The U.S. Department of Agriculture expects U.S. farm income to increase to an inflation-adjusted $110 billion (2005$) in 2013, the highest level in 40 years. The changing economics on-farm will change the economics of rural-to-urban transfers.
The forecasted increase in farm income reflects rising global demands for grains and increased mandates for corn-based ethanol. Farm income fell in 2012 to $98.1 billion from $104.0 billion (2005$) in 2011 due to drought conditions. “American agriculture continues to endure an historic drought with tremendous resolve,” Agriculture Secretary Tom Vilsack said. Government-backed crop insurance programs help limit the impact of the drought on farm income. Livestock producers have been hard hit by the drought due to sharply rising feed costs. The rising general tide in agriculture, therefore, should not blind us to problems in specific sectors and locales (more on this in the conclusion).
The National Trends
Agricultural income has ridden a rising trend since 2000 (see chart below—actual income in solid lines and forecasted in dashed lines). In the 1990s, inflation-adjusted farm income and operator income was on a downward trend. Since 2000, inflation-adjusted net farm income and operator income has risen by a cumulative annual rate of increase of 5.6% and 6.0%, respectively, through 2011. The U.S.D.A. forecast for 2013 represents an annual increase of 2.8% for inflation-adjusted farm income and 2.5% increase in inflation-adjusted operator income over 2011 levels. U.S.D.A. forecasts that this year’s annual farm income will reach $110 billion (2005$).
Agricultural balance sheets have strengthened considerably over the past decade (see chart below). The inflation-adjusted value of total assets and real estate grew at steady cumulative annual rates of 2.1% and 2.8%, respectively, through 2000. Thereafter, cumulative annual growth rates jumped to 4.3% and 5.0%, respectively, for the inflation-adjusted value of total assets and real estate through 2011. The cumulative annual rate of increase is
forecasted to accelerate, where the inflation-adjusted total assets and real estate will increase at annual rates of 5.6% and 6.0%, respectively from 2011 through 2013. At year-end, total farm assets will reach $2.3 trillion (2005$) and farm real estate $2.0 trillion (2005$).
Agriculture has been deleveraging its balance sheet for more than a decade (see chart below). In the 1990s, the debt/equity ratio hovered at or slightly below 18%. Deleveraging started in the late 1990s and had been steadily declining to 11.6% through 2007 when the financial crisis hit in 2008. The debt/equity ratio jumped by 1.5 percentage points during the depth of the financial crisis, but has almost fully returned to pre-financial crisis levels by 2011. U.S.D.A. forecasts expect continued deleveraging of the farm’s balance sheet going forward.
Consequences for Water Transfers
What a difference the 21st century has made. The 1990s was a period of declining inflation-adjusted farm income, slow growth in inflation-adjusted asset prices and stable debt/equity ratios at or below 18%. Over the past decade, we are now in the era of rising inflation-adjusted farm incomes, faster growth in asset prices and declining debt/equity ratios. By these measures, the economics of the farming sector is much stronger today than a decade ago.
This should change the economics of water transfers. Taking from the recently released study Water Transfers in the West by the Western Governors Association and the Western State Water Council, the day of the “buy and dry” transfers are long gone. With the growing economic vitality of agriculture and strengthening balance sheets, agriculture is not inconsequential or “low-valued”. Going forward, this means that water transfers should use water conservation and programs that support if not expand the economic viability of agriculture. This change will be natural. The “old model” will become increasingly expensive from an economics perspective, as well as increasingly difficult from long-standing political perspectives.
Caveat and More. The U.S.D.A. data is nationwide. Experiences of states and locales can vary much from national trends. While global market forces are not specific to a region, drought conditions and water supply are. For drought, think of Kansas and Texas. For water supply, witness the Central Valley in California.
Anecdotal evidence suggests that western agriculture is not immune from national trends. REITs (Real Estate Investment Trusts) and Hedge Funds are busy acquiring agricultural lands in both the Midwest and West. How much of this activity is due to the search for an inflation hedge, belief in a worldwide commodity boom, or even speculation on water transfers? Who knows?
On a more personal level, I recently discovered that alfalfa prices in the Imperial Valley, California are now in the range of $230/ton. A decade ago, alfalfa prices were on the order of $85/ton. If alfalfa prices had increased only by inflation, alfalfa prices today would have been about $110/ton. In other words, the inflation-adjusted price of alfalfa has more than doubled! The Chinese have found Imperial Valley alfalfa and they are unlikely to go away.