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FAPRI Reports Baseline Economic Projections To Congress

FAPRI Reports Baseline Economic Projections To Congress

Corn prices drop while net farm income remains strong; feed costs expected to be turning point for livestock producers

If average weather returns, look for a record 2013 corn crop—and for corn prices to drop $2 per bushel, says Pat Westhoff, University of Missouri Food and Agricultural Policy Research Institute director.

FAPRI prepared the annual baselines for submission to the U.S. Congress. Latest figures were released Friday.

Corn prices are projected at $5 per bushel, down from $7 for the crop harvested last fall. The FAPRI corn price depends on expected planting of 96.9 million acres, second highest since the 1930s and just under the 2012 record.

Corn prices drop while net farm income remains strong; feed costs expected to be turning point for livestock producers

FAPRI assumes average weather and a return to trend yields of 162 bushels per acre. That contrasts with 123 bushels in drought-stricken 2012. Last year, yields ran 23% below trend, the third year in a row below trend.

More corn cuts revenue, as record yields are offset by lower prices. Corn revenue drops in 2013 and 2014.

At the end of the 10-year baseline, corn prices stay just under $5 per bushel, still above pre-2007 levels.

With lower corn prices, demand returns for livestock feed and ethanol production. Both fell with high prices last year.

While FAPRI assumes average conditions, expect price volatility, Westhoff warned.

In a stochastic analysis, FAPRI computers draw 500 potential outcomes. Those show yearly corn prices that are below $3.50 per bushel 10% of the time and above $6 per bushel 10% of the time. Actual volatility and uncertainty may be greater, Westhoff said.

A rebound in global grain and oilseed supplies sharply lowers prices for soybean and wheat crops in 2013. Cotton prices stagnate in the face of large global stocks.

Soybean production was cut by drought, but not as much as corn. Late-season rains helped yields. For 2013, FAPRI estimates new highs in soybean production, exceeding the 2009 record. Prices drop sharply.~~~PAGE_BREAK_HERE~~~

Despite crop revenue drops, two measures suggest 2013 will be the third straight year of high income for farmers, Westhoff said.

Net farm income in 2013 could reach the highest level since the early 1970s, even after correcting for inflation.

The other indicator, net cash income, declines in 2013. The two measures differ because net farm income includes changes in the value of inventories, and bigger crops should boost the amount of grain owned by farmers at year-end.

Federal crop insurance plays into a bump in income. The drought coverage payments exceed usual program payments from the federal Commodity Credit Corporation.

For the baseline, FAPRI assumes continuation of current farm law. That could mean CCC outlays of about $9 billion per year over the baseline. About $6 billion goes to major crop programs.

While revenues are high, farm input costs rose by 55% over the last six years, far higher than overall inflation. However, feed costs are expected to decline if 2013 brings average crop yields. Increased input costs moderate then slowly rise through 2022.

Both oil and natural gas prices dropped in the recession. However, oil prices rebounded and remain high, while natural gas prices dropped and stay well below pre-recession levels. Fertilizer prices increase, but remain below 2008 peak levels.

In land use, good planting-time weather and high prices pulled another 10 million acres into crops in 2012. Total planted area remains high in 2013, but declines with lower prices in 2014. Conservation Reserve acreage drops again in 2013.~~~PAGE_BREAK_HERE~~~

Analysis also includes estimates for beef, dairy

Scott Brown, University of Missouri economist, also reported to House and Senate agriculture committees baseline livestock projections for the next decade, finding the pounds of meat produced in the United States will drop in 2013 for the second time in five years.

Livestock farmers struggle to fill growing world meat demand, not because of low prices but because of high costs, Brown said.

"When we look at 2013, the big issue for livestock and dairy farmers is feed costs. If we get a decent crop in the bin this fall, 2013 and beyond looks much better," he noted.

Crops have produced below-trend-line yields for three years, with 2012 bringing lowest yields.

"Having the worst drought in decades mattered a lot," Brown said. "Many livestock farmers remain in business, hoping feed costs subside, bringing a better financial situation."

Size of U.S. beef herds dropped in the face of less forage and feed. On the hog side, sow inventory remained stable despite sharp increases in feed costs.

Weather remains a big unknown in price projections. For their analysis, MU economists assume normal weather ahead.

"Producers see record livestock prices, but no record profits," Brown said. "Market signals encourage increasing cow herds. Even with good beef prices available, it takes time to rebuild cow herds.

"For cow-calf producers, it is more than feed costs when forage was not available in drought-stricken areas." Producers remain concerned about available pasture.~~~PAGE_BREAK_HERE~~~

For years, beef dominated the meat industry in terms of production, Brown said. As recently as 1995, beef was tops. However, by the fourth quarter of 2013, pork production may eclipse beef for the first time since 1962.

More than costs are in play in the baseline. The general economy remains a big unknown in the projections.

"The U.S. needs economic growth to sustain record prices," Brown said. "Meat prices have stayed strong in the worst economic downturn in decades."

If anything causes job growth to slow or if the economy heads into recession, those meat prices can't be sustained.

Brown doesn't expect inflationary food prices. "Beef prices were up 49% in 2012, compared to 2000-2006," Brown said. "The challenge will be to maintain prices."

U.S. consumers have changed eating habits, reducing meat consumption by 20 pounds per person. Mainly, that drop comes from lower availability. If feed prices decline, meat supplies should grow.

At the same time, growing international demand takes more meat, particularly high-quality beef, out of this country. That export demand, especially from the Asia/Pacific region, grows with rising middle-class earnings.

"Economies of those developing countries show real growth of 6 to 7% per year. That helps our meat sales."

Increasingly, U.S. dairy products compete in the world market, Brown said. Now, the U.S. exports half of its nonfat dry milk. "Dairy farmers are garnering a larger share of the international trade."

As domestic fluid milk consumption declines, that export trade becomes essential.

Dairy producers faced high feed costs in times of low and volatile milk prices. While milk prices recovered in late 2012, farm receipts remained below cost of production for many producers.

"Like livestock producers, dairy producers need a larger projected crop in 2013 to lower future feed costs and improve net returns."

In 2012, feed costs approached $64 billion, more than double 2006.

The analysis is included in "U.S. Baseline Briefing Book: Projections for Agricultural and Biofuel Markets." The 50-page book was prepared by the team of MU FAPRI and Agricultural Markets and Policy in the MU College of Agriculture, Food and Natural Resources.

The book is on the MU FAPRI website at

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