South Dakota Farm Income Down

By Matthew Diersen

The overall South Dakota economy is stable based on aggregate data from the Bureau of Economic Analysis (BEA). Gross Domestic Product (GDP) in South Dakota, measured for the third quarter of 2015, was $46.6 billion and steady with a year earlier. Annual State Personal Income for 2015 was recently released and totaled $38.6 billion, unchanged from a year earlier. The latest unemployment rate for South Dakota was 3.2% in February, low by national standards (Labor Market Information Center, 2016). Holmquist and Diersen (2015) found similar growth rates of farm and non-farm measures of economic activity from 1998 to 2014 at the state level.

South Dakota GDP: Production agriculture down

Isolating production agriculture in the GDP for South Dakota for 2015 presents a stark contrast to levels observed in recent years. Agriculture, forestry, fishing, and hunting contributed $3.35 billion to GDP in the third quarter of 2015 (on an annualized basis). The agriculture category’s share of total GDP was thus 7%. The annual level for agriculture in 2014 was $5.09 billion and its share of GDP was above 10% from 2010 to 2014. The forestry, fishing and hunting categories are small and with less variability than production agriculture, which is best thought of as farming and ranching. Supporting agriculture-related industries are not included in the GDP agriculture category.

Farm-related measures from the BEA Personal Income data show a similar decline compared to the levels and shares from recent years. The BEA reports Farm earnings and Farm income at the state level. Both measures include wages, salaries and farm proprietor income, and differ slightly based on the accounting for employee benefits. In South Dakota, Farm Earnings were relatively high from 2011 to 2014 (see Figure 1.). The annual level of Farm earnings in South Dakota for 2015 is estimated at $1.16 billion or 3.0% of total Personal Income. In 2014 total Personal Income was $38.6 billion and Farm earnings totaled $2.67 billion, resulting in a 6.9% share for the farm sector. Variability in farm earnings is largely absorbed by farm proprietors, who may reduce spending, use prior savings or increase borrowing to smooth out the variability.

Farm Income Components

The large swings in agriculture are best understood by considering the components of farm income. The BEA provides a detailed state-level breakdown, Farm Income and Expenses, in late September for the prior year. Thus, last September was the first detailed breakdown for 2014. See Lenze (2015) for the latest commentary at the national level. The reporting delay is necessary as the BEA incorporates estimates from the USDA’s Economic Research Service (ERS), the Internal Revenue Service, and other sources as it prepares state-level breakdowns. The ERS estimates are only available so far for 2014 in the “Value added to the U.S. economy by the agriculture sector” state-level table. The ERS estimates are adjusted by the BEA for depreciation, corporate farm activity and patronage dividends. These tend to be small adjustments compared to revenue fluctuations at the state level.

At the state level, the major components of Farm Earnings would consist of cash receipts from sales of crops and livestock and of payments for production expenses such as feed and fertilizer. The components of receipts and production expenses that have changed the most have been cattle and corn. As cattle prices change, receipts vary, purchased livestock expenses vary and inventory values vary. As corn prices change, receipts vary and feed expenses vary. Corn receipts are quite variable as they follow changes in prices, acres and yields.

Farm-related components of earnings for 2015 will eventually be available, but will likely track expected national trends. The ERS forecasts various financial indicators for 2015 and 2016. They project that U.S. cash receipts fell 10.6% from 2014 to 2015 and will fall another 2.5% from 2015 to 2016. They also project that cash expenses fell 3.0% from 2014 to 2015 and will fall another 1.1% from 2015 to 2016. Applying these changes to the same components at the state level suggests that South Dakota cash receipts fell sharply from 2014 to 2015 even as expenses fell (see Table 1.). Assuming small declines in other income and assuming modest other adjustments imply farm earnings for 2015 of $1.2 billion and for 2016 of $1.1 billion. The extrapolated earnings for 2015 is consistent with the BEA estimated level of $1.16 billion. Such levels will most directly affect farm proprietor income until input costs decrease or receipts increase.