AGRICULTURAL CONDITIONS

 

AND TRENDS

 

 

 

 

 

 

 

 

 

July 21, 2006

 

 

 

 

 

 

 

 

 

 

 

 

A biannual report prepared by Steven S. Vickner, Ph.D., and Tyler J. Bowles, Ph.D., Department of Economics, Utah State University, for Zions Agricultural Finance.

 

 

General Agricultural Issues

 

            While higher energy prices will provide additional markets (e.g., ethanol and bio-diesel) primarily for corn and soybean farmers, the net effect of higher energy prices on agricultural producers will be overwhelmingly negative for the next few years.  The current structure of U.S. agricultural production has developed over decades of generally low energy prices.  This energy-intensive structure cannot change overnight.  Agricultural producers, therefore, will incur a significant burden if high energy prices persist, which appears to be the consensus expectation.  Before addressing more specifically the effects of higher energy prices on U.S. agriculture, let us first address the latter issue: has a discrete upward shift occurred in the trend line of energy (primarily oil and natural gas) prices?

            Federal Reserve Chairman, Ben S. Bernanke who, by the way, has available to him the best experts on the topic, discussed the issue of high energy prices in a speech before the Economic Club of Chicago on June 19, 2006.  He concluded, “Thus, unlike in earlier episodes, the significantly higher relative price of energy that we are now experiencing is expected to be relatively long lasting and thus will likely prompt more significant adjustments by households and business over time.”  He reminds us that the price of energy is not exempt from the immutable laws of supply and demand, and that while demand has and likely will continue to grow at a strong rate, “. . . whether substantial new sources of production [of oil and natural gas] can be made available over the next five years or so is in some doubt.”  Hence, a growing demand for energy without a commensurate increase in energy supplies will continue to put upward pressure on energy prices. Where does this leave agriculture over these next five or so years?

            Agricultural markets are notoriously competitive, which leaves producers with essentially no ability to pass increased costs on in the form of higher prices.  Increases in energy costs, therefore, come directly out of the bottom line.  Given the equally notorious thin profit margins in agriculture, this news does not bode well for farmers.

            The USDA reports that across the agricultural sector as a whole, total energy expenditures, which would include the cost of inputs (e.g., nitrogen fertilizer), account for 15% of operating costs.[1]  Hence, a 100% increase in energy costs, which is the approximate increase over the past few years, will cause a 15% increase in operating costs.  Clearly, a cost increase of this magnitude, ceteris paribus, would be hard to absorb for most agricultural producers.  The USDA also provides information on energy costs for various commodities.  These data suggest that wheat and food grain producers are the most vulnerable to higher energy prices. 

            A recent study by the University of California Giannini Foundation provides additional detail concerning the effects of higher energy prices on California agriculture.[2]  Maintaining $31.8 billion in cash receipts from the sale of agricultural commodities, California is ranked as our nation’s largest agricultural economy. As agricultural technology is somewhat homogenous across geographic regions, these results from California are somewhat representative.  Using a rather sophisticated model and data set, the Giannini study develops estimates of the “global effect” of higher energy prices (i.e., the effect on costs from considering direct operating expenses, input prices, and cost of processing and distribution) on various commodities and sectors.  The conclusion is that there is a great deal of variability across agricultural activities regarding the effects of energy price shocks and that, as a whole, the agricultural sector is affected more by higher energy prices than most other sectors.

            There is a consensus that higher energy prices likely will persist.  Further, critical analysis suggests these higher prices will hurt farm-sector profits more than most other sectors of the U.S. economy.  This apparent fact, along with the higher interest rate environment that has emerged, will put additional financial pressure on the U.S. farm sector over the coming years.

            Consequently, the USDA is forecasting that 2006 net farm income will drop to $56.2 billion, far below the record levels of the last two years.  Table 1 catalogs the USDA’s most recent forecast of net farm and net cash income. Total cash receipts are expected to fall $7.3 billion to $231.7 billion in 2006. Nearly two-thirds of the decline in revenue will come from the crop sector; 2006 crop revenues are predicted to fall to roughly 2003 levels due to lower production and prices for both soybeans and corn in the 2005/2006 marketing year (see Tables 3 and 4). Due to lower prices, livestock revenue is also expected to decline but only by 2.1 percent to $122.3 billion. Also putting downward pressure on forecasted net farm income is a $4.5 billion reduction in direct government payments and, as mentioned earlier, an-energy driven $8.1 billion increase in total production expenses (i.e., for fuel and fertilizers). 

