In September 2019, the USDA released estimates of the U.S. farm income for 2019. In the current period of China tariffs harming the Midwestern farmer, we were surprised by this good news. The estimate for the net farm income grew from $69 billion in March to $88 billion in September which is a major positive change. What factors contributed to this 27% increase in the estimate?
The major positives contributing to this improvement are:
- Lower Production Expenses
- Lower Capital Investment
- Increase in Direct Payments (Market Facilitation Payments – MFP’s)
Lower Production Expenses are a result of farmers using more efficient methods of production, leading to lower labor costs. Lower Capital Investment is unfortunate for Mechanical Power and our customers who manufacture farming equipment. When farmers hear about a cloudy upcoming year (as they did in March), they tend to hold off on investing in new capital equipment and make do with their existing equipment. Although 2019 may be negatively impacted by these decisions, higher 2019 farm incomes should bode well for OEMs in 2020 as farmers need to replace an aged fleet and they will have the cash to do so.
The increase in direct MFP payments has also been a positive influence on farm incomes. The total direct payments during 2018 and 2019 have exceeded $10 billion. These payments are intended to assist farmers or ranchers whose commodities have been directly impacted by retaliatory tariffs. It was not known until May if these Direct Payments would be offered to impacted farmers so they could not be factored into the March 2019 forecast.
These improvements were partially offset by:
- Lower value of Crop Production
- Lower value of Animal Production
The improvement in Farm Income is a welcomed development for suppliers to the Farm Equipment Manufacturers like Mechanical Power, Inc. However, it is not time to celebrate and declare victory. We will continue to diligently watch the trade/tariff situation and how the farmers react if the MFPs are curbed or eliminated in 2020.