Where Will the Farm Economy be Going for the Next Decade?
Monday, March 14th, 2011
Economists at the Food and Agricultural Policy Research Institute at the University of Missouri took the cloak from their crystal ball and reported to Congress what farmers and consumers should expect over the next year and the next 10 years. Consumers should expect a 4% rise in food prices, but farmers should expect quite a few dynamics in the commodity markets. Here is what FAPRI says….
One of the main global economic drivers cited by FAPRI is an expectation for moderate economic growth for the US and the other world economies, with an 8% rate forecast for China for each of the next 6 years.
Within the crop sector of the US farm economy, FAPRI says the tight supplies of corn, beans, and cotton have contributed to higher prices, and with an increase of planting to 258 million acres for the 13 major crops, stocks of corn and cotton should increase over the next two years. However they are still short enough to be sensitive to supply or demand shocks. The 8 million acre increase will apply to corn, beans, wheat and cotton. Regarding ethanol, use will dip slightly going into next year because of the expected expiration of the 45 cent tax credit, then resume its upward trend surpassing the 10% blend wall in 2013-14.
Higher corn prices for the current marketing year make up for lower yields last summer and will result in record high receipts per acre. For the old crop onward, receipts per acre should remain at or above $800, with variable costs expected at less than half of the value of the corn. Beginning with the current wheat crop, total use should start to exceed production, with stocks being drawn down. Foreign supplies should remain tight, helping increase US wheat exports. Net returns for wheat should remain at $250 per acre or above, with variable costs rising from $100 to $150 per acre by 2020. For soybeans, Chinese imports have been driving the demand and the price, but US price increases should slow because demand will slow. The crush will increase due to rising demand for oil and meal. Soybean prices should remain above $500 per acre, with variable costs less than $150 per acre.
Within the livestock sector, meat production has remained steady, held back by the recession. While higher prices are expected in 2011, production costs will be higher as well. FAPRI says prices will strengthen over the next few years with record high prices for feeder calves, fat cattle and hogs, with higher consumer prices for meat and dairy production. Foreign demand for US meat will remain high despite higher prices, which have been mitigated by the lower value of the dollar.
Beef production will continue to decline through 2013, and then begin to increase to 2020. With high foreign demand for beef, less will be available for US consumers. Cow-calf returns in 2011 should return to the average for the past 20 years and remain above $40 per cow for the next five years before fading to loss levels in 2017. Beef exports will remain strong, but growth will slow due to higher prices. Pork receipts should remain at or above $60/cwt through 2020, with profits through 2014, breakeven levels through 2016, then profitability through 2020. Pork production and domestic production are both expected to increase, but exports will not expand as rapidly as they have for the past few years.
Farm program payments that reached $20 billion in 2005 and 2006 have settled back to the $10 billion mark and will remain steady through 2020. Crop insurance outlays will be $70 billion over the 10 years, kept high by higher prices for insured crops. Net farm income may reach a record $100 billion in 2011. FAPRI says the coming decade will see steady growth for both income and costs, leaving a steady profit margin. The lower prices for commodities the past two years have reduced food price inflation. However, higher prices for many commodities and petroleum are expected to push food prices up by 4.2% during the present year, and falling back to 2% after 2012.
USDA farm policy for the next 10 years would have all farm bill provisions expiring on schedule along with the ethanol tax credit, and restrictions for corn being used for ethanol after the 15 billion gallon mark.
Within the general economy, inflation is expected to remain about 2%, but unemployment will be slow to decline, and that will have a negative impact on the demand for meat and dairy products. Real GDP growth is expected to continue at 3% per year, but consumer spending will increase at a slow rate. Farm input costs will continue to rise, including fertilizer prices. While many input costs will quickly rise because of higher energy prices, their rate of growth will slow after 2012 because energy price growth will also slow.
Food price inflation, which was at .5% in 2010 and the least since 1962, will be at 5% in 2011 due to higher commodity prices and energy prices. The rates will fade back to the 2% level in 2013 and remain there through 2020. While commodity prices take most of the blame for food price inflation, there is a stronger correlation between food price inflation and the cost of transforming raw farm production into consumer ready food regardless of commodity prices. The highest of the costs is labor, followed by packaging and energy. Higher meat prices will be the most notable because of higher feed prices. However longer term food inflation is expected to approximate that of the general consumer price index.
CCC outlays, which had been $20 billion in 2005 and 2006, will remain below the $10 billion mark through 2020, but that does not include crop insurance and the SURE disaster program. When those are added, total payments to farmers will be about $20 billion per year with slow growth to $22 billion by 2020. Direct payments do not vary and will remain at $5 billion per year, with ACRE payments pushing total farm safety net payments to $6 billion per year every year. Crop insurance subsidies have risen with higher grain prices with the loss ratio increasing from .80 for the past 10 years to .86 for the next 10 years. With the increased importance of crop insurance, indemnity payments will soon equal direct payments and remain at that $5 billion level annually.
Cash receipts from crop sales that were $60 billion in 2006, will be double that amount in 2011 and continue above $120 billion per year. Dairy and livestock receipts will continue to grow after bottoming out in 2009. Overall farm production costs, which declined in 2009, will also rise with steady, but slow upward pressure. Farm income recovered in 2010, and will continue that trend, with cash expenses continuing upward, with a $100 billion margin per year. In 2011, net cash income will exceed $100 billion for the first time, and net farm income will reach record high levels.
Following a short crop production year in 2010, increased production and stocks are anticipated in 2011, however grain prices will remain high and that will lead to higher meat prices along with lower beef production. The higher prices for all commodities will lead to record high income for agriculture, exceeding $100 billion for the first time ever and continuing at that margin through 2020.