SD Personal Income Grows Anemic 1.2% in 2016; Farm Earnings Down 57%

1. mike from iowa 2017-03-30 10:52

   Take DAPL out of iowa and it wuz prolly a dismal year.
2. o 2017-03-30 12:45

   I do not mean for this to begin a stone throwing session at farmers, but given the complexity of taxation, isn’t there a big difference between agriculture “earnings” and farm “income?” Farmers use the tax code to reduce “income” by purchasing equipment/seed/fuel . . ., so doesn’t much of the individual’s “income” stay stable except in the most dire years? Is there also a distinction between individual income and corporate income if the farm is a corporation? The effect seems to be on “earnings” which seems to be a measure of not only income but associated spending.

   Again, I am in NO way saying or implying that farmers are doing anything wrong, I just ask if all this makes looking at and comparing the economics of income difficult (or impossible).
3. Troy 2017-03-30 14:58

   Two Comments:

   Why our ag income drop is greater relative to others: My guess is likely related to product mix in both crops and livestock. Small grain prices (e.g. wheat, oats, etc.) are down more than other crops (corn, beans, etc.) and cattle/hog prices are down more than poultry/dairy.

   Why we haven’t seen the spill-over into the rest of the economy: My guess is two-fold:

   1) Net Cash Income (vs Net Farm Income) is stronger because farmers are selling off of inventory in storage. Because the lower net farm income has been happening for almost four years because of reduced exports these last four years, farmers will soon be running out of this cash cushion so it isn’t sustainable. I’d be interested to see statistics on the change in storage inventory in SD over the past four years.

   2) Sioux Falls related industries are doing well, tourism is doing well, and the housing starts nation-wide have been good for the timber industry. All of these are unrelated to agriculture and thus to some degree counter-balance our agriculture dependence.
4. Troy 2017-03-30 14:59

   P.S. O, you are correct with regard to timing. Net Cash Income is obviously computed on a cash basis which includes sale of inventory from prior year’s production. Net Farm Income is computed on an accrual basis which computes the income generated from that year’s production whether sold or stored.
5. Clyde 2017-03-30 20:24

   Well, you are right, Troy, on our mix. Cattle prices have taken a major hit while grains are down hard as well. That pretty much describes agriculture in South Dakota. The thing that has really amazed me is how so many of our so called learned leaders can’t seem to figure out why sales tax revenues are way down. All you have to do is stop farmers buying the big ticket items they need to be in this business and you are guaranteeing a big hit. As of now its looking really bleak for the future and if you think we are getting big subsidies to tide us over you are mistaken. Not far from land foreclosures for unpaid property taxes either.
6. Cory Allen Heidelberger Post author | 2017-03-30 20:27

   I dread getting into the accounting details, but Troy, is that difference accounting unique to farming? On O’s thought, can other industries take advantage of timing their purchases?

   On spill-over and selling off inventory: would South Dakota farmers be selling off inventory at greater rates than farmers in other states? Remember, the way I read these numbers, we’re not just not seeing spillover; we’re seeing South Dakota earnings growth rates outpace national and regional averages in several areas.

   Ditto product mix: how different has South Dakota’s product mix been in the last few years from the product mix in other states? Did we somehow pick a uniquely bad product mix, then engage in unique compensatory measures like selling off inventory to drive other industries’ earnings to higher growth rates than other farm states saw?
7. Troy 2017-03-31 07:59

   Accounting unique to farming? Kinda in that agriculture has a higher percentage of use of cash vs. accrual as compared to most businesses. Both do so for good reasons and are likely to continue. You just can’t flip back and forth and over time they will equal.

   Selling off at greater rates: Probably only because of higher drop in net farm income relative to others. It is why they use cash accounting (even out income year-to-year.

   Earnings growth rates outpacing nation: The factors which impact other major sectors of our economy (mining, timber, tourism, Sioux Falls industries, manufacturing) are impacted by different factors than what is effecting Ag and this independence is good for us. True principle of economic diversification.

   SD has for my entire life been heavy in small grains and cattle relative to neighboring states. Sometimes the difference works in our favor but now it is not. Evens out over time.

   Last question: No. Especially with agriculture, you not only don’t react to quarterly swings but often annual swings can be misleading.

   Regarding Clydes comment on why sales taxes are down: While that is a factor, it is only a small factor (10-15% depending on assumptions of tertiary sales) as evidenced by the reality on sales taxes in Sioux Falls. A bigger factor (degree I don’t know) is the recent acceleration of decline in personal debt (debt payments divert dollars from taxable items). It is largermthan what I would guess would occur with the prospects of higher interest rates and it seems oddly concentrated here.
8. Bill Dithmer 2017-03-31 08:21

   It is unfortunate that the agriculture economy is in the crapper right now but it wasn’t a suprise to most people. While some people are quick to point out that commodity prices drive the states  ag economy, they most likely are missing the real causes of the current problem.

