As farm incomes drop, grocery deals rise

— -- Consumers are reaping some benefits as farmers take their biggest hit in 35 years: lower food prices at the supermarket.

The U.S. Department of Agriculture forecasts farm income of $49.1 billion in 2009 when adjusted for inflation. That would be a 39% drop from 2008, a record year when U.S. farmers earned $80.4 billion after expenses.

It would also be the worst annual percentage drop since 1983. In dollars, it would be the worst since 1974, adjusted for inflation.

Consumers are benefiting a little from farmers' troubles, says Richard Volpe, a researcher in the Department of Agricultural and Resource Economics at the University of California-Davis. Supermarket prices on pork and dairy products are down, he says, but nowhere near as much as the drop in prices farmers are getting for their products.

Volpe says competition among supermarkets battling for consumers in the recession has more to do with the falling food prices.

The average retail price of a gallon of milk was $2.98 in August, compared with $3.89 in August last year, according to the Bureau of Labor Statistics. Meanwhile, dairy farmers saw the average price they got for every 100 pounds of milk drop to $11.80 in August from $18.40 a year earlier, according to the USDA.

The average store price for a pound of bacon dropped from $3.84 to $3.59 from August of last year to this August. During that time, hog farmers saw the average price they got for every 100 pounds of pork drop from $60.70 to $39.70.

The recession, a decline in consumer demand worldwide, the swine flu and a sluggish market for corn-based ethanol have led to steep declines in prices for farm products, says Bob Young, chief economist for the Farm Bureau, which represents farmers.

"All of that is hitting at once," he says. "It's a bad year. This is the sharpest year-over-year decline we've seen. ... I expect to see some operations have to shut down."

The price drop has hit every sector of farming, but hog and dairy farmers have seen the sharpest declines. Both had benefited from exports to emerging markets abroad and were hurt by the global recession, says Mitch Morehart, an agricultural economist with the USDA. Meanwhile, he says, expenses remained high.