A Glimpse at the 2001 Ag Outlook Calendar
February 13, 2001
Larry DeBoer, Phil Paarlberg, Phil Abbott, Wally Tyner, Otto Doering, Chris Hurt, James Pritchett, Marshall Martin, Howard Doster, Craig Dobbins, and Mike Boehlje.
A slowing U.S. economy, much higher costs for crop production, and a new administration in Washington. How will these and other events effect the agricultural economy in 2001. Here we provide you with a brief summary of the outlook for 2001.
Will Recession Visit in 2001?
Will there be a recession in 2001? Several leading indicators say we are on the edge, but that we may experience an economic slowdown rather than an actual recession. On the positive side, high employment should support consumer spending. Housing construction should revive, as indicated by increased building permits and lower mortgage rates. By midsummer the economy should feel the effects of recent interest rate cuts.
Since the economy is nearer to a recession than it has been in years, a shock could push it over. These could include: further energy costs increases; Middle East conflict escalation; severe natural gas shortages; or electricity disruptions in California.
Barring these potential shocks, expect GDP to grow 3.0% above inflation in 2001, with the unemployment rate rising to 4.5% by this time next year. Without explosive energy cost rises, inflation should remain around 3.0%. Interest rates are likely to fall, with the 3month Treasury rate to be 5%, and the 30year Treasury rate to be 5.3% by this time next year.
New Folks @ 1600 Pennsylvania Avenue
The political climate has changed with the new administration in Washington. How might this impact the farming sector?
- The change in the White House provides less support for the “prairie populists” who would like to return to old agricultural programs like supply controls.
- A strong Secretary of Agriculture may regain from EPA some of the environmental agenda for agriculture.
- Tax cuts and other issues requiring attention in 2001 are likely to absorb the attention of Congress such that current Freedom to Farm policies will not be changed. It is more likely that Congress will appropriate “emergency” payments again for the 2001 and 2002 crops rather than amending current legislation.
- Any slowdown in the economy coupled with potential tax cuts could reduce or eliminate the projected budget surplus. Thus in 2001, Congress will have to look at the full range of agricultural policy options and especially be concerned with the budget.
Improving Ag Trade Prospects
Exports are expected to improve for the second consecutive year in 2001 and are currently forecast at $53.0 billion compared to $50.9 billion last year. The major forces boosting exports this year include: reduced export competition with smaller Chinese corn and wheat output plus poor production in Eastern Europe; increased global meat demand; improved economic growth in Asia; and a weakening U.S. dollar. The largest growth in sales is expected for corn, wheat, cotton, and meats.
However, uncertainties include: The impact of StarLink corn contamination; potential global economic slowdown; high energy prices; and the lack of Presidential trade negotiating authority.
Lower Corn Acreage
Corn exports are expected to be a key to price direction this winter. Concerns over StarLink contamination have slowed exports, and the pace will need to pick up. However, world corn supplies are reasonably tight and both Argentina and South Africa are expecting smaller crops this winter. This means that buyers will increasingly come to the U.S. for supplies. Prices are expected to improve somewhat in the early spring, with central Indiana prices reaching $2.10 to $2.20 per bushel.
Higher energy cost and concerns about availability of nitrogen fertilizers are expected to result in a reduction of 2001 corn acreage by about 1.5 million acres. With normal yields, 2001 production would drop to about 9.6 billion bushels from near 10 billion in 2000. Carryovers from the 2001 crop could drop from the 1.8 billion level to about 1.3 billion. Prices for the 2001 crop are expected to be above the loan level. Thus, LDP’s may not be working. Harvest prices may be near $2, and reach $2.30 to $2.40 during the marketing year. If so, these higher anticipated corn prices would largely offset the higher costs of production.
Downside Risk on Bean Prices
Another record South American crop, now estimated to be up 9% has dimmed prospects for strong soybean price recovery this winter. Carryover stocks from the 2000 crop will be sufficient at over 300 million bushels, and prospects of huge South and North American crops in 2001 could turn the lights out on price prospects.
Increased acreage is expected in the U.S. as production costs increases are more moderate for soybeans as compared to corn or spring wheat. In addition, the smaller winter wheat acreage will provide some added bean acres. In total, soybean acres could increase by 2 to 2.5 million acres, and produce a record crop near 3 billion bushels. If so carryover stocks from the 2001 crop could grow to near 500 million bushels.