   The only reason the people in ag have been able to make ends meet is their efficency.  Bigger machines, better chemicals., no till and the list goes on. While prices do go up and down, they average out to be about the same as the seventies.  That means  the sames prices  being paid with a dollar that buys 1/7th what it did back then.

   For all this time there have been warning signals, the farmers knew it, and the ranchers knew it, or should have. The bankers knew it but continued to make operating loans in spite of it. Lets cut to the chase, its about the cost of using ag ground.

   For the most part, ag was shot in the foot by bankers that encouraged debt. A good part of that debt was through the purchase of  or the leasing of ground. While the banks were not allowed by law to deal in real estate,  that doesnt mean they didnt deal in land. At this time the banks hold more paper on ag land in SD then at any time in our history. That all looked great when land prices went up by leeps and bounds, but now the day of recconing has come. Ag productivity has about reached the efficiency that it is capable  of. Here is where the problem is.

   While comodity prices remain the same, the price of ag land didn’t.  Clear back in 2000 we set down and figured out how much money could change hands running other peoples cattle. At that time the top price should have been $24 a unit, cow calf for a month. But it wasn’t.  It would have averaged out to about $28 and the banks continued to give operating loans knowing that the only way ag could turn a profit was through slight of hand, subsidies,  and insurance.

   And now here we are. Land with value that is way way over valued for what it is being sold for. A correction is coming folks. When banks start to worry about defaults on ag loans the purse strings will tighten and it will again mean fewer people in agriculture then today. It wont be as easy as it was at one time. I saw big, huge farmers and ranchers that had federally backed loans forgiven for the amount that it would take to buy more ground because they no longer carried that debt. I was at a farm sale south of Wamblee some thirty years ago when a man came driving up. He was looking for a neighbor, and I found him. There were papers signed five minutes before the land sold. The neighbor bought that land with money he didnt spend to pay an agreed opon debt.

   It would be hard for that kind of thing to happen today, loans dont just disappear any more. Those cow calf units that couldnt turn a profit at $24 back in 2000, pale in comparison to over $40 today.  Meanwhile ground prices and taxes went up driven not by more productivity,  but just plain old hopes and dreams, nothing else.

   How are those 20% teriffs  looking right about now? If it happens it is my opinion that we will loose 20% of the people in ag right now. When ag land values begin to correct, some will have to eat a bunch of debt, who do you think that will be?

   The Blindman
9. jerry 2017-03-31 09:51

   Blindman, that is about as accurate of a description of ag land and those who utilize that I have seen. As Cory noted with a meeting in Aberdeen with some smart ass producers saying more or less, when do we sign up to be Democrats. These guys that will have lost it all to the nothingness of Thune, NOem, Rounds and Daugaard will be the new Tom Berry Democrats. They will start to look at the nothingness that the west river republicans have provided and ask themselves how they believed in all the crap that was being shoveled to them. As you note, the day of reckoning has already been achieved, we are all just waiting for the announcement on who will bail us out. Sure will not be the putin trump regime, maybe China again, who knows. Maybe we just load up and move to California like the Depression days. We will all be Tom Joad’s driven from the land by the drought of poor judgement as was the case of the 30’s.
10. Cory Allen Heidelberger Post author | 2017-03-31 21:54

    Bill D, excellent commentary. What will that correction look like? Will land lose value? Will farmers end up upside down just homeowners in 2008? I assume that an ag land correction would hammer South Dakota’s economy far harder than did the 2008 recession… but what will happen nationally? Will the rest of the U.S. notice?
11. Cory Allen Heidelberger Post author | 2017-04-01 10:04

    Mixed signals: an Ohio farmer says agriculture is on the cusp of a depression like the 1980s, but the Environmental Working Group’s Anna Weir says farmers’ economic situation isn’t so bad:

    “Most farmers depend on off-farm income,” Weir said, pointing to USDA data showing that despite declines in farm incomes, farm households are expected to earn more this year, thanks to money from other jobs, such as those held by farmers’ spouses [Arthur Delaney, “Already Struggling, Farms Stand To Lose Under Trump Trade Agenda,” Huffington Post, 2017.03.31].

    However…

    Experts tend to dispute the idea that the current agriculture downturn is as bad as the one in the 1980s ― a crisis partly triggered by U.S. farmers losing access to the Soviet Union’s wheat market. But it’s still pretty bad, said Brent Gloy, an agricultural economics professor at Purdue University. He said the USDA data on farm household incomes doesn’t reflect reality for the subset of operations that grow the most food.

    “If you look at the people who produce 90 percent of the farm products, they’re feeling the stress of [low commodity prices] significantly,” Gloy said. “They’re much less likely to have off-farm jobs and off-farm income.”

