Increased production costs are cutting into farm income, which is expected to fall 12 percent in 2018, USDA’s Economic Research Service said Friday.

ERS projected net farm income for 2018 at $66.3 billion, down $9.1 billion from 2017. “In inflation-adjusted 2018 dollars, net farm income is forecast to decline $10.8 billion (14.1 percent) from 2017 after increasing $13 billion (20.2 percent) in 2017,” ERS said. “If realized, inflation-adjusted net farm income would be 3.3 percent above its level in 2016, which was its lowest level since 2002.”

“What is really driving the decline in farm income is the increase in production expenses,” ERS economist Carrie Litkowski said on a webinar held Friday.

ERS is forecasting total production expenses will increase $14.8 billion, or 4.2 percent, to $369.1 billion in 2018, “led by increases in spending on fuels/oil, interest, feed, and hired labor.” Seed and fertilizer expenses are projected to be down slightly.

Average net cash farm income for farm businesses is forecast to decline $13,500 (16.2 percent) to $69,800 in 2018, which ERS said would be “the fourth consecutive decline since 2014 and the lowest average income recorded since the series began in 2010.”

The decline will hit producers in every region of the country. Incomes are expected to fall more than 20 percent in a large swath of the western United States and in areas that produce most of the nation’s fruits and vegetables. That’s in line with ERS predictions projecting average net cash farm income for specialty growers will fall by 17 percent.

Average net cash farm income for wheat growers is forecast to be up 8.2 percent this year. For corn, the increase is forecast at 1.7 percent, and for soybeans, 0.8 percent. Cotton growers can expect to see their incomes drop by 8.5 percent, ERS said.

Looking at the farm sector overall, ERS said the “balance sheet remains strong” but more operations are seeing debt levels increase.

The sector’s risk of insolvency is at its highest level since 2009, ERS said. Both debt-to-asset and debt-to-equity ratios are expected to rise, the former to 13.5 percent, the latter to 15.6 percent. Each ratio has been increasing steadily since 2012 – “a fairly long period,” Litkowski said.

Direct government payments are forecast to increase $2.1 billion (17.9 percent) to $13.6 billion in 2018. Most of the increase is “due to higher anticipated payments for supplemental and ad hoc assistance and miscellaneous programs, including Market Facilitation Program payments to assist farmers in response to trade disruptions,” ERS said.

Overall, ERS said commodity insurance and other government payments are forecast to make up 24 percent of farm income this year.

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