Following a 6 percent increase in total production expenses in 2003, Agricultural Research Service economists say this year should see costs rise by less than 2 percent.

“Purchased inputs – the major component of total expenses – are forecast to increase $1.6 billion,” Jim Johnson and Mitchell Morehart said at this year’s USDA Economic Outlook Forum at Arlington. That will account for 50 percent of the increase in total production expenses.

Direct government payments this year are projected to total $10.3 billion, down significantly from 2003’s estimated $17.4 billion.

Payments were larger in 2003 because, under the 2002 farm bill, producers received 2002 and 2003 crop payments, as well as a portion of 2004 crop payments. Direct payment rates are fixed in legislation and aren’t affected by the level of program crop prices.

Counter-cyclical payments, loan deficiency payments, and marketing loan gains in calendar 2004 are expected to decline from last year’s levels. Market prices determine payment rates for these programs, and program crop prices are expected to be higher this year. Additionally, the level of market prices relative to loan rates affects the amount of the program crop that realizes loan deficiency payments and marketing loan gains.

Thus far, Johnson and Morehart note, the Crop Disaster Program, the Livestock Compensation Program, and the Non-Insured Assistance Program are the only ad hoc and emergency programs expected to provide payments to producers in 2004.

In their forecast of expenses for 2004, they say animal feed is expected to see one of the largest increases, 6 percent, while costs for livestock purchases may drop by more than 11 percent.

A relatively low percentage change in costs for production items such as interest, taxes, and wages, will help to hold down expense increases in 2004, they say. Prices for those items rose 4 percent last year, but are expected to go up only 2 percent this year.

Fuel expenses are expected to drop by only $80 million, based on an outlook for slightly lower fuel prices and a projected decline in planted acres. Costs for fuel rose $2 billion, or 31 percent, in 2003 due to a 19 percent increase in the composite price of oil. For 2004, that price is forecast to decline by almost 4 percent.

After recording a more than 13 percent increase last year, fertilizer prices for 2004 are forecast to rise by only 2 percent. Last year saw a whopping 68 percent increase in the cost of natural gas, the primary ingredient in nitrogen fertilizers; in 2004, gas prices are expected to decline about 3 percent.

Nonetheless, natural gas prices are expected to be about 29 percent higher than in 2002.

If the value of commodity production and expenses are combined into a ratio, Johnson and Morehart say, it shows how efficiently U.S. farmers use inputs to increase crop production.

“During most of the 1990s, operating margins ranged between 80 percent and 85 percent. Low commodity prices, combined with relatively high annual increases in production costs, pushed the ratio of expenses to the value of production well above 85 percent for the period 1999-2002. Government payments played an important role in relieving the cost/price squeeze during this period.”

The forecast that increases in receipts will exceed increases in expenses both in 2003 and 2004 “suggests that operating margins, excluding government payments, could retreat back to the 85 percent level for the first time since 1998.”

The U.S. farm sector is forecast to produce a net value-added of $93 billion in 2004 as its contribution to the national economy – a $6 billion decline from 2003’s record $99 billion.

“The earnings from agricultural production are widely distributed among many different persons and enterprises, and have a broad impact across agricultural and local economies,” Johnson and Morehart say.

Payments to stakeholders are expected to rise $1.4 billion, over 3 percent, to another record high. The residual net farm income forecast of $47.6 billion “will accrue to those who contribute resources with the expectation of receiving financial rewards for sharing in the risks of production.”

Net rent to non-operators is expected to represent 14 percent of net value added, while compensation of employees will be 23 percent, and interest payments 12 percent.

“Together, these returns could represent 49 percent of value added.”

Contractors are expected to earn an estimated $13.4 billion in 2004, or 15 percent of net value added and 29 percent of net farm income. The balance, $32.5 billion, will go to farm operators; their share represents 36 percent of net value added and 70 percent of net farm income.

Several hundred representatives from government, agribusiness, and academia participate in the annual Outlook Forum.

e-mail: hbrandon@primediabusiness.com