Washington, DC
March 5, 2008
Grain prices increased
dramatically in the last two years and are expected to remain
well above pre-2006 levels, report economists with the
Food and Agricultural
Policy Research Institute (FAPRI).
Higher prices increase revenues for crop producers but also
increase feed costs for livestock producers. Overall, net farm
income goes up, some government farm program payments drop and
consumers see higher food costs.
Those current and future farm changes are in a 68-page 2008
FAPRI Baseline Briefing Book delivered to the U.S. Congress and
U.S. Department of Agriculture today by the agricultural
economists from a multi-university think tank.
The independent analysis which projects the agricultural economy
for 10 years is requested annually by Congress.
“Agricultural market outlooks appear more uncertain than in past
years,” said Pat Westhoff, co-director of
Missouri University FAPRI,
Columbia, Mo. “Petroleum prices and biofuel policies drive most
of the changes.”
In 2007, high corn prices due to rising ethanol production led
to big increases in corn acreage at the expense of soybeans and
cotton.
This year, corn faces price competition from soybeans and wheat
in a “battle for acres,” Westhoff said. FAPRI expects 2008
soybean acreage to increase about 6 million acres with wheat
acreage increasing as well. Corn retreats 2 million acres from
its post-World War II high recorded in 2007.
Plantings of 12 major crops are expected to increase 4 million
acres in 2008, following a 3 million acre increase in 2007. Most
new acres come from double-crop soybeans and wheat, reduced
fallow ground and expiring contracts on Conservation Reserve
Program acres.
The Consumer Price Index for food rose 4 percent in 2007, more
than the CPI for all goods and services. “Much of that increase
came from rising energy prices, which increased costs all along
the marketing chain including the farm level,” said Scott Brown,
FAPRI livestock analyst.
The biggest change in agriculture is a shift to supplying
biofuels, both in corn for ethanol and soybeans for biodiesel.
FAPRI reports that trend will continue because of high petroleum
prices and mandates in energy legislation.
Corn receives major attention in the report. Ethanol demand for
corn almost doubled from 2005 to 2007, with nearly 4 billion
bushels to be used from the crop to be harvested this fall.
FAPRI projects corn for ethanol will almost equal the bushels
fed to U.S. livestock by 2015, Brown said.
“In spite of rising production costs, net returns to corn
farmers remain very high by historical standards,” Westhoff
said.
Soybean production dropped sharply last year, with an acreage
shift to corn. However strong domestic and international demand
for vegetable oil, caused in part by growing biodiesel
production in the United States and Europe, helped reverse that
shift.
Wheat prices increased when crop failures around the world led
to large exports of U.S. wheat. FAPRI expects wheat exports will
drop when foreign crops recover. Projected wheat prices remain
higher than in years before 2006, because of higher prices for
corn and other crops.
Since a farm bill has not passed Congress, the analysis assumes
present 2002 farm bill is extended. Major parts of the outlook
are influenced by the Energy Independence and Security Act
passed in December 2007 which mandates increased use of ethanol
and soydiesel.
FAPRI assumes current biofuel mandates, taxes and tariffs remain
in place. However, the economists assume cellulosic ethanol
mandates will be waived as advances in technology remain slow.
“There’s no doubt but what the energy bill has greater influence
on crop prices than a farm bill,” Westhoff said. “World energy
demand drives the economy, which shifts U.S. domestic uses and
world trade.”
Growth in ethanol production means distillers grains and other
coproducts displace increasing amounts of corn in feed rations.
In general, prices for coproducts keep pace with corn prices, so
they do not give large cost-savings as some expected, Brown
said.
Weakening value of the dollar has increased world demand for
U.S. agricultural products. Exports of soybean, corn remain high
as prices have increased less in foreign currencies than in
dollars.
The devalued dollar has not helped domestic livestock producers
who face record-level prices for grain and oilseed meal in
rations.
“Higher corn prices force feedlots to lower what they can pay
for feeder cattle,” Brown said. “Coming years could be
financially difficult as high and rising input costs coincide
with lower feeder cattle prices.”
Returns for beef producers have declined from the high levels in
2003-05. Cow-calf returns are expected to remain in the red for
most of the baseline years. After an increase the last two
years, beef cow numbers are projected to decline throughout the
baseline.
Hog producers face lower returns. Pork supplies remain high
through 2008, despite recent decisions to cut sow numbers, Brown
said. “Given expected input costs, hog prices need to average
$50-55 per hundredweight to provide historic average returns.”
FAPRI projects prices of $44 for finished hogs in 2008.
Dairy producers face lower prices after record prices of $19 per
hundred pounds for milk in 2007. Strong international demand
provides a cushion to an expected decline in milk prices, Brown
said.
“Projecting future prices was uncertain in the best of times,”
Brown said. “We assume average weather in the baseline; however
a drought in any year when grain stocks are tight would change
everything.
“We know we will be wrong, we just don’t know when and how
much.”
FAPRI no longer projects a single line on a commodity but
averages 500 what-if scenarios involving changes in weather,
exports and oil prices. That stochastic outlook helps economists
explain to Congress the risks and opportunities in a course of
action. “The difference between the 90th and 10th percentile can
be quite dramatic,” Brown said.
Food costs rose 4 percent last year which exceeded the overall
Consumer Price Index inflation. While all components of CPI for
food rose in 2007, the dairy, egg, and cereal and bakery goods
led the increase. The food CPI is expected to rise 3.7 percent
in 2008. However, food inflation increases should slow to 2.5
percent in 2009 and 2.1 percent by 2017.
While there is a correlation between farm value of commodities
and retail food prices, other factors influence food inflation
as well, Brown said. Recent fuel-related costs combined with
farm values to push food prices higher.
FAPRI at the University of Missouri in Columbia prepared the
briefing book, with help from other states. FAPRI at Iowa Sate
University gave international and crop insurance outlooks. Other
sectors include rice by the University of Arkansas, fruits and
vegetables by Arizona State University and cotton by Texas Tech
University. Texas A&M University translated national trends to
farm and ranch levels.
MU FAPRI is funded in part by the U.S. Congress and the MU
College of Agriculture, Food and Natural Resources.
Full report:
http://www.fapri.missouri.edu/outreach/publications/2008/FAPRI_MU_Report_03_08.pdf
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