Despite falling revenues and increasing costs, the financial position or structure of the farm economy is expected to be quite stable. Table 2 catalogs the elements of the balance sheet of the U.S. farm sector. While both asset and debt values are forecasted to increase, farm equity is predicted to climb 5.5 percent to $1.5 trillion indicating a faster growth rate in asset appreciation. Moreover, the debt-to-equity and debt-to-asset ratios are both expected to decline slightly to their lowest levels this decade to 15.1 and 13.1 percent, respectively.

 

Table 1.  Income Statement of the U.S. Farm Sector

                                                                                                                                                                                                               

 

                                                                        2000           2001           2002           2003           2004           2005^F          2006^F

                                                                                                                                                                                                               

                                                                                           - - - - - - - - - - - - - - - - - - - - - - - $ billion - - - - - - - - - - - - - - - - - - - - -       

 

Cash income statement

1.  Cash receipts                                             192.1          200.1          195.0          216.6          241.2          239.0          231.7

     Crops                                                           92.5            93.4          101.0          111.0          117.8          114.1          109.4

     Livestock                                                      99.6          106.7            94.0          105.6          123.5          124.9          122.3

 

2.  Direct government payments                    22.9            20.7            11.2            17.2            13.3            23.0            18.5

 

3.  Farm-related income                                   13.7            14.8            14.8            15.7            17.2            17.5            18.0

 

4.  Gross cash income (1+2+3)                     228.7          235.6          221.0          249.5          271.7          279.5          268.2

 

5.  Cash expenses                                           172.0        1760             171.6          177.9          186.2          196.7          203.5

 

6.  NET CASH INCOME (4-5)                        56.7            59.5            49.5            71.6            85.5            82.8            64.8

 

Farm income statement:

7.  Gross cash income (1+2+3)                     228.7          235.6          221.0          249.5          271.7          279.5          268.2

8.  Nonmoney income                                      11.0            11.6            12.3            12.8            13.6            14.5            15.5

9.  Inventory adjustment                                   1.6              1.1             (3.4)            (2.5)             7.0             (0.3)             1.7

 

10. Total gross income (7+8+9)                    241.3          248.3          229.9          259.8          292.3          293.6          285.4

 

11. Total expenses                                         193.4          197.7          193.4          200.3          209.8          221.1          229.2

 

12 NET FARM INCOME (10-11)                   47.9            50.6            36.6            59.5            82.5            72.6            56.2

                                                                                                                                                                                                               

 

Source:  USDA Economic Research Service                   F = forecast.

 

Table 2.  Balance Sheet of the U.S. Farm Sector

                                                                                                                                                           

 

                                                                        2000           2001           2002           2003           2004           2005^F          2006^F

                                                                                                                                                                                                               

                                                                             - - - - - - - - - - - - - - - - - - - - - - - - - - $ million - - - - - - - - - - - - - - - - - - - - - - - -     

 

Farm assets:

                                                                      1,203,215   1,255,926   1,304,049   1,378,757   1,500,830   1,589,467   1,671,637

 

    Real estate                                                    946,428      996,242   1,045,655   1,111,777   1,227,060   1,310,600   1,395,800

    Livestock and poultry                                    76,788        78,536        75,621        78,540        79,420        79,422        75,623

    Machinery and motor vehicles                       90,105        92,804        93,582        95,944        98,715      101,676      103,000

    Crops stored                                                  27,932        25,239        23,114        24,429        24,435        24,433        23,114

    Purchased inputs                                              4,896          4,212          5,632          5,627          5,700          5,871          5,900

    Financial assets                                              57,067        58,893        60,445        62,440        65,500        67,465        68,200

 

Farm debt:                                                        177,637      185,703      193,312      197,998      206,945      212,613      218,717

    Real estate:

      Farm Credit System                                     29,692        32,855        37,815        40,095        43,044        45,083              ----

      Farm Service Agency                                     3,418          3,347          3,181          2,848          2,610          2,447              ----

      Commercial banks                                        29,757        31,082        33,060        35,126        38,063        40,164              ----

      Life insurance companies                             11,053        11,205        11,421        11,597        11,894        12,102              ----

      Individuals and others                                  17,188        17,519        17,880        18,316        18,682        19,381              ----

         Total                                                          91,108        96,008      103,356      107,981      114,293      119,117      122,929

 

    Nonreal estate:

      Farm Credit System                                     16,687        19,229        19,735        20,097        20,137        20,338              ----

      Farm Service Agency                                     4,208          4,151          3,973          3,807          3,374          3,104              ----

      Commercial banks                                        44,854        45,025        44,344        43,539        45,664        45,578              ----

      Individuals and others                                  20,779        21,289        21,903        22,574        23,477        24,416              ----

         Total                                                          86,528        89,694        89,955        90,017        92,652        93,436        95,788

 

Farm equity                                                   1,025,578   1,070,224   1,110,738   1,180,759   1,293,885   1,376,854   1,452,920

 

                                                                                                                                    Percent

 

Selected ratios:

    Debt-to-equity                                                   17.3            17.4            17.4            16.8            16.0            15.4            15.1

    Debt-to-asset                                                     14.8            14.8            14.8            14.4            13.8            13.4            13.1

                                                                                                                                                                                                               

 

Source:  USDA Economic Research Service.                F = forecast.

