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U.S. farm income contracted somewhat in 2018 according to the most recent United States Department of Agriculture (USDA) update, released Nov. 30.

The report indicated that net cash income in 2018 declined 10 percent from the previous year to about $93.4 billion, the lowest net cash income since 2009. Strikingly, net cash income has declined 38 percent from the recent peak in 2012, when many in the agricultural industry experienced a protracted period of exceptional profit margins. Only one other time period, the mid-1970s, has sustained a similar decline.

The decline in farm income from the previous year was a result of both a decline in gross cash receipts and an increase in production expenses. For example, gross cash receipts for agriculture fell less than 1 percent from the previous year. Direct farm expenses, such as labor, feed, fertilizer and chemicals, increased more than 2 percent. Other farm expenses also increased slightly, adding to the profit-margin squeeze.

However, due to strong balance sheets built during the run-up in farm income, the aggregate U.S. farm sector remains in adequate financial shape though tighter than previous years, by several measures.

First, solvency measures such as debt-to-asset and debt-to-equity ratios, while seeing a modest recent rise, remain well below levels observed in the last farm crisis.

For instance, though above the historic lows of the early 2010s, debt-to-equity remains below levels observed from 1962 through 2003, a 41-year period.

Second, liquidity measures have tightened but also remain above the water line. The USDA essentially reports that the aggregate current ratio remains in positive territory though down significantly from the peak years. The decline in liquidity likely also explains the slight uptick in debt levels; the USDA has estimated an aggregate debt load increase of less than 2 percent from a year ago.

Finally, delinquency rates for non-real estate farm loans also remain historically low. According to the Federal Reserve Bank of Kansas City, the delinquency rate for agricultural loans held at commercial banks currently sits around 2 percent, up slightly from the valley observed in 2012 though still below recent averages.

California farm forecast: Mixed

In California, the largest contributor to the nation’s cash farm receipts, the outlook is somewhat mixed and depends heavily on region and industry.

Areas impacted by fires are understandably expected to experience a step back in farm income. Drought has also been a factor in several key production areas, with 2018 showing no signs of improvement.

In fact, NOAA estimated that from January to December, California’s acres showing signs of drought increased 48 percent.

In areas unaffected by fire and drought, gross cash receipts expectations vary by specific industry but in general look to be stable or slightly down from the previous year.

As an example, the USDA estimates gross cash receipts for the dairy industry to be down 9 percent from the previous year but estimates poultry receipts to be 7 percent higher. After several years of strong production, gross receipts for tree fruit and nuts are expected to be slightly lower. Likewise, vegetable gross receipts are expected to be down slightly, though consumption remains stable.

Similar to the broader farm economy, production expenses for California also increased, with the cost of labor of particular concern.

In Napa and Sonoma counties, key wine grape production areas, unemployment in 2018 has hovered near 2.5 percent, at historic lows. In other large agriculture-centric counties such as Fresno, Madera, Merced and Stanislaus counties, the labor market also tightened.

For example, in October the Bureau of Labor Statistics estimated unemployment in Fresno County was 6.3 percent, down from 2016 and 2017 levels of 9.0 and 7.2 percent, respectively.

Overall, California agricultural producers faced multiple challenges from fires, drought, trade issues, labor concerns, water rights issues, heightened supply and more in 2018. Piecing these parts together, final 2018 profit margins will likely be tighter than the previous year.

However, California farmers and ranchers have proved to be resilient over the years, in part due to the state’s very diverse commodity base. This diversity is expected to continue helping California overcome many of the recent challenges and keep it at the top of the agricultural-receipts list for all U.S. states.