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Looking ahead to 2014

2014 is setting up to be another interesting year in the agriculture industry, following a fairly profitable year in 2013 for many crop producers in the Upper Midwest, as well as for many livestock producers later in the year. 2013 will end without a new farm bill passed to replace the current bill that officially expired on Sept. 30, 2013, and with some deep concerns relative to the future of the renewable fuels industry. Following are some items that are likely to be on the forefront in the agriculture industry for 2014.

The New farm bill

The current farm bill, which was extended for one year at the end of 2012, expired on Sept. 30, 2013, and some programs will be discontinued without the passage of a new farm bill, or an extension of the current farm bill. Both the U.S. Senate and House passed versions of a new farm bill during 2013; however, there were major differences in the Nutrition Title (SNAP programs) and the Commodity Title (farm safety-net programs) of the legislation. The Senate and House Conference Committee has been meeting since mid-November, and appears close to having a compromise agreement on a new farm bill to put before the entire U.S. Senate and U.S. House for final approval. It is felt that many of the safety net programs in the new farm bill could still be implemented for the 2014 crop year, if the legislation is passed early in 2014.

The new farm bill will likely involve some major changes in the risk management (safety net) programs available to farm operators, and will eliminate the direct payments for corn, soybean and wheat producers, which have existed since the late 1990s. It appears that a strong crop insurance program will be the cornerstone risk management program of the new farm bill; however, it is likely that conservation compliance will be required for crop insurance participation in the future, similar to other government farm programs. The development of a new dairy support price program, which may include some supply management provisions, is still being negotiated. Other livestock producers also hope that some type of livestock assistance program is included in the next farm bill to assist with low profit years and major disasters, such as the South Dakota blizzard in 2013.

The next farm bill will likely lower the maximum acreage in the Conservation Reserve Program (CRP) acreage from the current level of 32 million acres down to a maximum of 24 million acres in CRP during the next five years, in order to increase crop production acreage in the U.S. Actually, the total number of acres in the CRP program has been dropping for several years, and is currently at approximately 25.6 million acres, which is down from 29.5 million acres in CRP, as recently as September, 2012. There are many other USDA programs for conservation, rural development, and export enhancement that may be discontinued, unless they are reauthorized by the new farm bill.

Renewable Fuels

2013 ended with a considerable amount of uncertainty in the renewable fuels industry. In late November, the U.S. Environmental Protection Agency (EPA) lowered the renewable fuels standard (RFS) requirements for 2014 from 18.15 billion gallons of renewable fuel to 15.21 billion gallons, representing a reduction of about 16 percent. This is the first time since the Energy Independence and Security Act was enacted in 2007 that EPA has adjusted the annual RFS requirements. The EPA proposal would lower the RFS for corn-based ethanol from a current level of 14.4 billion gallons for 2014 to a revised level of 13.01 billion gallons, as well as significant reductions in the requirements for bio-diesel and cellulosic ethanol. Farm operators and others have until Jan. 28, 2014, to respond to the proposed RFS requirements. The RFS changes being proposed EPA for renewable fuels could have long-term impacts on the ethanol and bio-diesel industries.

Crop Production

The breakeven cost of producing corn at trend line yields will likely be close to $4.50 per bushel, and near $11.00 per bushel for soybeans, for many Midwest crop producers in 2014. These are similar to 2012 levels, but compare to breakeven levels of just over $3.50 per bushel for corn and near $8.00 per bushel for soybeans as recently as 2008. The 2014 breakeven levels for some producers will likely be above $5.00 per bushel for corn and near $12.00 per bushel for soybeans. Local forward grain prices for the Fall of 2014 have declined significantly in recent months, and are now near $4.00 per bushel for corn and $10.50 per bushel for soybeans, which are below breakeven levels for many producers.

Cash rental rates for farm land have increased dramatically in the past two or three years in many areas of the Upper Midwest, and can be a large variable in the producer breakeven prices for corn and soybean production across the region. Approximately two-thirds of the farmland in the Upper Midwest is under some type of cash rental agreement. Farm operators need to look for ways to control crop expenses and manage cash rental rates for 2014, as well as put together a good grain risk management plan, which utilizes crop insurance and sound grain marketing strategies, in order to achieve breakeven and profitable price levels for the coming year.

Livestock Production

Profit margins in the livestock sector were challenged at the start of 2013, mainly due to high feed costs, but profit margins turned positive in the last half of 2013, as feed costs moderated. Livestock profitability looks to be fairly strong in 2014, with solid market prices anticipated for pork, beef and milk, along with continued lower feed costs. Most analysts expect demand for milk and meat products to remain quite strong in the coming year, both for domestic markets and export markets. The big question marks in the livestock sector for 2014 may related to the spread of the Porcine Epidemic Diarrhea virus (PEDv) disease in hog operations, completing U.S. trade agreements to keep export markets strong, and potential government regulations that could affect livestock production.

Land Values

Land values ended the year at record levels throughout most of the Midwest, including numerous farmland sales in southern Minnesota above $10,000 per acre during 2013. Certainly not all farmland is selling at those rates, but most tillable farmland in the Upper Midwest is being sold at higher levels than comparable land was a year or two ago. A recent, highly credible, land value survey from Iowa State University, released in early December, showed that average land values in Iowa increased by 5.1%, as compared to a year earlier. This was only the second time since 2003 that Iowa farmland values did not increase by 10% or more from one year to the next. The other year was 2009, when average land values actually declined by 2.2%. Interestingly, 14 counties in northwestern Iowa showed a decline in land values in December 2013, as compared to a year earlier, with an average decline of 3.9%. However, it should be pointed out that this is also the area of the state with the highest average land values ($10,960 per acre).

Very good farm profits in some areas for 2013, along with relatively low real estate interest rates, and high demand for farm land are likely to keep land prices fairly strong again in early 2014. However, continued low grain prices and reductions in farm profitability in 2014, along with potential increases in farm real estate interest rates, could cause land prices to moderate and decline slightly by the end of the year.

Best wishes in 2014 to everyone involved in the agriculture industry!

TAGS: Management
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