 

Commodity Trends

Soybeans

            Table 3 summarizes key supply and demand metrics characterizing the domestic soybean complex. The USDA has forecasted soybean production to fall about 2.5 percent this marketing year to 3.010 billion bushels. Exports and crush uses are both forecasted up, but seed and feed demands are anticipated to fall leaving ending stocks up about 2.8 percent. Due to dry weather, yields are forecasted to fall.[3] However, blooming and setting pods, at 38 and 7 percent of total acreage respectively, were both well above average. Forecasted yields of 40.7 bushels per acre are roughly 6 percent lower than last year implying acreage harvested of 73.9 million acres (i.e., 3.010 billion bushels/40.7 bushels per acre) reminiscent of two years ago. The forecasted price interval for the 2006/2007 marketing year was reduced by a dime to $5.00-6.00 per bushel.

 

Table 3.  U.S. Soybean Marketing Year Statistics/Forecasts

                                                                                                                                                           

 

Marketing                                                                                                  Seed &     Ending             Yield       Farm Price

Year                        Production             Exports                 Crush         Feed         Stocks              (bu/ac)       ($/bu)

                                                                                                                                                                                                               

                                                      - - - - - - - - - - - - - - - - - - - - - - - - - - - - Million bushels - - - - - - - - - - - - - - - - - - - - - - - - - -        

 

00/01                              2,758                        996                   1,640              168            248                    38.1           4.54

01/02                              2,891                     1,064                   1,700              169            208                    39.6           4.38

02/03                              2,756                     1,044                   1,615              131            178                    38.0           5.53

03/04                              2,454                        887                   1,530              109            112                    33.9           7.34

04/05                              3,124                     1,103                   1,696              187            256                    42.2           5.74

05/06^E                            3,086                        905                   1,720              176            545                    43.3           5.65

06/07^F                            3,010                     1,090                   1,750              159            560                    40.7           5.00-6.00

                                                                                                                                                                                                               

 

Note: Marketing year begins September 1. One bushel of soybeans equals 60 pounds.   F = forecast.   E = estimate.

Note: To obtain acres harvested, divide production by yield.

Source: Oil Crops Outlook (USDA Economic Research Service, July 13, 2006).

 

Corn

 

            The USDA forecasts production for our nation’s most important feed grain to fall 3.3 percent to 10.740 billion bushels putting upward pressure on corn prices. Moreover, increased export and FSI (food, seed or industrial uses such as ethanol production) demands are pulling up prices as well. In fact, FSI as a percentage of production is roughly 30 percent, which is 6 percentage points higher than the previous marketing year. Demand for corn grain used in livestock rations fell 50 million bushels. Yields are expected to increase three-quarters of a percent to 149.0 bushels per acre, implying less acres harvested (72.1 million acres) than the previous marketing year (75.1 million acres). Less corn acreage is not unexpected given lower corn prices last season and anticipated rising production costs this growing season. As of July 11^th nearly one-fourth of corn acreage surpassed the silking stage, yet dry conditions again hurt soil moisture levels. Corn prices are expected to increase; the most recent forecast interval is $2.25-2.65 per bushel.

 

Table 4.  U.S. Corn Marketing Year Statistics/Forecasts

                                                                                                                                                           

 

Marketing                                                                                                                  Ending               Yield         Farm Price

Year                        Production             Exports                 FSI              Feed       Stocks                (bu/ac)     ($/bu)

                                                                                                                                                                                                               

                - - - - - - - - - - - - - - - - - - - - - - - - - - Million Bushels - - - - - - - - - - - - - - - - - - - - - - - - - - - -      

 

00/01                              9,915                     1,941                   1,957           5,842         1,899                  136.9           1.85

01/02                              9,503                     1,905                   2,046           5,864         1,596                  138.2           1.97

02/03                              8,967                     1,588                   2,340           5,563         1,087                  129.3           2.32

03/04                            10,089                     1,900                   2,537           5,795            958                  142.2           2.42

04/05                            11,807                     1,814                   2,686           6,162         2,114                  160.4           2.06

05/06                            11,112                     2,100                   2,975           6,100         2,176                  147.9           1.95-2.00

06/07^F                          10,740                     2,150                   3,535           6,050         1,077                  149.0           2.25-2.65

                                                                                                                                                                                                               

 

Note: Marketing year begins September 1. One bushel of corn equals 56 pounds.   F = forecast.

