Kent Theisse

January 4, 2010

6 Min Read

The coming year is setting up to be another challenging year in the agriculture industry, following a very difficult year in 2009 – especially in the livestock sector – and in areas of the Midwest that are still battling to complete the 2009 corn harvest. Following are some items that are likely to be on the forefront in the agriculture industry for 2010:

Crop Production – The breakeven cost of producing corn at trend line yields will likely be close to $4/bu. for many producers again in 2010, and near $8.50/bu. for soybeans. These breakeven levels are similar to 2009 levels; however, they compare to breakeven prices of $3-3.30/bu. for corn in 2008, and just over $6/bu. for soybeans. As recently as 2006, the breakeven prices were approximately $2.25 for corn, and below $5 for soybeans. Producers need to look for ways to control crop expenses for 2010, as well as put together a good grain risk management plan that utilizes crop insurance and sound grain marketing strategies. It is also a good idea for farm operators to develop a good crop budget or cash flow statement to determine breakeven and profitable price levels.

Crop producers also need to pay attention to the level of cash rental rates are for 2010, and may want to consider a flexible cash lease as an alternative to a straight cash rent lease. A good flex leaseadjusts the final land rental payment, based on actual crop yields and prices during the year of production. There are many good examples of flexible cash leasesand sample cash rental lease agreementsavailable. It is important for producers to know their breakeven price before finalizing land rental rates. Producers also need to be very wary of entering into long-term land rental agreements with fixed cash rental rates beyond 2010, which may add considerable financial risk in future years.

Livestock Production – Even though livestock profit margins remain quite tight to negative at the end of 2009, there are some signs that profits could improve by mid-year in 2010, with some expected improvement in export markets and stronger futures prices for livestock sales. The big question mark will be what happens to feed costs in 2010, which will likely be impacted by final 2009 crop production numbers, grain quality, crop exports, and 2010 planting intentions. Livestock producers may want to take advantage of lower corn and soybean meal prices to lock-in a portion of their feed needs for 2010. Again, watching breakeven market price levels is important when making forward price decisions for marketing hogs and cattle. Availability of credit could also become a major issue during 2010 for swine, dairy and beef producers in many areas of the U.S.

Renewable Fuels Last year (2008) and much of 2009 have been very challenging times for the renewable fuels industry, as the industry dealt with high input costs, unstable fuel prices and government uncertainty. Profitability in the corn ethanol industry improved late in 2009, as ethanol plants took advantage of locking-in some lower corn prices, and were able to receive some improved prices for the ethanol produced. The big key to the future of the U.S. renewable fuels industry will likely depend on world oil prices and crop prices for 2010, and on U.S. government policy for the long-term. The new administration, especially the Environmental Protection Agency (EPA) has been reluctant to support ethanol and biodiesel in recent months. The EPA has delayed any decisions on expanding gasoline blends beyond the current E-10 blends to at least mid-year in 2010. The ethanol industry had hoped to have the blend percentage increased to E-15 by the end of 2009, which would greatly help to strengthen ethanol demand for the future. Research and development on cellulosic ethanol continues; however, it appears that we are still a few years away from having a significant amount of ethanol produced from cellulosic sources.

Government Programs – The Average Crop Revenue Election (ACRE) program, which was initiated in the 2008 Farm Bill, was fully implemented during the 2009 crop year. A very low percentage of corn and soybean producers in the Midwest enrolled in ACRE for 2009; so a large majority of crop producers will again face a decision on whether or not to enroll in ACRE again for the 2010 crop year. Producers who had crop losses in 2009 may be able to take advantage of the Supplemental Revenue Assistance Payments (SURE) program, which was the permanent disaster program initiated in the 2008 Farm Bill, to receive addition crop revenues for 2009. USDA has also made adjustments in the Conservation Reserve Program (CRP) to bring the total CRP acreage under 32 million acres, as stipulated by the 2008 Farm Bill, which is a reduction from approximately 36 million acres a few years ago.

Climate Change – The U.S. House of Representatives passed a somewhat controversial Climate Change Bill (HR-2454) by a narrow margin in late June 2009. HR-2454 would cap carbon emissions at 17% below 2005 levels by 2020, 42% below by 2030 and 83% below by 2050. The bill also creates a so-called cap-and-trade system, through which a company or business could purchase carbon allowances (credits) from other businesses and industries that reduced carbon emissions through their normal operations. The legislation also calls for 15% of electrical energy in the U.S. to come from renewable sources by 2020, such as wind and solar. In early December 2009, the EPA announced the determination that greenhouse gases (GHG), including carbon dioxide and methane, “threaten the public health and welfare of the American people.” EPA made this determination based on a 2007 U.S. Supreme Court ruling that allowed GHG’s to be regulated under Clean Air Act regulations.

The U.S. Senate has held committee hearings on the Senate version of legislation (S-1733), but has not reach consensus on a final climate change bill. Once a bill passes the Senate, the differences with the House version of the bill will have to be worked out in conference committee, before a final climate change bill can be considered for passage. The proposed climate change legislation – and the so called carbon cap and trade aspects of the legislation – has become quite controversial in many areas of the U.S., especially related to some specific industries, including the agriculture industry. This legislation could have a bigger and more lasting impact on the future of the U.S. agriculture industry than any recent farm bill, or any other legislation enacted by Congress in recent decades. Farm operators need to educate themselves about the potential impacts of this legislation by reading print and web-based information and attending informational meetings, and should contact their Congressional offices regarding potential impacts of the proposed climate change legislation.

Best wishes in 2010 to everyone involved in the agriculture industry!

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at [email protected].

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