    Gloy and Weir agree that while farm incomes are down and debt is rising, debt levels are still near historic lows, and farmland remains relatively valuable. Plus, the downturn that started in mid-2013 followed several years of strong growth that put money in farmers’ pockets [Delaney, 2017.03.31].

    Is the market failing to support an industry that provides a basic life essential?
12. Troy 2017-04-01 10:35

    CAH,

    Regarding your last question, huh? Just a few years ago, you were clamoring for a decrease in federal support because farmers were making too much money.

    1) As Bill D said, the cost of this “basic life essential” has gotten cheaper because the producers have gotten better at producing food. Granted Bill thought it was a bad thing because per unit prices haven’t gone up. But, I remember when a desktop computer less powerful than my phone cost $2,000. Now I get a computer 10X more powerful for less money. Industries which are becoming more efficient and providing product cheaper are good things, not bad.

    2) Debt levels are near historic lows. Even with the decline in income, debt service coverage ratios are not alarming.

    3) The underlying asset (land) is retaining its value because debt service coverage ratios are manageable. The assertion there is a major correction coming is not supported by a single piece of credible evidence.

    4) We are producing more food than ever and, despite a growing world population, we have closed the gap on world hunger.

    When you look at the above items, the assertion this is an industry in trouble is ludicrous.
13. Cory Allen Heidelberger Post author | 2017-04-02 21:43

    Well, Troy, if farmers are making enough money, then no, they shouldn’t have subsidies. If farmers aren’t making enough money to make it worth staying in the business of producing food, then we might need to intervene. I take no absolute position on farm subsidies, yea or nay. I’m just responding to what Bill D and a variety of commenters and experts have said and trying to figure out where the market stands. If you are right, if the ag industry is plenty wealthy, then sure, drop the subsidies, crop insurance and all. Let them live or die by the market.

    But I remain uneasy that the market appears to be leading us to monopoly, especially in production of a basic product essential to life. We may not need subsidies, but we may need some trust-busting. (One way or the other, Troy, I will have my socialism, and you will like it! :-D )
14. jerry 2017-04-03 01:57

    To make a farming ranching enterprise work, there has to be at least two incomes for a cash flow. “Most farmers depend on off-farm income,” Weir said, pointing to USDA data showing that despite declines in farm incomes, farm households are expected to earn more this year, thanks to money from other jobs, such as those held by farmers’ spouses”. So given what we know, the family farm and ranch is just an extension of the bankers whims. When the banks fail, as they did in 2008, taxpayers will be forced to bail out the banks with farmers and ranchers getting the same as they are connected. To Troy’s dismay towards Cory’s Socialism observations, Cory is correct. Farming and ranching is as close to absolute socialism as it gets, and even needs further help to withstand the storms coming.

    There is some good news in that though as well. Ag spouses can get a better future with their Social Security by working off the farm/ranch. The ag business tends to write off too much to keep from paying taxes and this hurts both of them when it comes time to hang up the hoe. The wives need this income as it is the only thing they may have to survive when the time comes for them to go to the Medicaid provided nursing homes. Stop on into one of those places sometime and you can see for yourself how many are there on Medicaid and how many will be on the street when the socialist program fails thanks to NOem, Thune, Rounds and especially Daugaard. Medicaid keeps the nursing homes doors open for all.

    Socialism is a much needed solution to grant an industry that sees itself dependent upon federal assistance. This industry does not only need a hand up, it needs a hand out to continue to supply the food we all need. In order for both to survive, they must be regulated much like the farming ranching operations in Europe. That would include leaving much of the lands in fallow for clean water drainage to go along with range management. More government? Better government solutions.
15. Caroline 2017-04-03 15:01

    Two thoughts:
    1. I have a bunch of bananas on my counter. A sticker on the bananas says Honduras. I also have a package of hamburger without a country of origin label. Does no one see the problem here?

    2. I am a firm believer in government farm programs for many reasons. But on my crazy days when I start thinking about conspiracy theories I wonder if those subsidies are more about keeping a supply of grain available for
    the grain marketing giants to play with. Does anyone remember when hogs got to 8 cents? Many smaller hog farmers were broken! The government stepped in to save the day by buying excess supplies from the packers for 50 cents and then pushed the pork into the school lunch programs. The hog farmer was still broke, but the packer was in high cotton. Now packers own most hogs from birth to slaughter. Where are the anti-trust people???
16. grudznick 2017-04-03 15:23

    People want to see stickers on bananas because nobody wants bananas from Iowa or Oklahoma. I expect if they start labeling meat loaf with country or state labels they will need to pass a law that says 50% or 85% american beef or else people will mix the cheap Chilean beef in to water down the american beef.

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