The general economy and the agricultural economy are expected to rebound from a difficult 2002. Faster growth in the general economy is expected, although unemployment may still increase in the first-half of the year. Inflation is expected to remain low with rising interest rates. The rebound in farm income is expected to come from an anticipated return to more normal yields in Indiana for 2003, and from a much-improved animal sector including cattle, hogs and poultry. The milk production sector is expected to have little economic improvement however.

The Search for Faster Growth

Larry DeBoer

The economy hit a “soft spot” this past fall. Many economic indicators showed slower growth including manufacturing activity and auto sales. The unemployment rate increased from 5.6% in September to 6% in both November and December. GDP for the fourth quarter probably grew less than 2% and as a consequence, the Federal Reserve responded to the slowdown with a bigger-than-expected half-point cut in its interest rates on November 6.

In the coming year, growth should pick up although it will not match the heady days of the late 1990s. Low interest rates should encourage consumers to spend, though at a somewhat slower growth pace because of high debt levels and lower consumer confidence. Federal tax cuts could spur spending, if they happen, but state and local tax hikes will restrain spending. Very low mortgage interest rates should keep housing construction booming and very low inventory/sales ratios should prompt businesses to re-stock their shelves. The low-capacity utilization rate means there’s lots of unemployed plant and equipment and thus business investment will likely grow slowly again in 2003.

Federal spending is growing fast, especially for defense for obvious reasons. State and local government budgets are in sad shape, so only small increases in state and local spending are likely. The falling value of the dollar may restrain imports, but the rest of the world is not growing fast enough to increase our exports very much.

For 2003, expect GDP to grow 2.7% above inflation, about the same as in 2002. Such growth will not be fast enough to bring the unemployment rate down, so it will probably approach 6.4% by mid-year, then begin to drop again. It may be November 2003 before the unemployment rate drops back to 6% again. Unemployment that high should keep inflation in check. The inflation rate as measured by the consumer price index is expected to remain around 2.1% for 2003.

After its big November rate cut, the Federal Reserve signaled that further rate cuts are unlikely. With the threat of a double-dip recession receding, the Fed may even consider rate increases by the latter part of 2003. The 3-month Treasury interest rate, currently at 1.2%, is expected to rise to 2% by this time next year. The demand for housing loans keeps growing, and business investment is no longer declining, so long term rates should rise also. The 10-year Treasury rate is currently at 4.1%and is expected to rise to about 4.5%by December 2003.

What about war with Iraq? This forecast assumes there won’t be one. If there is a war, consumers will probably cut their spending and oil prices will probably spike as occurred during the Gulf War. If so, a war would result in slower GDP growth and higher inflation than suggested here.

Issues in Agricultural Policy

Allan Gray and Otto Doering

Sign-up for the new, 2002 Farm Bill has gone slow. At the end of 2002, only 20% of the farms in

the U.S. had signed-up. This slow pace has resulted in the USDA issuing a warning that all of the sign-up cannot be done in the last few weeks prior to the April 1 deadline.

At time of sign-up, producers will need to make a decision on updating their acreage and yield bases. One problem that has slowed sign-up is the inability to document the recent yield history for a specific farm or parcel of land. As a general guideline, most farms will want to update their acreage and yield bases to the 1998 through 2001 crop years with two noted exceptions. The first exception are farms that have a historic base that is 60% or more corn. Since corn payments are expected to be larger than for other crops, a large corn base may make it advantageous to maintain the old base. The second exception involves farms that have added non-program crops in the updating crop years of 1998 through 2001. Non-program crops include fruits, vegetables, popcorn, and forage crops. Non-program crops are not eligible for base, so if these crops were planted in the 1998 to 2001 crop years, that acreage will be lost as base. The new Farm Bill is discussed in the Sept. 2002 PAER.

Since the November elections, leadership of the Senate and House Agricultural Committees has changed. The retirement of Senator Thurmond allowed Senator Lugar to move to the chairmanship of the Foreign Relations Committee and Senator Thad Cochran of Mississippi became the Agricultural Committee Chair. Senator Cochran is expected to be a strong supporter of farmers including the new 2002 agricultural legislation. He has already come out in favor of Drought Assistance and is a strong supporter of not lowering payment limitations. In the House, Representative Bob Goodlatte of Virginia will replace Representative Combest and has pledged to continue the strong agricultural leadership in the House.

