Agribusiness: Mixed-bag outlook for agriculture this year

Farm bill will have big effect when finalized

The current USDA baseline from the Economic Research Service creates a weak setting for agricultural-sector performance over the short-term future. This situation is the result of slow U.S. and global economic growth and a strong dollar. Over the longer run, stronger economic growth provides a foundation for strengthening agricultural exports, resulting in rising market prices and net farm income.

Net farm income in recent years has been supported near the average of the 1990s by large marketing loan benefits and additional federal funds for emergency and disaster assistance.

The most-important issue currently affecting the agricultural sector is the debate over the farm bill. Both the Senate and the House have passed their own versions that are widely divergent. The level of farm income that commodity producers will enjoy over the next five years is highly dependent on the outcome of deliberations in the conference committee. The White House seems to favor lower farm payment limits and freer markets. A good Web site to track farm-sector happenings is www.agweb.com.

The ERS thinks that farm income will be relatively level over the next five years but will depend on the farm bill that comes out of Congress. If government support payments are limited and target prices lowered, farm income could easily be lower in the future. There is a greater emphasis on conservation payments in both Congressional versions.

Domestic production is growing faster than domestic demand, putting greater emphasis on export markets. Export revenues account for 20 to 30 percent of U.S. farm cash receipts, a key factor in net farm income.

China is now a major player in international commodity markets because of its enormous size, influencing both supply and demand. China is among the world’s leading producers of rice, wheat, soybeans, hogs, beef, poultry and cotton. On the demand side, China’s population of 1.3 billion is becoming increasingly urbanized.

Competition in global markets will continue to be strong, with expanding production in a number of countries. Increasing exports from South America reflect its continuing conversion of land to crop land, particularly in Brazil.

A continuing strong U.S. dollar is a negative factor for U.S. agricultural competitiveness and constrains growth in exports. The dollar is assumed to stay strong as capital flows into the United States are attracted by relatively large financial returns. Bulk commodity, horticultural and vegetable/fruit trade are more sensitive to a strong dollar than are processed products.

Drought and range forage conditions are severely affecting the cattle market. Lack of adequate forage has resulted in the liquidation of part of the breeding herd. This has caused a short-run oversupply of slaughter animals (driving prices down) but augers well for higher prices in the future. Calf prices are already strong because of these conditions.

Hog prices should firm up over the next year. The industry is now very vertically integrated, resulting in production efficiencies that have dropped break-even costs into the mid- to upper-30-cents-per-pound range. Firming of prices is also expected in the sheep industry as more producers get out of the business and supplies shrink.

Corn prices are expected to firm slightly with ethanol production creating a potentially very bright outlook for corn producers. There are few reasons to expect winter wheat prices to get much higher in the near future as supply continues to be excessive.

Barley prices have dropped recently but locally the demand for malting barley continues to strengthen. There is significant uncertainty in the sunflower, dry bean and sugar beet industries. Producers of these commodities should follow ERS’s Situation and Outlook Reports in order to keep abreast of changing world supply/demand conditions.

Sorghum and potato prices are both in the boom phase of the boom/bust cycle and price decreases should be expected as more producers create an oversupply of product.

Hay prices are strong because of demand by recreational/hobby animals and poor forage conditions in much of the West and High Plains.

In summary, there are both strong and weak areas in the agriculture sector in Northern Colorado. Prices of some commodities are strong; others are weak because of oversupply conditions. The strength of overall farm commodity income will depend on the farm bill that comes out of Congress. Structural changes are occurring in the livestock industry that will result in further integration and branding of products. Change is a constant in agriculture as well as in the rest of our economy.

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