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Tuesday, March 06, 2012

Can You Manage These Financial Risks Over The Next 10 Years?


How would your farm’s operational budget survive a serious dip in commodity prices resulting from either large yields and carryover, or a major disruption of the global market such as a Middle Eastern conflict or oil supply issue?  Will this be a high or low revenue year, and will you be able to cover both variable and land costs if the commodity market volatility becomes a strain? As you prepare for the 2012 cropping season, make sure you have all of your bases covered.

Ahead of the planting season and the Farm Bill debate, the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri released its ten year projection of the farm economy, should current policies continue.  In brief the FAPRI economists concluded:

Prices for corn and other crops could fall if there are good growing conditions and yields increases along with acreage.  Price volatility will continue and corn prices could range from under $3.50 to above $6.00 in any given year.  Crop returns have increased as government support has declined, but variable expenses have also increased along with land costs.  Ethanol production will remain flat after reaching the blending limits, but also meeting the mandated production levels.  Future increases in biofuel production are uncertain.

While supplies of meat to the domestic market have declined sharply, the supplies of meat entering the international market have increased sharply.  Further domestic declines are expected due to consumer expense, but any moderation in feed costs will stabilize the price level.  Retail prices have been at record levels, along with slaughter prices, due to declining supplies and increased demand.

Farm income:
Farm income reached a record in 2011, but lower crop revenue and higher production costs will cause farm income to decline over the next several year. Actual net farm income will continue to be variable because of volatile prices, yields and expenses.  CCC outlays for agricultural support programs will probably be focused on crop insurance and the conservation reserve, but are expected to even out.

Policy assumptions:
Farm Bill provisions are expected to continue, including direct payments, target prices, acreage base eligibility, and loan rates, along with renewable fuel standards, and the conservation reserve.

Macroeconomic assumptions
Economic growth will remain below 2.5% through 2013, with a slow decline in the rate of unemployment, and very low rates for short term interest rates.  Oil prices will continue to climb through 2014, and then ease slightly, but will affect about every aspect of the food and agriculture industries.  Inflation is expected to remain under 2%, with slow increases in farm input costs, but lower feed prices will push down the overall Producer Price Index.

Feed use will again compete with ethanol use.  Corn exports grow as prices moderate and changing diets increase global livestock feed demand.  While recent low yields drew down stocks, more favorable growing conditions will result in rebuilding of stocks and lower prices.  Overall net returns from corn should remain high and support corn acres. 

Wheat stocks are much larger relative to use than is corn.  Increased production in 2012 could result in larger stocks in the coming year and will tie wheat to corn markets unless there is a significant shortfall.  Strong competition from the Black Sea will limit future exports.  Domestic feed use may increase if wheat prices compete with corn.  Prices and returns have increased as supplies of corn have been tight, but could fall depending on global grain yields.

China accounts for more than half of global imports and has caused price increases.  The balance of future growth in imports by China and Brazilian supplies will strongly influence US exports and prices.  Overall soybean exports are expected to grow at a modest pace.  The domestic crush will increase slowly in response to growing demand for oil and meal. Projected prices will remain above $11 per bushel, keeping net returns above the level set in 2011-12.  Soybean returns must remain strong to be competitive with corn, but actual prices are likely to vary considerably from year to year.

Land use:
Corn acreage increases above 93 million in 2012, and as prices moderate acreage will decline slightly.  Wheat area increases in 2012, along with soybean area.  With more favorable planting and growing conditions, the area planted to 12 major crops could increase by more than 5 million acres.  But if prices moderate, that area could decline after 2012.  In later years an expansion of warm season grasses for bioenergy could slightly reduce the area devoted to major crops and hay.

Despite high returns for calves, the number of beef cows continues to fall.  Dry weather in some states has kept the industry from responding to market signals.  Record returns are expected to continue through 2014 and the beef cow herd should grow.  Increasing tight supplies of calves will push up feeder calf prices, putting feed lots in a difficult financial position depending on feed costs.  Trade continues to be a bright spot for the industry with high levels of exports helped by a relatively weak dollar and tight global supplies of beef.

Even with strong prices, farrow to finish returns suffered from high feed costs, but prospects for profitability are bright and feed prices should fall.  As producers increase production profitability will turn downward.  Sow inventories should grow into 2014 with expansion cautious due to volatile feed prices.  Even with the sow herd 20% smaller than 20 years ago, production is 35% above 1992 due to productivity.  Consumers are consuming 12% less pork than 10 years ago.  Exports are expected to grow at a slower rate putting more pork onto the domestic market.

Government cost:
Projected spending averages about $9 billion per year.  The baseline does not included mandatory outlays for crop insurance, the SURE disaster program and certain conservation programs.  Crop insurance costs will vary with the weather and crop prices.  CRP spending will vary with rental rates.

Payments and Crop Insurance
Average projected prices are above levels that would trigger marketing loan or counter-cyclical payments.  High prices and limited participation mean ACRE payments are small and after 2013, they average over $700 million per year.  Higher coverages and crop prices have increased crop insurance premiums.  The average annual loss ratio, which has been 0.79 over the last 10 years, should increase to 0.87 over the next 10 years due to changes in rules to set premiums.  Projected payments to producers for crop insurance often exceed the value of direct payments.  For the 10 year period beginning in 2012, net USDA expenditures for crop insurance will total over $76 billion.

Farm receipts and expenses:
Cash receipts from program crops have more than doubled since 2005.  They will decline slightly in 2013 because of lower marketing year prices, but remain over $120 billion. Receipts for non-program crops will grow at an average rate of almost 3% per year.  Dairy and livestock cash receipts increased $46 billion between 2009 and 2011 and will increase further in 2012 for beef, but decline for dairy due to lower milk prices.  Hog and poultry receipts will be higher in 2012 due to higher market prices.  Farm production expenses increased almost 12% in 2011, led by sharp increases in feed, fertilizer, and fuel.  Lower crop prices should reduce feed expense in 2012 and 2013, but fertilizer and fuel prices will remain elevated.  Total production expenses increase by 3% in 2012 and by a slower rate in subsequent years.

Farm Income:
Gross cash income and expenses increase at a similar pace in the next 10 years, and nominal cash income about the same in 2021 as in 2011.  Crop and livestock receipts increase marginally in 2012 with lower prices reducing crop receipts in 2013.  Net cash income and net farm income decline slightly through 2015, but recover in later years. 

The outlook for the farm economy is generally positive, but with serious risks.  Net farm income peaked in 2011 and is projected to decline only slightly in 2012.  Weather-reduced yields in 2011 have contributed to high prices for several major crops. Prices could fall if more favorable weather results in increased crop production in 2012. After years of rapid growth, ethanol production is expected to remain fairly stable for the next two years. Meat supplies to the domestic market have declined dramatically in recent years, putting upward pressure on livestock and meat prices.  Crop insurance may account for a substantially larger share of total public support to the farm sector than in the past. High prices reduce the likelihood of large expenditures on some traditional farm programs.  Food price inflation increased in 2011, but is projected to slow later this year. By 2013, food prices increase at about the same rate as prices of other goods and services.

Posted by Stu Ellis on 03/06 at 12:53 AM | Permalink

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