Several pieces of agricultural legislation may come up in 2003. The first is Drought Assistance, a hold-over from last fall. Farmers, commodity groups, and some politicians are still pursuing drought relief legislation. The Senate has passed a $3.1 billion proposal. However, passage may be more difficult in the House. Since the fall election is over and other topics such as a potential war in Iraq are absorbing much of the budget attention, the odds of further farm financial assistance are reduced. An energy bill did not make it out of committee in the last Congress, so that bill will start over in 2003. A new energy bill will be important to the stimulation of both ethanol and biodiesel production. Restrictions on packer ownership of livestock is still a possible agricultural policy issue. Senator Grassley of Iowa has led the movement to ban packer ownership of animals and continues to look for support of that proposal.

Don’t expect agricultural legislation to be a high priority this year with a new Farm Bill last year; with growing budget deficits; and a looming war.

Ag Trade Booms with Higher Prices

Philip Paarlberg

 

U.S. agricultural exports for fiscal year 2002/03 are forecast to be nearly $59 billion compared to $53.2 billion in fiscal year 2001/02. The increase in export value reflects significantly higher prices for grains, oilseeds, and oilseed products due to droughts in North America, Africa, and Australia. World grain production is forecast to fall from 1865 million tons to 1808 million tons. World oilseed output is forecast to be about the same as in the past year because increases in foreign oilseed production offset the drop in the U.S. soybean crop. Export tonnages from the United States are not expected to be significantly higher in 2002/03 due to higher world prices, slow economic growth, and competitive South American supplies.

The United States passed trade promotion authority in August and presented its proposals to the World Trade Organization to liberalize agricultural trade. The U.S. proposal calls for expanded market access, elimination of export subsidies, restrictions on state trading agencies, and reduced domestic farm support. The Cairns Group, Japan, and developing nations also tabled proposals. * The European Union will present its position by the end of March 2003. The Cairns group proposes a greater expansion in market access than does the United States, ending of export subsidies and domestic support, and restrictions on export credit and credit guarantee programs. Japan seeks to maintain the status quo. Developing countries would like greater access to developed country markets. The European Union proposal will probably include an effort to restrict access of products with genetically modified material plus labeling and traceability rules.

The United States continues to be criticized for inconsistency between its trade proposals and its actions. The 2002 Farm Bill is seen as not conforming to the spirit of our WTO proposal. The United States is considering import restrictions of Canadian wheat as well as filing complaints against proposed European Union labeling and traceability laws.

The food crisis in Africa has expanded north to Ethiopia and Eritrea where 9 million people are threatened with starvation. Those are in addition to the 14 million in southern Africa plus several million in North Korea. U.S. food aid has been plagued by the inclusion of genetically modified corn. While some nations have agreed to accept milled corn, Zambia has not been willing to accept the U.S. corn.

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* The Cairns Group is a coalition of 17 agricultural exporting countries who account for one-third of the world’s agricultural exports. Members of the Group are: Argentina, Australia, Bolivia, Brazil, Canada, Chile, Colombia, Costa Rica, Guatemala, Indonesia, Malaysia, New Zealand, Paraguay, the Philippines, South Africa, Thailand and Uruguay. Since it formed in 1986, the Cairns Group has succeeded in putting agriculture on the multilateral trade agenda and keeping it there.

Grain Prices May Weaken in 2003

Chris Hurt

The January crop reports from USDA “took the wind out of the sails” for grain markets, as the expected ending stocks for corn, soybeans, and wheat were all increased. For corn it was a reduction in both expected feed usage and exports that resulted in an 80 million bushel increase in ending stocks to 919 million. The story was similar for wheat with both feed and export use reduced. For soybeans, it was an increase of 40 million bushels in final 2002 production as a result of increases in both acreage and yield. In combination, these revisions were a disappointment to those who felt that tight storage stocks would result in stronger prices through the winter.

Indiana corn prices for the 2002 crop are expected to average about $2.40 to $2.45 in the central and northern portions of the state, and 15 cents higher at Ohio River markets. Prices may still recover 10 to 15 cents per bushel from their current levels, but this will only get them back to about $2.45 to $2.55 per bushel by late winter or early spring.

Summer prices will take their clue from U.S. plantings and weather. Corn acreage is expected to increase by over 2% and reach 80.7 million acres. With normal yields, production would be slightly over 10 billion bushels, with ending stocks from the 2003 crop of around 1 billion bushels. If so, a return to the very depressed harvest prices that occurred in 1998 through 2001 crops would not be expected, rather harvest prices near$2.00 per bushel would be expected.

