Happy days could be here again as Indiana farm income prospects appear to be favorable in 2004. Higher incomes are expected to be led by higher corn, soybean, and wheat prices both for old crop in storage and for 2004 crops as well. Even though costs of grain production will be up sharply, strong crop prices are expected to more than offset rising input prices. Key to the strong grain prices will be rising demand due to the rapid growth in the U.S. and world economies, low interest rates, and a weak U.S. dollar which will stimulate agricultural exports. The fortunes will not be as positive for animals industries however. The beef sector will continue to be impacted by BSE, and continued large hog and milk production in combination with higher feed prices may prohibit positive returns.

Economy Roars to Life

Larry DeBoer

The 8.2 percent surge GDP for the third quarter of 2003 was probably the beginning of a more rapid recovery pace. However, much depends on upcoming willingness of businesses to invest in plant and equipment. Their 18 percent annualized increase in spending in the third quarter provides evidence of the strong potential. Other indicators that point to favorable business investment are continuing low interest rates and growing orders for capital goods. There is still excess capacity in factories and equipment that are not being used, but capacity utilization has already begun to recover which is a positive sign. Also since technology has changed rapidly, plants that reopen may require considerable upgrades of new equipment. Overall, growing business investment is expected to be an added stimulus to the economy in 2004.

Consumers lead the economy and their growing optimism remains the most important aspect for the improving outlook. In addition, housing construction continues to boom and defense spending is likely to rise, although Federal domestic spending and state/local spending will not. The declining value of the dollar and greater economic growth in economies of Europe and Japan should help increase exports and cause the trade deficit to fall a little. These positive factors are expected to result in growth in the Gross Domes-tic Product of four percent above inflation in 2004.

The unemployment rate should fall with GDP growing at this rate. It is likely to fall, but rising productivity and industry restructuring could slow employment growth compared to past recoveries. The unemployment rate should fall to 5.5 percent by late in the year. Core inflation—not including food and energy prices—should remain around 1.1 percent. But increases in energy prices will add to the overall inflation rate. Expect inflation of two percent over the next twelve months.

What about interest rates? The Federal Reserve is done cutting interest rates for now. With an increasing growth rate in the economy we expect increases some-time during the year. Expect the 3-month Treasury interest rate to rise to 1.5 percent by December 2004 (up from about .9 percent currently). More rapid expansion and Fed rate hikes should put upward pressure on long term rates as well. The 10-year Treasury interest rate should be about 4.5 percent by the end of the year compared to 4.1 percent now.

Potential for Record Ag Exports

Philip Paarlberg and Philip Abbott

The current forecast for the value of U.S. agricultural exports for 2003/04 is very uncertain due to the loss of beef export due to BSE. Prior to December 23, 2003, it appeared U.S. agricultural exports might reach $60 billion. That level would have matched the previous high reached in fiscal year 1995/96. With the halting of U.S. beef and cattle exports due to BSE, U.S. agricultural exports will be closer to$58 billion. The remaining strength in exports is largely due to increases in both price and export volume for cotton, export volume for wheat, and prices for soybeans and products. For most other commodities, prices and export volumes are forecast to be moving in offsetting directions which dampens the effect on value. While short U.S. crops are a major cause of higher prices, another contributing factor is the weakening U.S. dollar.

Higher prices and a strong U.S. economy also boost U.S. agricultural import value to around $49 billion. In contrast to exports the effect of a weakening U.S. dollar should be to dampen imports, but that effect is not yet apparent. Imports of $49 billion would leave the U.S. agricultural trade balance at $9 billion.

As an alternative to the failed World Trade Organization (WTO) agreements, last fall in Cancun, the United States is expanding its use of regional and bilateral trade agreements, termed “competitive liberalization.” One of the major regional trade agreements pursued by the United States has been the “Free Trade of the Americas (FTAA).” The FTAA talks however have made little headway on agriculture.

With both the WTO and FTAA negotiations facing problems, the United States sought trade agreements with other nations. Negotiations with several nations were completed or underway, including Morocco, Australia, and nations in Latin America. An agreement with four Latin American nations was reached in late December. About half of U.S. agricultural exports will be duty free at the beginning. For sensitive commodities the phase in of duty reductions varies from 5 to 20 years.

Some Changes in 2004 Farm Programs!

Allan Gray

For 2004 to 2007 crops there are slight changes for corn and wheat compared to 2003 crops. The corn target price rises by three cents per bushel to $2.63, while county loan levels will drop by three cents. For wheat, target prices rise by six cents per bushel and county loans rates fall by three cents per bushel in Indiana. These changes have two impacts. First the increase in the target price makes the level of government support slightly stronger (particularly if prices are low), and second, they increase the odds that greater payments will come from the government in the form of Counter Cyclical Payments. The soybean target price and loans are unchanged for the 2002 to 2007 crops.

