As softer agricultural demand has led to sharp declines in agricultural commodity prices and in turn lower farm income expectations, farmers have cut capital expenditures. In addition, farmland prices have dipped below the highs posted in 2008.
In the first half of 2008, U.S. crop prices jumped sharply, rising 35 percent above year-ago levels. The strongest gains emerged in corn, soybeans and wheat. After softening during the first part of 2008, U.S. livestock prices rebounded in the summer barbeque season. But with shrinking demand over the second half of the year, both crop and livestock prices retreated. By March 2009, U.S. crop and livestock prices had dropped roughly 20 percent below 2008 highs (Chart 4).
In 2009, weaker commodity prices are expected to trim farm revenues.6 Gross revenues are expected to fall almost 10 percent. The biggest revenue declines are expected in the crop sector, led by falling corn and wheat revenues. Livestock revenues are also expected to slip in 2009, led by sharp declines in the dairy industry.
Despite lower production costs, declining revenues in 2009 are expected to cut farm profitability. Early in the year, falling grain and energy prices led to declines in feed, fertilizer and fuel costs, trimming farm production costs by almost 5 percent. Despite the lower feed costs, livestock producers are struggling to post profits for the year because revenues have fallen more sharply. Crop producers, by contrast, are expected to enjoy positive profit margins, albeit narrow ones. Together, lower revenues and input costs are projected to clip net farm incomes by 20 percent in 2009. Nevertheless, incomes will remain historically high (Chart 5).
Eroding farm income expectations have slashed capital spending by farmers. In the fourth quarter of last year, Federal Reserve surveys reported steep contractions in capital expenditures. In the Chicago, Dallas, Kansas City and Minneapolis Federal Reserve districts, the number of agricultural bankers reporting contractions in farm capital spending rose sharply. Moreover, according to the Association of Equipment Manufacturers, tractor sales fell 20 percent during the first three months of 2009. Weaker sales are leading to reduced production at agricultural equipment manufacturers.
The expected declines in farm income are also clipping farmland values throughout the Corn Belt. According to Federal Reserve surveys, farmland values fell with the decline in commodity prices in the fourth quarter of 2008. In the Kansas City District, nonirrigated farmland values declined 6 percent from September to December 2008 - but remained above levels posted the previous year. The strongest declines occurred in the eastern parts of Nebraska. The Federal Reserve Banks of Chicago and Minnesota also reported similar farmland values declines in the fourth quarter, although prices remained well above year-ago levels. As commodity prices firmed in the first quarter of 2009, farmland values, especially high-quality farmland, have stabilized.
Source: Jason Henderson, Vice President and Omaha Branch Executive, Federal Reserve Bank of Kansas City