Weather bears a special note. The drought from 2002 is not over. Much of the Rocky Mountain and the Great Plains regions remain very dry. In fact, moderate drought has now moved further to the east with most of Missouri, Iowa, and the northern half of Illinois and Indiana showing signs of concern. The forecast for late winter and spring is for below normal precipitation, especially for the Eastern Corn Belt. If so, dry soils will not have moisture replenished going into spring planting. Another important point is to expect an early planting season, especially in the Eastern Corn Belt. Early planting tends to favor even larger acreage moving toward corn. Finally, summer precipitation is officially called normal for now, but some meteorologists are suggesting a movement toward La Nina which favors a hot dry summer especially for the Western Corn Belt. While U.S. winter weather tends to have little impact on corn and soybeans prices, current conditions and forecasts do provide reasons to believe weather rallies could be a part of 2003 price patterns.

While demand remains very strong for soybeans due to large purchases from China, the more dominant factor influencing prices may well be the size of South American production. Weather in Argentina has been favorable, and USDA increased the estimated size of their crop by about 40 million bushel in January. Brazil and Argentina combined will produce a crop in excess of 3.0 billion bushels according to USDA estimates. This is 11% larger than our 2002 crop and an increase of 12% over their record crop last year. Weakness in U.S. soybean prices can generally be expected through early March as the South American crop nears harvest.

U.S. soybean acreage is expected to drop by about 3 million acres as acreage moves to wheat, corn, and sorghum. In addition, the states of Indiana and Ohio were unable to plant about 1 million acres to corn last year due to the wet spring. Much of this will head back to corn for 2003. With normal yields but reduced acreage, U.S. production may only be about the size of the smaller 2002 crop. Thus, ending stocks are expected to stay in the range of

200 million bushels, about like the 2002 crop.

Indiana soybean prices for the 2002 crop are expected to average about $5.50 per bushel. Weaker prices are expected into late winter, with very modest recovery into the spring and early summer. For the 2003 crop, prices are expected to be near $5.00 per bushel at harvest if normal yields should occur.

Winter wheat averages are up 29% in Indiana and 6% for the US. Prices are expected to be under pressure in 2003 as the U.S. increases acreage, yields return closer to normal, and world production increases. If so, forward pricing of wheat should be consider prior to harvest.

Income prospects from grains and soybeans should improve for Indiana producers if the state returns to normal yields. The final estimates for Indiana’s 2002 crop were 121 bushels per acre (16% below normal); 41 bushels per acre for soybeans (10%below normal); with wheat at 53 bushels per acre (15% below normal).

Input Prices Rise, Especially for Corn

Alan Miller

Diesel fuel and anhydrous ammonia are more expensive now than they were a year ago. Higher prices for fuel, propane, and nitrogen will increase the average out-of-pocket production cost of producing corn and soybeans in a fifty-fifty rotation in Indiana by about $5.50 an acre in 2003 relative to a year ago. Most of the increase is on corn where the average cost will increase about $9.00 per acre and only $2 per acre for soybeans on average quality soils in Indiana.

Spot prices on diesel fuel are up about 30% relative to this time last year. Propane prices are up about 23% over the same time period. Uncertainty stemming from a possible Iraq war, as well as disruption in fuel supplies due to plant shut downs in Venezuela; appear to be the primary factors driving prices up. Near–term futures for crude oil and propane are higher than the deferred months, which may bode well for possibly lower crop drying costs later in the year, if the uncertainty surrounding a possible Iraq war is resolved.

Expectations of more corn and wheat, relatively tight stocks in the U.S., and a nitrogen fertilizer production industry in the U.S. which is already operating at or near full capacity have contributed to higher anhydrous ammonia prices. But the most important factor is the significant increase in the price of natural gas. Spot prices for natural gas have increased from an average of $2.61 per MMBtu in January 2002 to nearly $5.00 per MMBtu at the end of 2002. Anhydrous ammonia prices quoted to farmers are only up about 9% over the same time last year. Current farm prices for other forms of nitrogen, such as Urea and liquid nitrogen, haven’t kept pace yet with anhydrous, but will probably firm up later as purchasing activity increases.

Seed prices appear to be unchanged overall from last year. Selected bio-technology and new varieties will be priced higher, but the overall increase in seed prices may be below the modest 2% to 3%increase of the previous two years.

Chemical prices have been nearly flat for the last five years and nothing in the outlook indicates a major change. Current price quotes for various chemicals are up 2% to down 8% with no change in price for several products.

Machinery prices and repair costs are likely to increase in 2003, although the increases are expected to have a small impact on crop costs. USDA’s indexes of prices paid for farm machinery and repair costs show that recent annualized increases have been about 1.5% for both items. That slight upward trend is expected to continue in 2003.

Animal Industries Expect Better Year

Chris Hurt

Prospects for improved income for most of the animal industries will be welcome in 2003. Improvement will be driven by reduced meat supplies and by better demand from stronger U.S. and world economies. Total production of red meats and poultry is expected to drop by 1.6% in 2003, the first time such a drop has occurred since 1982. The decrease is expected to be led by a drop of more than 5% in beef production and a 2%reduction in pork production. Broiler and turkey production will only be up moderately.

Hog producers had a difficult 2002, but prices are expected to improve back to breakeven by April or May and move into the mid-$40s by June. For the year, hogs are expected to average about $40 per hundredweight, up from $35 in 2002. Continued reductions in the size of the breeding herd are expected for much of 2003, with profitable hog prices extending through the summer of 2004.

Potential large reductions in beef supplies are expected to result in substantial improvement in cattle prices and returns. Slaughter steers averaged about $67 per live hundred-weight in 2002, but should reach close to $75 for 2003. The highest prices are expected to occur in late March and April, and could reach $80. Calf and feeder cattle prices will also be strong. Steer calf prices in 2002 averaged in the mid-$80, and should average in the mid-to-higher$90s this year. Some heifer retention could begin in late 2003 and 2004 which means a continuation of strong cattle prices until those heifers can begin to increase beef production in several years.

The one animal sector that may not see much improvement this year is dairy where large production and weak demand for products in 2002 has left large inventories of milk products. Adjustment in cow numbers is just now beginning and the improvement in the general economy is not expected to be rapid enough to result in much improvement in milk prices until late in the year. All milk prices averaged$12.10 per hundredweight in 2002, the lowest level since 1980. The current forecast from USDA is for all milk prices to drop to $11.85 in 2003. USDA is estimating that the Milk Income Loss Contracts (MILC), the government support program added about $1.20 per hundredweight to the price of milk for moderate and small farms of about 130 cows or less in 2002. That amount of support is expected to be somewhat greater in 2003, and represents an important element in helping family dairies come closer to covering all costs of production. The support can only be received on a maximum of 2.4 million pounds annually.

Land Values and Rents Moving Even Higher

Craig Dobbins

In spite of a significant drought, low yields and poor returns for animal enterprises, Indiana cash rents and land values remain strong. The results of the Purdue Land Value and Cash Rent Survey conducted in June 2002 indicated that on a state-wide basis land values increased 3.2% to 7.8%.

What has contributed to the strength of these markets? Certainly one aspect has been the limited supply of land. For the current owners of farmland there is little incentive to sell. The decline in the stock market and low interest rates on certificates of deposit have reduced the attractiveness of these alternative investments. In today’s investment environment, farmland is providing a 4% to 5% annual return with a similar increase in value and thus provides an attractive investment.

The land market continues to be strongly influenced by tax-free exchanges arising from the sale of farmland near cities to developers. Unlike previous recessions, the demand for new housing and commercial property showed little decline in this recession. There also continues to be a strong demand for country home sites and recreational land.

The sharp decline in long term interest rates has also helped to strengthen the farmland market. Low interest rates have reduced the repayment requirements associated with land purchased using debt. While interest costs associated with ownership still exceed the amount of cash rent on most tracts, this difference has narrowed to the point where some farmers are concluding that the additional potential benefits of ownership exceed this cost.

In 2003, long-term interest rates are likely to increase as the economy strengthens. This will likely slow the rate of increase in farmland values, but the other forces that are providing price strength are expected to remain. For the year ahead, farmland values are expected to increase 3%to 6%.

Expanding farm size by renting land is a strategy being aggressively pursued by many farmers. Combining the strong demand with the limited supply of land available to rent each year creates a strong rental market. The results of the June Purdue Land Value and Cash Rent Survey indicated that on a state-wide basis cash rent values increased 1.4% to 4.6%.

The new Farm Bill has removed the uncertainty of income support levels for the next several years. Various analyses of the Farm Bill indicate that support levels provided by this legislation will help support cash rent values. The implementation process associated with updating base acres and yields is under way and while it is taking longer than people would like, the process is proceeding.

The loss of LDPs this fall and the time frame in which government payments are received is creating a tighter cash flow situation for some farmers.

The tightening supplies of corn and soybeans caused by last summer’s drought have led to increased commodity prices. However, much of this price improvement is offset by lower government payments and increased costs of production. Per acre corn and soybean production costs are expected to increase approximately 4.7% and 2.1%, respectively, (see the Input Price section of this article). The contribution margin (revenues less production costs) for a corn-soybean rotation is expected to be about the same as last year with normal yields. This indicates that an improvement in the returns per acre after all costs will result only if fixed costs are spread over more acres.

Improved prices, an expected return to normal yields, the new farm program, and the desire of many farmers to expand farm size will keep the demand for rental land strong and push cash rents higher by an expected 2% to 3% this year.