In 2007, the farm sector's net value added to the national economy is forecast to be $136.2 billion, up $31.8 billion over 2006, $36.5 billion over its 1997-2006 average, and besting the previous record of $85.9 billion for net farm income earned in 2004, according to the latest report from the USDA Economic Research Service.

Net farm income is forecast to be $87.5 billion, up $28.5 billion from 2006 and more than $30 billion above its 10-year average of $57.4 billion. This tops the previous record of $85.9 billion for net farm income earned in 2004.

Net cash income at $85.7 billion is forecast to be $17.8 billion (27 percent) above 2006 and only slightly below its prior record level of $85.8 billion established in 2005.

The values of both crop and livestock production (at $148.5 billion and $140 billion, respectively) are forecast to be at record levels in 2007. Both measures have not only trended steadily upward since 1970 but have been roughly equal over the entire period.

In general, 2007 proved to be a very good year for U.S. producers of agricultural commodities, both crops and livestock. The boost in 2007 U.S. farm income is primarily the result of high commodity prices. Prices for a number of major commodities were higher throughout the year, and unexpectedly high for wheat, soybeans and milk, among others.

The higher prices available to U.S. farmers are principally resulting from strong demand from the domestic biofuels industry and from foreign buyers. As a result, farmers have lots of production to sell at high prices, according to the USDA report.

The growing use of major crops in the production of biofuels continues to contribute to the demand for these commodities and to place upward pressure on commodity prices available to farmers. Corn is the prime beneficiary of the increased production of biofuels, but soybeans also are being used.

Currently, inadequate rainfall in competitor countries and increased international consumption are reducing world supplies and inventories for corn and soybeans. In addition, with international growth in population and rising incomes, global wheat consumption has exceeded production in recent years.

The combination of reduced food supplies and higher incomes in developing countries with large populations is translating into rising effective demand for farm commodities, regardless of where produced. In addition, the U.S. dollar has depreciated 25 percent or more against major foreign currencies in recent years. The lower value of the dollar amounts to greater effective demand for U.S. exports, boosting farm-level prices to a level that more than offsets the increase in production costs. On the other hand, the lower value of the dollar increases the costs of imported production inputs, particularly fuel and fertilizers (nitrogen and potash).

The rise in commodity prices boosts gross farm income, which is forecast to rise $50.3 billion in 2007 and to be $83.7 billion above its average over the prior 10 years (1997-2006). At the same time, production expenses are forecast to exceed their 10-year average by $53.5 billion, partially offsetting the rise in gross farm income. Net farm income is the difference between gross farm income and production expenses. Consequently, net farm income in 2007 is forecast to be more than $30 billion (52.6 percent) above its 10-year average of $57.4 billion.

Not all farmers, however, are sharing equally in the income gains. A number of states in the East, Southeast and Mountain regions continue to experience drought. For the most part, production in the states affected by drought do not account for enough farm production to have a major impact on national farm income measures. However, farmers in regions with significantly lower production benefit less from high commodity prices since they have less to sell.

Farmers in these regions are also typically seeing a greater rise in production costs for such things as irrigation and feed/hay. When gross farm income is lower and production costs are higher, net income can quickly turn negative for producers mired in drought conditions.

Total production expenses are forecast to rise $21.7 billion (9.3 percent) to a record-high $254.2 billion in 2007. If realized, the 2007 increase in expenses would be the largest on record. The rise in 2007 is the fifth straight increase of more than 4 percent.

Since a decrease in 2002, total expenses have risen $61.5 billion (32 percent). The price level of all production inputs combined is expected to climb 6 percent in 2007. Since 2002, input prices have risen 30 percent, which accounts for a large majority of the increase in total expenses. But input expenses also rise as output rises. Total output in 2007 is forecast to increase 3.4 percent, with crop output rising 4.9 percent and livestock output rising 1.4 percent.

The largest increase in an individual expense forecast is a $6.9 billion (22.5 percent) jump in feed expenses. Fertilizer and miscellaneous expenses are both predicted to rise more than $2.5 billion (19.5 percent and 9.5 percent respectively). Total labor should be up $1.6 billion (6.5 percent). Seed expenses are forecast up $1.5 billion (14 percent). Overall, 12 of the 16 expenses estimated will reach their highest level ever.

The principal crop-related expenses such as seed, fertilizers, and pesticides are forecast to be $37.5 billion, up $4.3 billion (13 percent) from 2006 and the fifth straight increase of a billion dollars or more. An increase in planted acres is one factor affecting these expenses in 2007.

The primary reason for the forecast $1.5 billion (14 percent) jump in seed expenses is the 12-percent forecast increase in prices paid for seed. The demand for corn seed caused by the increase in corn acreage is a major reason for the overall rise in seed prices. The price for all corn seed was 12.7 percent higher in April 2007 than a year earlier. Seed expenses have been rising rapidly since 1995 and seed prices have been climbing steadily since 1999. The rise in seed prices is tied to the greater use of GMO seeds, which are more expensive to produce and are in high demand.

Fertilizer expenses in 2007 are forecast to increase $2.6 billion (19.5 percent) to a record-high $15.9 billion due to an estimated 18-percent rise in fertilizer prices. The use of fertilizer in 2007 should be up 5 percent, with use on corn up 9.5 percent. Nitrogen is a key ingredient in all fertilizers, but corn in particular requires high applications of nitrogen. Natural gas is an essential input in the manufacturing of nitrogen, and has been increasing in price.

Expenditures for pesticides are forecast to rise 3.4 percent in 2007. Unlike fertilizer and seed expenses, which have risen significantly over the last 10 years, pesticide expenses have declined or been flat. Pesticide prices are predicted to rise only 1.2 percent in 2007. Applications of pesticides on field crops should increase by 1 percent in 2007. The shift in acreage from soybeans and cotton to corn will have offsetting effects in the use of herbicides and insecticides.