Other important policy issues for 2004 include provisions for COOL, the Conservation Security Program, Equip, the energy bill and ethanol use, and a study on changing payment limits.

Country Of Origin Labeling (COOL) provisions contained in the 2002 Agriculture Act have been delayed until 2006, except for specific fish species. In addition, the budget bill caps spending for the new Conservation Security Program (CSP) at $41 million which is substantially below the anticipated program needs and will thus, greatly limit the number of producers that can be reached in fiscal year 2004. The bill also limits spending in the EQIP program to $975 million dollars for fiscal year 2004 which is about $25 million less than was authorized. The program does not impact commodity support payments such as loan deficiency payments, Counter-Cyclical payments, or Direct payments.

Last fall, the joint House and Senate conference committee reached a compromise on the Energy Bill. The House has approved the compromise bill. The Senate has not approved the bill as Democrats have blocked a vote on the bill through the use of filibuster rules. The Senate Democrats want concessions in the bill to allow companies that produced MTBE to be sued for higher liability amounts. Until these concessions are made it is unlikely that the Energy bill will reach a vote in the Senate.

The bill can be important for corn and soybean producers because of its targets for use of biofuels. The bill targets the use of 3.1 billion gallons of biofuel by 2005 and 5 billion gallons by 2012 in the nation’s fuel supply. The bill also extends the current subsidies for ethanol to 2012. Finally, the bill introduces an excise tax credit to blenders of biodiesel. The tax credit would be $0.01 per gallon for each percent of biodiesel blended with diesel. For example, a blender that blends two percent biodiesel with regular diesel, commonly known as B2, would receive a $0.02 per gallon credit towards their excise taxes. This should increase the demand for biodiesel.

The 2002 Farm Bill contained language authorizing a Payment Limits Commission. One of their major findings was that current payment limit policies drive producers to choose certain organizational structure in order to avoid the payment limits. They recommend that Congress eliminate the entity rule for payment limits. This would effectively tie payments directly to a person and not to a particular entity. Other findings from the commissions study were that current enforcement of payment limits is erratic, as lack of data to attribute payments to individuals makes it difficult to fully understand the impacts and that the Farm Service Agency needs more manpower to credibly enforce any payment limit structure. Finally, the commission could not agree on whether to eliminate generic certificates as an option when the producer reaches the payment limit for loan deficiency payments with half the commission for, and half against elimination. In any case, the commission recommended that no changes be made to the current payment limit system until the 2007 Farm Bill and any changes made at that time should be phased in over a 3 to 5 year period.

Crop Costs Turn Higher

Alan Miller

Indiana crop production costs will increase for the second year in a row in 2004. Average production costs per acre are forecast to increase almost seven percent for corn and soybeans grown in a 50-50 rotation as much as 7-10 percent. Fortunately, expected higher revenues will outpace rising costs providing the opportunity for an additional $18 or more per acre of net returns relative to our forecast a year ago in January.

The high price of natural gas has created unprofitable operating conditions for U.S. producers of ammonia-based nitrogen fertilizers. Ammonia producers are likely to idle plant capacity and reduce product inventories. More of the ammonia product used in the U.S. this year will likely be imported.

Farm prices for nitrogen fertilizers appear to be up about 26 to 31 percent relative to a year ago in early January and will likely stay there given high natural gas prices.

Phosphate fertilizer is in tighter supply this year. Prices appear to be up about ten percent from a year ago. Potash is also up about eight percent. As a result of higher N-P-K prices, the fertilizer cost for corn grown in a 50-50 corn-soybean rotation on average quality Indiana land is expected to be up about $11 per acre in 2004 relative to a year ago.

Seed prices are moving upward as well. The price of Roundup Ready© soybean seed varieties, which are planted on about 90 percent of the state’s soybean acres are up around eight percent. This change is prima-rily due to an increase in the royalty fee associated with the Roundup Ready© trait. Corn seed prices appear to have increased overall, although that certainly isn’t true for all varieties. Farm chemical prices will be a mixed bag depending on products and formulations. Individ-ual product price increases are expected to range from 0 to 5 percent. Higher production costs will also increase the interest expense of producers who borrow money to purchase inputs. In addition, the cost of renting farmland is expected to be up slightly once again in 2004.

The variable costs of growing corn in a 50-50 rotation on average yield land are expected to be about $17 per acre higher than last spring. The costs of growing rotation soybeans are expected to be about $7 per acre higher.

Specific estimates for 2004 costs for various land quanties and rotations can be found in the Purdue Crop Cost and Returns Guide January 2004 (ID-166).

Crop Rotations for 04: More Beans?

Alan Miller and Craig Dobbins

Part of the benefit of higher crop prices is being lost to higher production cost, especially for corn. For average soils, forecast per acre return above variable costs on average soils is $154, $176, $152, and $156 for rotation corn, rotation soybeans, second-year soybeans, and wheat, respectively. These estimates indicate that a corn and soybean rotation continues to provide the best returns. Second year soybeans provide a return that is $2 less than rotation corn. For high productivity soils, second year soybeans are forecast to have a $1 per acre greater return than rotation corn. For low productivity soils, wheat provides the greatest net return followed by rotation soybeans, and rotation corn. These forecast net returns indicate that Indiana growers will have economic incentive to plant soybeans in 2004 despite the disappointing soybean yields in parts of Indiana; however, this incentive isn’t nearly enough to justify messing up a good rotation.

This aforementioned forecast assumes that soybean yields will continue in 2004 to be approximately one-third of corn yields on a given piece of ground. Where bean yields have fallen below the 1 to 3 ratio, both rotation corn and second–year corn will be relatively more attractive. Assuming this relationship holds true in 2004, rotation beans show a pretty significant premium to the rotation corn grown in a 50-50 corn-soybean rotation.

Some Hoosier producers are questioning whether bean yields have lost ground relative to corn yields in recent years. One could argue that the long term upward trend in Indiana soybean yields has become pretty flat over the last ten years. The current uncertainty about where soybean yields are headed in the future increases the difficulty of trying to adjust cropping plans for year to year fluctuations in prices and production costs. One recommendation is that producers estimate crop costs and returns using a range of possible yield outcomes that reflect best and worst case scenarios, as well as the expected, or the most likely outcome. Also, it is wise to remember that good rotations and good agro-nomic practices have economic

“staying power” over time.

On lower yield land in Indiana, wheat may once again be an economically attractive alternative to corn and soybeans. And, wheat double cropped with soybeans always looks economically attractive in those parts of the state where double cropping is a viable activity. You can study our forecast crop returns and costs and the yield relationships used in our analysis in ID-166 referenced in the previous section.

Crop Outlook is Bright

Chris Hurt

Despite rising costs of production, crop prices are expected to rise by more than enough to compensate providing prospects for rising incomes from corn, soybeans, and wheat in 2004. There are many positive fundamentals including rising U.S. and world incomes, the rising buying power of foreign currencies, surging Chinese demand, record tight world stocks for corn and wheat, and volatile weather. The surplus problems of the 1998 to 2001 crops appear to be behind us as we are in a period of much tighter stocks and as a result crop prices are expected to be higher and more volatile.

Soybeans steal the headlines with U.S. stocks of soybeans growing dangerously small as a result of the tiny 2003 U.S. crop and record usage this past fall. Prices will need to be high through the winter, spring, and into the early summer to get users to cut-back sufficiently. The question of just how high prices will have to be is much more difficult.

The rate of reduction in use during the rest of the marketing year has to be about 15 percent for crush and 18 percent for exports. This level of “rationing” is more severe than was required in 1997 when futures moved to a high of about $9 per bushel in the late March to May time period. Actually, the level of rationing required this year is closer to 1988 when futures prices reached highs near $11.00 per bushel. The difference this year is the huge size of the South American crop compared to previous years. But, futures price highs at $9.00 per bushel, or higher, still remain a possibility.

Old crop prices are not expected to drop rapidly. High cash prices, of$8.00 or higher, may be required for several months to accomplish the rationing required.

Prospects for the 2004 crop would suggest some additional bean acres drawn from reduced winter wheat acres and from corn acres. However, this may represent only 1 to 2 percent more bean acres than in 2003. Production prospects with national yields near 40 bushels per acre are about 2.9 billion bushels, and a crop of that magnitude would substantially overcome the current shortage. Harvest price prospects, given normal 2004 yields are expected to be in the$5.50 to $6.00 per bushel range given current information.

Producers who have a substantial portion of their old crop beans may want to consider a scale-up pricing strategy as current prices are rare. On the other hand, those who are comfortable holding old crop beans face the distinct possibility of even higher prices. The tightness of beans means that basis levels will likely be strong, so holding beans in storage is the preferred strategy. Pricing soybeans in the February through May period is the best bet of when price highs will be made this spring.

New crop futures may be able to reach $7.00 or higher this winter and spring as well. This would provide excellent pricing opportunities, as the “normal weather scenario” suggests cash harvest prices at $6.00 or lower. Again some pricing of new-crop could be considered in the February through May time frame.

Corn price prospects improved sharply in January as USDA reduced the size of the 2003 crop and increased fall usage to record high levels led by record industrial use and near-record feed use. Record tight world stocks and the lower value of the U.S. dollar are expected to keep export business growing throughout the winter and spring even in the shadow of higher corn prices. Anticipated ending stocks on August 31, 2004 are expected to be near 900 million bushels signaling potential growing concerns about supply shortness this spring and summer.

For 2004, corn acreage could be down 1 to 2 percent and a normal yield of about 141 bushels per acre across the country will only produce a crop of 10.1 billion bushels, smaller than expected usage for the 2003 crop. In addition, expect upward pressure on usage as 15 new ethanol plants are under construction (January 2004 Renewable Fuels Association: www.ethanolrfa.org) with capacity of about 200 million bushels, and with the weak U.S. dollar. This means that ending stocks could tighten even more for the 2004 crop with prices averaging higher than for the 2003 crop, perhaps around $2.40 to $2.80 per bushel for the marketing year.

Old-crop corn prices still appear to have additional upside potential this winter and into the spring. This may move May futures to near $3.00 per bushel. Basis levels should also improve, so holding old crop in storage makes the most sense.

Corn may well be more bullish than soybeans in 2004 since there is no major Southern Hemisphere crop. Forward pricing opportunities could be considered with December futures at $2.80 or higher. Continued strong exports this winter, or weather concerns this coming spring and summer could drive new crop corn to new highs. Generally, the best new crop pricing opportunities are expected in the February through May time period.

Winter wheat acreage is down three percent and concern remains for dry conditions in the west central plains, plus world wheat stocks are at record tight levels. However, last year’s world wheat crop was greatly reduced by drought in Australia, Canada, Europe, and the Former Soviet Union. A return to more normal world crops in 2004 would help reduce the world tightness and greater seeding of spring wheat could still result help compensate for small winter wheat acreage in the U.S. If normal weather develops for U.S. wheat, prices are expected to move lower into the spring and early summer, therefore pricing of old crop wheat and forwarded pricing some new-crop could be considered as this winter.

Animal Enterprises Head in Various Directions

Chris Hurt

Demand for animal products is expected to be led by strong domestic and foreign income growth and by the lower exchange rate of the U.S. dollar which will stimulate exports. By species, total supplies are expected to be as follows: Pork (-.1%); Beef (+1.3%); Broilers (+3%); Turkey (+.2%); eggs (+.5%); and milk production (+.9%). Prices for all species are expected to be higher in 2004 except for beef cattle and milk.

In the beef sector, consumer demand is not expected to change much even in the light of the December 23rd announcement of BSE. However, beef exports will be largely shut off for what we assume will be the first-half of the year. It is also assumed that beef imports will be down about 15% for the same time period. We export about ten percent of our beef and import a slightly higher percentage. Thus, domestic consumers will need to eat about 8.5 percent more beef for the first-half of the year than they would have in the absence of BSE. This will result in retail beef prices dropping about 10 to 12 percent.

Finished cattle prices dropped from about $93 prior to the announcement to the very low $70, but recovered to the mid $70 currently. For the first quarter of the year, cattle prices are expected to average in the very high $70s or low $80. Summer prices are expected to move lower, perhaps pushing back to the lower $70’s by the end of summer but finish the year with a move back into the low $80’s. If these prices are achieved, the yearly average will be in the higher $70’s and could still be the second or third highest annual cattle price in U.S. history.

Calf prices averaged near $1.00 per pound in 2003, and will be lower this year due to lower fed cattle prices and higher feed costs. Expect calves to average in the very high $80 to mid $90.

For hog producers, pork supplies are expected to be nearly unchanged in 2004, although they will be somewhat higher in the first three quarters before dropping in the fourth quarter as a result of fewer farrowings in the spring quarter.

Prices are expected to be near $40s for an average in the first quarter, and move to the mid-$40’s in the spring and early summer. Summer prices are expected to average a few dollars lower, with the fall quarter average in the very high$30’s. For 2004, prices are expected to average about $42, which is $2 higher than in 2003. Unfortunately, costs are expected to rise by about$2.50 per live hundredweight. So, given current hog price and costs estimates, the industry would have about a $2.00 per live hundredweight loss for the year. The spring and summer quarters are expected to be profitable with losses in the first and the last quarters of the year.

USDA expects milk prices to average in a range of$11.95 to $12.75 per hundredweight (or $12.35 at the mean) in 2004. Milk cow numbers are expected to increase by 1.7 percent with milk production increasing 2.6 percent. There remains a surplus of butter and cheese that will continue to depress prices. With high soybean meal, corn, and energy prices, many dairies will continue to feel the costs-price squeeze. This will be the third year that prices have been in the $12 to $12.50 range, the lowest prices for milk since 1980. Currently futures prices are reflecting more optimism for 2004 milk prices as rising incomes are creating better demand for milk products.

Broiler production is expected to rise by three percent with prices moving upward by three percent to 64 cents per pound. Turkey production is expected to be unchanged with prices also about two percent stronger to 63 cents for wholesale turkeys in Eastern U.S. markets. Egg production is expected to be stable with prices reaching 91 cents per dozen (New York). This would be an increase of three percent over last year.