Agriculture Will Turn Up, But Just a Bit In 1999*

After a difficult 1998, Indi-ana agriculture is facing a year of only modest improvement. Revenues from the 1999 crop are expected to be similar to 1998, with Loan Deficiency Payments once again important in marketing plans. Slightly better cropping returns will be related to modest reductions in input costs. Wheat prices are expected to be about 20 cents per bushel higher than for the 1998 crop, with corn prices unchanged and soybean prices down 20 cents.

The animal sector will experience the largest improvement. This will be particularly true for hogs, which resulted in about a $90 million loss for Hoosier producers in 1998. This year, producers are expected to only reach breakeven, however. Income prospects for poultry include a reduction in returns to near breakeven for egg producers, but a return to profitability for turkeys after two years of losses. Dairy returns will fade some-what as milk prices drop from record high levels in 1998, but profits will remain favorable. The Indiana beef sector will also return to profits in 1999, with prospects for several positive income years to come.

As in 1998, the strength of the general economy and the continued flow of money from the federal government will be important in keeping the agricultural sector afloat.

 

A Slowing, But Positive Growth Economy

 

The general economy had another outstanding year of growth in 1998, but several concerns face the U.S. in 1999. Key among these is the slowdown in world economic growth. This weakness has led to weak exports and record trade deficits as imports continue to rise. Also, manufacturing employment has been falling, perhaps as a result of reduced exports, and business investment in buildings and equipment has also slowed. Finally,

the continued growth of our U.S. economy has been led by robust consumer spending. However, households have recently been spending more than they are earning, thus consumption is being kept high by drawing down their savings. This is the first time since the Great Depression that consumers have had a “negative savings rate,” a situation which cannot be maintained in the longer run.

These concerns point to a more cautious forecast for 1999. The rate of growth in GDP is expected to slow to about a 2 percent annual rate of growth. It is important to note that this forecast represents only a slowing of the growth rate, not a recession. Consumers are expected to continue to spend, just at a slower pace. The slowing of economic growth will likely lead to a small increase in unemployment. Expect to see the unemployment rate rise to 5 percent by the end of 1999, up from the mid-4 percent level at the cur-rent time.

The current inflation rate is 2.4 percent per year, not counting food and fuel. With falling oil prices, over-all infliction is less than 2 percent. Only modest inflation pressure is expected in the coming year. Contributing to the low inflation rate are depressed commodity prices. This can easily be seen in low fuel prices and depressed agricultural commodity prices. Wage pressures have also been moderate as labor continues to increase incomes due to productivity increases and have not demanded a larger portion of corporate profits.

The U.S. economy faces a period of moderate-income growth with low inflation and low interest rates. This provides the Federal Reserve with the opportunity to reduce interest rates if the U.S. economy begins to show excessive signs of slowing in 1999. Consequently, it is likely that interest rates could move lower, per-haps by .2 percent to .4 percent over the year.

Also of positive economic note are governmental budget surpluses. A number of states, including Indiana, have large budget surpluses, as does the federal government. Budget sur-pluses at the federal level mean that the amount of debt issued can be reduced, thereby freeing more debt capital for use by consumers and businesses. Less government demand for debt means lower interest rates. Also, if the U.S. economy does begin to falter in 1999, the federal government is in a stronger bud-get position to either increase government spending to stimulate the economy or to cut taxes.

 

Agricultural Trade Remains Depressed

 

Revenues from agricultural exports are expected to weaken 6 percent in 1999 to $50.5 billion, the lowest level since 1994. The weakness this year is a result of lower prices rather than smaller sales volumes. In fact, the total volume of agricultural exports is expected to grow about 1 percent with recovery in wheat, corn, and red meat products. However, weaker export volumes are expected for soybeans and for poultry.

Since the peak export year in 1996, the volume of agricultural exports has dropped 5 percent, but the value has dropped by 16 percent. This reflects both a weakening of demand for U.S. exports as well as a major reduction in prices. The problem is a result of increased world crop production in the past two years and of the weaker world economy.

The value of exports to Asia has been of particular concern, because they have dropped by 31 percent since their peak in 1996. Prospects remain uncertain at best for Asia, as we read almost daily in the newspaper headlines on the business page. Some believe the recessionary tendencies in Asia may abate some-what, but a return to positive economic growth is not expected until the year 2000. While growth cannot be expected from Asia this year, there are at least signs that the worst may be behind.

One of these signals is the changing value of the U.S. dollar, which reached a peak relative to foreign currencies in the summer of 1998. Since that time the dollar has dropped sharply relative to major trading partners such as the Japanese yen. The dollar could continue to decline relative to other currencies if the U.S. economy continues to slow as expected, if large trade deficits persist, and if emerging economies begin to show signs of recovery from recession. A declining dollar means U.S. farm goods become more price competitive and would provide better export prospects late in 1999 and especially in 2000.

 

Will The Government Bridge the Income Gap?

 

Farm incomes were under severe downward pressure in 1998 as revenues for all crops and livestock products dropped about 5 percent for all farmers across the country. However, the federal government provided additional money to stabilize the sector as government expenditures rose by $5.4 billion. Thus, net farm income in the U.S. only dropped by about $2 billion, or 4 percent, from 1997. The income impacts in Indiana were more severe due to our specialization in grain and hog production, the sectors most severely affected.

At least for 1998, it is clear that additional federal government expenditures provided a valuable cushion in what would have been a more financially difficult period for farmers. Contrary to the tone of the Freedom to Farm provisions, the federal government seemed unwilling to subject U.S. farmers to the full impacts of a market-oriented agriculture. This raises the question of whether U.S. government policy has already shifted back towards proviling disaster assistance as well as income supports at higher levels than perceived by the Freedom to Farm legislation. If the U.S. government found ways to largely bridge the income gap in 1998, will they, or can they, be expected to do so in 1999 and future years?

Our current farm legislation was written at a time of rapidly expanding world markets, but it reflected little thought and few provisions for a period of weak world demand and low farm prices. Key among policy issues is whether the marketplace will do an acceptable job of bringing world supply and demand back into balance or whether the U.S. government would once again become more assertive at supply management. Provision for set-asides are not contained in our farm policy, except for the Farmer Owned Reserve. Will world production drop in 1999 to better align supply with demand, or will farmers worldwide keep producing as much as possible? If grain pro-duction continues to be large in 1999 relative to the world use, some con-sideration of U.S. supply management could resurface for the 2000 crop.

 

Corn Prospects Remain Weak

 

The final crop estimate set the 1998 national yield of corn at 134.4 bushels per acre. The crop was estimated at 9.76 billion bushels, 6 percent above the previous year’s crop. Total supply was a record of 11.1 billion bushels. Usage is expected to grow to a record this year of 9.3 billion bushels, with record feed usage and record food, seed, and industrial usage. Exports are expected to up by 15 percent, and the year-to-date export pace is up 18 percent. Carry-over stocks are expected to reach 1.8 billion bushels which represents 71 days of use, a number which is among the higher levels over the past decade.

The Southern Hemisphere crop is expected to be smaller, led by a 25 percent reduction in the size of the Argentine crop. The South African crop will be up 18 percent, but since its production is small compared to Argentina’s crop, the two on average will be down about 13 percent. The smaller crops in the first half of 1999 will be supportive to corn exports and to corn prices. Weather conditions in South America were dry during the planting season, but more precipitation fell in December. