AMES, Iowa — U.S. net farm income is projected to plummet to $58.9 billion in 2006, compared to $73.8 billion in 2005, but it still gained on its 10-year average of $57.2 billion, the USDA said in its Ag Income and Finance Outlook report, released Nov. 30.

“I think the reason for the drop is because we were coming off such a good year,” said Mike Duffy, an Iowa State University (ISU) extension economist and ISU professor of agricultural economics. “That is why you see the estimate above the 10-year average.”

Among the main reasons the USDA gave for the decline in this year’s farm income were the drop in the livestock production value, and the dip in direct government payments, combined with cost increases for purchased inputs.

Each November, the Economic Research Service (ERS) provides a comprehensive summary of the financial conditions of farms and farm households. The ERS uses these income forecasts and estimates to help gauge the financial health of the U.S. agricultural economy.

The USDA report said U.S. net cash income is expected to reach $66.6 billion in 2006, dropping from the high levels realized in 2004 and 2005.

“The forecast for 2006 points to a changing economic environment from the unprecedented period of 2004 and 2005,” said Mitch Morehart, an analyst for the ERS, which compiles the annual report. “In those two years, the earnings of farmers held above the trend line for the first time since 1993,” he said. “In 2006, earnings will likely return to more recent historical levels.”

Since 1996, the average income for farm households has exceeded the average U.S. household income, earning an average difference of 15.2 percent from 1996-2005.

According to the USDA, average U.S. family farm operator household income is predicted to drop 0.9 percent in 2006 to $80,703, with the decline in farm income drastically offsetting the increase in off-farm income.

But Duffy said the USDA doesn’t account for the various avenues that U.S. farmers take to achieve their off-farm income.

“It’s difficult to discuss off-farm income without considering that the vast majority of ‘farms’ are really small, retirement or hobby farms,” he said. “As such, you get a very distorted picture if you want to look at the people who rely (on farming) for most or all of their income.”

U.S. farms are also expected to contribute $107.6 billion in net value-added to the U.S. economy in 2006, down significantly from 2004’s $128.9 billion. The USDA estimated the value of production in the U.S. farm sector to be $279.5 billion in 2006, up $4.1 billion over 2005, and above the 10-year average of $237 billion.

Total production expenses in 2006 are projected to top $11 billion (or 5 percent) to a record $237.3 billion, the USDA said. “I follow the land market very closely in Iowa,” Duffy said. “We are seeing the values really increase relative to what we thought they would do. Most of this increase has come within the past six weeks. Rents are also going to be a lot higher next year.”

In addition, the USDA projected the value of crop production to be above $7.1 billion over 2005, which would result mainly from the higher projected corn prices and stronger sales of vegetables, fruits and nuts, and greenhouse/nursery products.

Conversely, the value of livestock production is forecast to plunge $4.7 billion from 2005, but remain $18.9 billion above the 10-year average. In turn, farm gate prices for most major livestock products are estimated to dip from 2005, with milk prices seeing the most declines.

The USDA also said total direct government payments are expected to be $16.5 billion in 2006, down from 2005’s $24.3 billion, which is nearly 4 percent below the five-year average.

“The situation has changed very dramatically in the past few weeks,” Duffy said. “The price for both corn and soybeans has just shot up. For example, Iowa’s average price for corn from January to October was about $2.10; today, corn is trading for around $3.30 and soybeans for over $6.10.”

The USDA estimated government payments under the direct and counter-cyclical program in 2006 at $5.2 billion, a less than 1 percent increase from 2005.

“This is a big part of the reason why the government payments are going to be so low. There won’t be an LPD or counter cyclical payment,” he said.

“This is creating a problem for farmers who priced their corn and soybeans early planning to get more government payments. This is also going to create some issues for livestock producers who purchase most of their feed.”

For more details on the USDA’s 2006 estimates, visit www.ers.usda.gov/Features/FarmIncome/2006/November

This farm news was published in the Dec. 13, 2006 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.