Farm Progress is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Farm income to drop — FAPRI projects

If numbers tell a story, then the latest “book” from the Food and Agricultural Policy Research Institute (FAPRI) tells an unsettling tale. For 2009, FAPRI’s well-respected analysts expect to see reductions in both crop and livestock receipts as well as a “modest turndown” in cost of production.

The overall impact, according to Patrick Westhoff, co-director of the institute and research associate professor at the University of Missouri, “will result in a significant drop in net farm income this year.”

Each year, at the behest of Congress, FAPRI prepares a set of baseline projections for the farm economy. The latest calculations and projections were sent to politicians the first week of March.

The report’s major points are “big swings in commodity prices over the last couple of years and the implications for both the farm economy and for consumers/taxpayers,” said Westhoff, shortly after the report’s release. “The large run-up in prices last year caused a very high level of receipts for the crop and livestock sectors in the country. But that was accompanied by very high costs of production, as well. The costs for fuel, fertilizer and other inputs also increased.”

On the consumer side, 2008 saw very high food price inflation — 5.5 percent, the fastest rate of inflation for food in many years. However, food price inflation has slowed in recent months and FAPRI currently projects a 2.7 percent food price inflation rate for 2009.

In trying to understand what happened over the last couple of years, the factors that drove up commodity prices are many. According to Westhoff, among the most important:

• Significant weather issues in a number of grain-producing countries in 2006 and 2007. “That limited overall supplies of grain products in world markets.”

• A rapid growth of incomes around the world. “That had been going on for a number of years and resulted in stronger demand for U.S. products and commodities around the world. That led to higher prices.”

• Government policies “had the effect of restricting the supplies available on world markets — especially during the big run-ups last spring.”

• Petroleum prices had a large run-up in 2008. “That made the cost of production (and) moving agricultural products around much higher. And that stimulated a very rapid expansion of the biofuel industry with expectations of even faster growth in the future.”

• The value of the dollar weakened quite a bit during 2007 and the first part of 2008.

Considering what’s happened since mid-2008, “everything I just talked about has gone in the opposite direction. Crops that were short in 2006-07 in Europe and Australia, for example, were much larger in 2008. The U.S. wheat crop was larger than many expected. Likewise, the value of the U.S. dollar has reversed and is now strengthening. The value of petroleum has fallen sharply and, of course, the overall (world) economic situation has weakened dramatically.”

All of that has come together to result in a much weaker situation for many commodity markets than was seen just a few months ago.

Looking forward

Looking forward, Westhoff said one of the major uncertainties is what will happen with the overall economy. “These baseline projections were prepared in January 2009. They therefore reflect the best information available at that time.”

FAPRI’s baseline projections “are premised on a census we take … (with a group) that has been doing projections for the macroeconomy for many years. They’re calling for a reduction in (the 2009 gross domestic product) of over 2 percent and a recovery in 2010. The 2010 recovery is very critical to the numbers you see in our baseline projections. Without that recovery, we’d be talking about lower prices for almost every product” discussed.

In terms of particular numbers in the baseline prices for the 2009-10 crops — “those we’ll harvest this fall” — corn will be around $3.74 per bushel; soybeans at $8.76 per bushel; and wheat at $5.30 per bushel. Those are all lower than prices seen over the last couple of years. But they’re much higher than the prices prior to 2007-08.

That’s a “kind of theme” throughout the baseline projections, said Westhoff. For the most part, “we’re looking at a bit weaker commodity markets over the next several years. But the prices will still be above the levels prior to 2007.”

ACRE and corn

The new farm bill’s ACRE program is an option for producers willing to “give up a portion of direct payments, counter-cyclical payments, marketing loan benefits, and to enroll all crops on their farm. If they do so, they’ll qualify for benefits if two things happen: if the average level of revenue for a particular crop in their state falls below a calculation based on recent averages of prices at the national level and yields at the state level; and they’ll have to have lower revenues on their farm than a recent average of that particular crop.”

FAPRI analysts studied a variety of potential scenarios under ACRE. It appears for corn, soybean and wheat producers “the average benefit to expect over the next four years is probably greater if they’re enrolled in the ACRE program. There are certainly exceptions to that rule and it depends on the evolution of prices and yields.”

USDA has released a baseline book of its own and, pointing to ethanol and the Renewable Fuels Standard as driving forces, projects slightly higher corn plantings than FAPRI.

Ethanol is a very important factor in the corn sector, agrees Westhoff, “and it has ramifications across the entire agricultural sector. We do expect to see continued growth in fuel ethanol production. We’re seeing less (of that) in the current marketing year, 2008-09 … primarily because of the much lower petroleum prices. … And there are actually a large number of (ethanol) plants sitting idle now because of profitability not being sufficient to justify their operation.”

Nevertheless, FAPRI expects fuel mandates will be satisfied by continued growth and production of corn-based ethanol. “We expect the use of the corn to make ethanol to grow from about 3.5 billion bushels this year to about 4 billion bushels in 2009 and 5.4 billion bushels by 2018.”

FAPRI doesn’t have a very large change in corn area for 2009 — “about 86 million acres, similar to USDA’s projections. For subsequent years, we see corn acreage increasing to about 91 million acres.”

ACRE participation will be “a good thing for most producers in the northern part of the country.”

On the other hand, when speaking with farmers, FAPRI economists have heard “a lot of concern and uncertainty” about the ACRE program. “I think it’s safe to say if you did a snapshot of farmers today — asked them what they’d choose to do — there would be low (ACRE) participation rates because of the uncertainty.”

However, with the ACRE sign-up not closing until June, “I expect a lot of additional information (on the program) to become available” and growers to become more amenable to the program.

ACRE and cotton

In contrast to corn and soybeans, FAPRI analysis shows cotton and rice — cotton in particular — fare much worse under ACRE. Payments to cotton producers under existing programs are “much larger than those under ACRE. We don’t expect ACRE to be very attractive to most cotton producers.”

Asked about FAPRI’s expectations that upland cotton acres will range between 8 million and 9 million acres for the next decade, Westhoff said since the numbers were crunched in January, “there have been additional signs of weakness in cotton demand in the United States and around the world. … Therefore, I wouldn’t be at all surprised if the actual cotton planted acreage for 2009 might turn out to be lower than the (report’s) projection. Going forward, if the world economy does eventually recover, we’d expect the weak cotton demand this year and for the near-term to turn around.

“Cotton is the sort of product that allows people to delay purchases of cotton and cotton products in bad times, as they are now. Once back in a positive economic situation, you’d expect to see resumed growth in cotton demand around the world.”

FAPRI expects “to see some uptick in the longer-term in underlying demand. It’s at least plausible we’ll get back to a bit better cotton profitability once past the next year, or two.”

Another difference between the FAPRI and USDA projections: FAPRI sees higher payouts for ACRE. While Westhoff has been unable to analyze the new USDA figures to find an explanation for the disparity, “there’s probably a bit of difference in how we think the variability of the sector’s prices might be over the next few years. … We think there’s a pretty high chance that there will be at least some years when revenues are less than longer-term averages. That doesn’t necessarily mean we have a more pessimistic overall scenario than USDA. It might just be we (see) more variability.”

While it is true FAPRI expects to see many farmers receive ACRE benefits, “there are uncertainties. If prices were to remain at current levels with average crops years over the next four years, there’s a very real possibility the program will pay out zero. There could be no benefits (for farmers) under that kind of circumstance.”

For more on FAPRI, or to see the baseline report, visit: FAPRI report.

e-mail: [email protected]

Hide comments


  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.