 3.7 3 2 1.6 1 1.0 0.9 Rate of return on assets from income 0 2000 2002 2004 2006 2008 2010 2012 2014 2016F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. Decomposing the rate of return on farm assets (ROA) 𝑆𝑃𝐵 = 𝐵𝑡𝑡𝑓𝑢 𝑈𝑣𝑠𝑜𝑝𝑤𝑓𝑠 𝑆𝑏𝑢𝑗𝑝 ∗ 𝑄𝑠𝑝𝑔𝑗𝑢 𝑁𝑏𝑠𝑕𝑗𝑜 𝑆𝑏𝑢𝑗𝑝 Value of production Profit margin on that assets generate value of production 24

Lower profit margins drive decline in ROA from 2013 to 2016 4 3.7 3.7 3 2 1.6 1 1.0 0.9 Rate of return on assets from income 0 2000 2002 2004 2006 2008 2010 2012 2014 2016F 0.25 0.19 0.20 Asset Turnover Ratio 0.15 0.15 0.15 0.10 0.07 0.05 Operating profit margin ratio 0.00 2000 2002 2004 2006 2008 2010 2012 2014 2016F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 25

Lower profit margin ratio in 2015 and 2016 consistent with other low income years 0.25 Asset Turnover Ratio 0.20 0.15 0.10 0.05 Operating profit margin ratio 0.00 2000 2002 2004 2006 2008 2010 2012 2014 2016F F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 26

Farm Business Outlook

Farm businesses account for 45% of farms, but over 90% of production Farm Businesses Residence Intermediate Commercial Operators report they are retired or have a Gross cash farm income less than $350,000 Gross cash farm income greater than major occupation other than farming. and operators report farming as their major $350,000 and farms organized as nonfamily occupation. corporations or cooperatives. Source: 2014 Agricultural Resource Management Survey (ARMS) 28

Average net cash income up for most crop farm businesses 1/ 2010 2011 2012 2013 2014 2015F 2016F 29

Average net cash income expected to fall for most farm businesses specializing in animals and products 1/ 2010 2011 2012 2013 2014 2015F 2016F 30

All Farm Businesses $87,700 in 2016 31

Share of highly leveraged crop farm businesses increased substantially since 2011 Percent of farm businesses 10% Crops 8% 6.1% 5% 5.0% 3% 0% 1996 2000 2004 2008 2012 2016F D/A (41-70) D/A (71 +) F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 32

Share of highly leveraged animal and product farm businesses also trending upward since 2011 Percent of farm businesses 10% Animals and products 8% 5.4% 5% 3.4% 3% 0% 1996 2000 2004 2008 2012 2016F D/A (41-70) D/A (71 +) F = forecast. Source: USDA, Economic Research Service, Farm Income and Wealth Statistics. Data as of February 9, 2016. 33