Only moderate recovery is anticipated for soybean prices this winter, with the possibility of cash prices in the central portion of the state moving to $4.75 to $5.00. Harvest prices could drop back into the low $4 range if the U.S. crop should develop. Thus at this early point, it appears that soybean prices for the 2001 crop will face another year of LDP activity without prices trading above the loan.
Wheat Prices Could Rise
The outlook for wheat has improved due to increased domestic utilization and higher potential exports. Poorer growing conditions for US hard red winter wheat on the heels of delayed planting and emergence have recently strengthened new crop futures prices. In addition to less than ideal crop conditions, the acreage seeded to winter wheat is down by 2 million acres.
Ending stocks of wheat are expected to be sharply lower for the 2000/01 marketing year with prospects for even smaller production in 2001. Carryovers from the 2001 crop are expected to be decreasing once more, perhaps to about 650 million bushels, the tightest stocks since 1997. Cash prices at harvest for the 2001 crop are expected to average at or above the loan rate, thus LDP’s may not be working for the 2001 crop. U.S. average prices could be around $3 per bushel for the marketing year, with prospects of soft red wheat in Indiana trading above $3 per bushel for the first time since March of 1998.
Gloomy Hog Forecast Returns
Hog producers have expanded the size of the breeding herd by 1% and anticipate farrowing 4% more sows this winter and 1% more in the spring. This will increase supplies by about 3% for the year to a record production of 19.5 billion pounds.
Prices are expected to be in the higher $30s in the first quarter, and increase to the lower $40s in the second quarter. Some profitable returns can be expected, especially in the spring and early summer. However by midsummer, prices are expected to head downward under the weight of large supplies, and average in the higher $30s for the summer before dropping to the lower to mid $30s in the fall. If so, this means that prices would drop back to breakeven in the late summer and end the year at about $4 per hundredweight below costs. Some continuation of losses can be anticipated into early 2002.
Cattle Producers Celebrate
The cattle industry is expected to have high prices to celebrate in 2001. Beef production is expected to drop by 5%, with the largest decreases in the last-half of the year. Not only are supplies dropping, but beef demand appears to have improved in the past two years. Smaller supplies are expected to result from reduced cow slaughter and from retention of heifers to begin rebuilding the cow herd.
Prices of choice steers in the early part of 2001 have already reached $80. Highs in late March or early April should be a few dollars higher yet. Finished cattle prices will likely recede to the lower $70s by late summer, but return to the very high $70s by the fall. Feeder cattle and calf prices will also be very strong with 500 pound steer calves reaching $1.10 to $1.20 per pound in the spring. Fall calf prices are expected to exceed those of the last fall. Brood cow producers can anticipate several years of strong, and profitable, calf prices.
Crop Input Cost Make Headlines
Higher energy costs are driving 2001 crop production costs sharply higher. This is
especially true for corn and to a lesser extent for wheat and soybeans. Leading the increases are nitrogen fertilizer costs. Estimates made in early 2001 were for corn production costs to rise by around $15 per acre, and about $4 per acre for soybeans. Nitrogen fertilizer prices were still highly volatile at the time of these estimates so producers should check actual prices closely. In addition to much higher prices, concerns over availability, especially for anhydrous were evident.
These large increases in corn costs are expected to cause more producers to consider shifting somewhat to soybeans. The corn price breakeven to shift to corn may be around $2.20 to $2.30 cash corn prices at harvest. Since many producers are already near a 50/50 rotation on corn and beans, shifting to more bean acres would force them to plant some bean acres on 2000 crop bean acres. They should carefully think about potential for disease buildup from a movement to beans on beans.
Land Values Continue To Strengthen
Despite continued low cash commodity prices, land values in Indiana have continued to strengthen. The June 2000 Purdue Land Survey showed a nearly 4% annual increase in farm land values, and a more recent Federal Reserve Bank of Chicago survey indicated another 3% or so strength in the last half of the year. The reasons land values continue to increase even with low commodity prices is likely related to a host of factors including: large government payments; a strong non-farm economy and the demand for small acreage home sites; a small amount of land on the market; very good yields in 2000, and financially strong farmers who want to grow.
For 2001, less increase in land prices can be expected. A slowdown in the general economy, continued uncertainty about government payments, higher production costs; and a return to more normal yields may all contribute.