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U.S. Farm Income to Leapfrog in 2013

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The agriculture sector is in for a boom with the U.S. Department of Agriculture (USDA) forecasting a record net farm income of $120.6 billion in 2013, a 6% year-over-year rise triggered by record crop production. This will be the second highest inflation-adjusted amount since 1973.

However, the latest farm income projection is lower than the earlier forecast of $128.2 billion announced in February. The revision reflects updated forecasts for cash corn receipts.

Net cash income - the difference between cash expenses and commodities sold during the year plus other sources of farm income—is projected at $120.8 billion. USDA expects net cash income to decline 10% from 2012 due to substantial crop stockpiles expected at year-end. Given the substantial increases in the annual quantity and value of crop inventories, particularly for corn, major portion of crops produced in 2013 is expected to remain unsold at end of the year. Nevertheless, after adjusting for inflation, net cash income is expected to remain high by historical standards. This will be the fourth time since 1973 that the net cash income will be above the $100 billion milestone.

Crop cash receipts are expected to dip 5.5% in 2013 - the first decline since 2009. Lower corn receipts reflect a likely fall in average price in 2013 price ($5.85 per bushel) from its record-high price in 2012.  

On the flipside, farm expenses is expected to rise $13.1 billion year over year to $354.2 billion, continuing the trend of large year-to-year increases since 2010. Production expenses are expected to set a record high in both nominal and inflation-adjusted dollars.

Increase in prices has driven production expenses since 2003. The two major livestock expenses—feed and livestock purchases — are expected to increase 3.1% in 2013. Feed expenses are projected to rise 3.6%, remaining relatively high through the first 9 months of the year and then subside in the final quarter. Feed costs are anticipated to decline in the last quarter due to the projected drop of nearly 30% in the price of corn and 16% in the price of soybeans between the third and fourth quarters of 2013.

The principal crop-related expenses are expected to rise 1.3% year over year with seed and pesticide expenses rising and fertilizer expenses declining. Fertilizers produced by CF Industries Holdings Inc. (CF - Free Report) , Agrium Inc. , Potash Corp. of Saskatchewan, Inc. and The Mosaic Company (MOS - Free Report) may be down compared with last year.

On top of this, fertilizer stocks, Potash Corp, Mosaic, Intrepid Potash, Inc. (IPI - Free Report) are already grappling with the exit of the world's largest potash maker Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company. Weak potash demand in India, a key market, and oversupply in the market is keeping potash prices under pressure. Indian government’s move to trim potash subsidy levels coupled with currency depreciation resulted in lower demand from farmers in that country. On the contrary, seeds from Monsanto Company (MON) and E. I. du Pont de Nemours and Company will cost higher, benefiting revenues of these companies.

Increased farm incomes have compelled farmers to continually upgrade and expand their fleets; thus leading to increased revenues for farm machinery makers like AGCO Corporation (AGCO - Free Report) , Deere & Company (DE - Free Report) , CNH Global NV . Relatively high commodity prices and strong farm incomes are also continually supporting a favorable level of demand for farm machinery across the world.

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