Note: To obtain acres harvested, divide production by yield.

Note: FSI represents grain used for food, seed or industrial purposes such as ethanol production.

Source: Feed Outlook (USDA Economic Research Service, July 14, 2006).

Wheat

 

            As of July 11^th nearly three-fourths of the entire winter wheat crop had been harvested, about 6 percentage points above average. Spring wheat heading was nearly 20 percentage points above normal at 87 percent. The USDA forecasts all wheat production to fall by about 300 million bushels to 1.806 billion bushels in the 2006/2007 marketing year. That is an astounding 14.2 percent decline in production to levels not seen since the 2002/2003 marketing year. Production shortfalls are largely attributable to an 8.8 percent fall in yield to 38.3 bushels per acre. Usage is a mixed bag. Export demand is predicted to fall by 10.4 percent or roughly 100 million bushels yet food demand is up 0.5 percent or 5 million bushels. Seed and feed demands are expected to be down 7.4 percent or 18 million bushels. Prices are forecasted to reach the highest level this decade with a prediction interval of $3.70-4.30 per bushel.

 

Table 5.  U.S. Wheat Marketing Year Statistics/Forecasts

                                                                                                                                                           

 

Marketing                                                                                                  Seed &     Ending             Yield         Farm Price

Year                        Production           Exports                   Food           Feed         Stocks              (bu/ac)     ($/bu)

                                                                                                                                                                                                               

                                                      - - - - - - - - - - - - - - - - - - - - - - - - - - Million Bushels - - - - - - - - - - - - - - - - - - - - - - - - - - - -      

 

00/01                              2,228                     1,062                      950              380            876                    42.0           2.62

01/02                              1,948                        962                      926              265            777                    40.2           2.78

02/03                              1,606                        850                      919              200            491                    35.0           3.56

03/04                              2,345                     1,158                      912              283            546                    44.2           3.40

04/05                              2,158                     1,063                      910              263            540                    43.2           3.40

05/06^E                            2,105                     1,004                      910              243            568                    42.0           3.42

06/07^F                            1,806                        900                      915              225            439                    38.3           3.70-4.30

                                                                                                                                                                                                               

 

Note: Marketing year begins June 1. One bushel of wheat equals 60 pounds. F = forecast. E = estimate.

Note: To obtain acres harvested, divide production by yield.

Source: Wheat Outlook (USDA Economic Research Service, July 14, 2006).

 

 

Potatoes

 

            Due to limited data, market conditions for the domestic potato sector are only reported through the 2005/2006 marketing year in Table 6. Production has trended downward since 2002/2003 from 45.817 to 42.088 billion pounds. The 3.516 billion pound decline in production from the 2004/2005 marketing year to the following was attributable to both declines in acres harvested (from 1.167 to 1.085 million acres) and declines in yields (from 391 to 388 hundredweights per acre). Yields have fluctuated from a low of 362 to a high of 391 hundredweights per acre, but the 2005/2006 yield of 388 exceeds this six-year average yield by 13.5 hundredweights per acre. Prices have fluctuated as well and were reported to be $6.90 per hundredweight in the 2005/2006 marketing year.

 

Table 6.  U.S. Potato Marketing Year Statistics/Forecasts

________________________________________________________

 

Marketing              Production                 Yield                  Farm Price

Year                        (million lbs)              (cwt/ac)               ($/cwt)

________________________________________________________

  

 

00/01                            51,354                        381                     5.08                   

01/02                            43,767                        358                     6.99                   

02/03                            45,817                        362                     6.67                   

03/04                            45,781                        367                     5.89                   

04/05                            45,604                        391                     5.67                   

05/06                            42,088                        388                     6.90                                                             

________________________________________________________

 

Note: All potatoes combined.

Note: To obtain acres harvested, divide production by 100 times yield.

Source: Vegetables and Melons Outlook (USDA Economic Research

Service, June 22, 2006), Quick Stats (USDA National Agricultural

Statistics Service), and USDA Agricultural Baseline Projection to

2015 (USDA Office of the Chief Economist).

