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The financial impact of farming

Nebraska’s agricultural sector is a diverse and important contributor to the state’s economy. Although best known for corn, soybean and beef production, Nebraska is also nationally ranked in the production of wheat, sorghum (milo), hay, popcorn, dry edible beans, eggs, pork and ethanol production.

During the 2010 to 2013 period, cash receipts from all farm marketing (both crop and livestock products) contributed an average of $22 billion to Nebraska’s economy. In addition, total net farm income averaged over $6.1 billion during the same time period, which on a per-farm basis, is over $123,000.

These figures reiterate the importance agriculture plays in Nebraska’s economy. However, just like any business or household, the amount of money a farmer or rancher has to spend is determined by income level. In agriculture, that income level is influenced primarily by the prices received for agricultural commodities.

In most respects, the markets for agricultural commodities are just like any other product market. Prices are determined by interaction of sellers (supply) and buyers (demand). Thus, changes in either demand or supply result in changing prices. Generally speaking, higher prices come from increases in demand and/or decreases in supply. Conversely, lower prices stem from an increase in supply and/or decrease in demand.

On the other hand, the supply of commodities in agricultural markets is unique due to the seasonal nature of crop and livestock production.

Crop producers only have a single harvest each year. Thus, a good crop (large increase in supply) tends to result in low prices, cash receipts and reduced incomes; while a bad crop (large decrease in supply) results in high prices, cash receipts and increased incomes. Weather is the primary determinant of agricultural supply. Swings in production tend to result in changes in the prices of agricultural commodities and hence, producers’ incomes.

Ag markets are unique in that food is essential for life— everyone must eat. Although essential, its demand is not very responsive to changes in price because we only have one stomach, which constrains how much we can physically consume. If food prices decline by 10 percent, we increase our consumption by less than 10 percent. If an increase in demand brings about higher prices— which in turn benefits producers’ incomes— how then is this accomplished in spite of the “stomach constraint?”

Economic prosperity and increased population can increase demand for food. When consumers have higher incomes, they spend more on all products, including food. Increases in population mean more mouths to feed, thus demand for food is higher. However, both increases in income and population tend to be slow. One way to achieve a significant increase in food demand is through exports.

Between 2005 and 2011, Nebraska corn production increased from 1.3 billion bushels to 1.5 billion bushels. However, contrary to the negative supply and demand relationship between crop production and price, corn prices more than doubled from $1.92 to $6.11 per bushel during that same period. While the large increase can be attributed to many factors, including expansion of the ethanol industry, one obvious factor is exports. At the national level, U.S. corn exports averaged over 1.9 trillion bushels per year.

At the state level, the value of corn exports has been increasing, from $1.1 billion in 2007 to over $1.6 billion in 2011. It is possible to produce more and have high prices and incomes for farmers if export increases.

While exports have positive impact on farm prices and income, it also exposes American farmers to conditions across the ocean. For instance, if China experiences a big crop, their imports from the U.S. will decrease, putting downward pressure on prices.

Moreover, conditions abroad could be favorable to the American farmer. For example, in response to rising agricultural production costs in China, the Chinese government started raising price support.

The high prices in China have made U.S. commodities more competitive and subsequently boosted its exports to China, according to USDA Senior Economist Fred Gale. Hence, farm production in other countries also add to the price volatility experienced by the American farmer.

Exports are also important to Nebraska in general because of its ripple effect on the rest economy. In 2012, a dollar in agricultural exports generated an additional $1.3 in economic activities.

Farming supports fertilizer, seed, feed, farm machinery and tool industries. Also, the high cost of farming makes financial institutions a necessity. Last but not least, manufacturers are often close to farming communities because of the bulkiness and perishability of farm produce.

All these activities provide jobs in the farming communities which helps boost the local economies and standard of living in rural Nebraska.

About the Authors

Dr. Frank Tenkorang
UNK Department of Economics
Dr. Tenkorang received his Ph.D. from Purdue University in 2006. He teaches economics and agribusiness courses.

Dr. Deborah Bridges
UNK Department of Economics
Dr. Bridges has a Ph.D. from Washington State University. Her research area focused on the impacts of increased ethanol production.

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