Beef

 

            The USDA’s Office of the Chief Economist assembles the monthly World Agricultural Supply and Demand Estimates (WASDE) report, which is considered to be the gold standard when forecasting global agricultural commodity market conditions. They have forecasted domestic production to increase 5.8 percent to 26.103 billion pounds in 2006. It is well-known that the domestic cattle herd is in the rebuilding phase of the long term cattle cycle so this upward trend in production since 2004 is not unexpected. Prices for choice steers are forecasted to be $82-84 per hundredweight, well below 2005 levels.

 

Table 7.  U.S. Beef Marketing Year Statistics/Forecasts

_____________________________________________________

 

                                                                  Price of

Marketing              Production            Choice Steers

Year                        (million lbs)              ($/cwt)

_____________________________________________________

  

2000                             26,777                     69.65                                               

2001                             26,107                     72.71                                               

2002                             27,090                     67.04                                               

2003                             26,238                     84.69                                               

2004                             24,548                     84.75                                               

2005                             24,683                     87.28                                                                                         

2006^F                            26,103                     82-84

_____________________________________________________

 

Note: Prices for Nebraska, Direct, 1100-1300 pounds. F = forecast.

Source: Livestock, Dairy, and Poultry Outlook (USDA Economic

Research Service, July 18, 2006), and World Agricultural Supply

and Demand Estimates (USDA Office of the Chief Economist,

July 12, 2006).

             

            Given the mature domestic market for retail meats, the U.S. meat industry, which includes beef, pork and poultry, naturally became increasingly more reliant on foreign markets for growth. But export demand for beef was jeopardized by the December 23, 2003 announcement of a presumptive positive test for BSE in a single Holstein cow in the state of Washington.[4] Shortly after this announcement, three of our four largest beef importing customers – Japan, South Korea and Mexico – banned our beef.[5] Since then Mexico has resumed some beef purchases for limited products, and other countries have as well, but Japan and South Korea have sourced beef from other exporting regions such as South America and Australia & New Zealand. More recently, the threat of Avian Influenza has hurt the U.S. poultry industry in a similar way. However, poultry production cycles, at roughly nine weeks, are quite short so domestic supply can be adjusted much more quickly relative to beef to changes in export demand. Pork exports, however, continue to be quite strong U.S. producers.

 

Dairy

            If one had to choose a single word to characterize recent market conditions in the domestic dairy industry it would certainly be “overproduction”. The most recent USDA WASDE report forecasts production to increase almost 3 percent to 182.1 billion pounds in 2006. Not only is milk per cow forecasted to increase by almost 2 percent to 199.7 hundredweights per cow, but also the domestic dairy herd is expected to grow by nearly 1 percent in size to 9.12 million cows in 2006. Aggregate production masks the fact that some regions are growing much faster than others. While California leads the nation in terms of number of dairy cows and milk production, Idaho and New Mexico are perhaps the fastest growing. Recently, Idaho became the 5^th largest dairy state based on both the number of dairy cows and milk production.[6] In the face of weak demand, milk prices are expected to be depressed to levels not seen in several years. The most recent 2006 forecast interval is $12.50-13.20 per hundredweight.

 

Table 8.  U.S. Dairy Marketing Year Statistics/Forecasts

                                                                                                                                                           

 

                                                                                                                                                                Milk

Marketing                                       Farm              Milk                  Commercial          Ending           per Cow           Milk Price

Year                        Production      Use               Marketings     Use                       Stocks            (cwt)               ($/cwt)

                                                                                                                                                                                                               

                                                 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Billion Pounds - - - - - - - - - - - - - - - - - - - - - - - - - - - -        

 

2000                        167.4                 1.3                 166.0                 168.4                     8.9                   182.0               12.61

2001                        165.2                 1.2                 164.0                 169.2                     8.8                   181.6               14.51

2002                        169.3                 1.1                 168.2                 170.6                     11.2                 186.1               12.74

2003                        170.4                 1.1                 169.3                 174.7                     8.3                   187.6               11.91

2004                        170.8                 1.1                 169.7                 176.2                     7.2                   189.7               16.05

2005                        177.0                 1.1                 175.9                 179.7                     8.0                   195.8               15.14

2006^F                       182.1                 1.1                 181.0                 185.2                     8.2                   199.7               12.50-13.20

                                                                                                                                                                                                               

 

Note: Milk equivalent, milkfat basis. F = forecast.

Note: To obtain number of milk cows, divide production by 100 times yield.

Source: Livestock, Dairy, and Poultry Outlook (USDA Economic Research Service, July 18, 2006), and World Agricultural Supply and Demand Estimates (USDA Office of the Chief Economist, July 12, 2006).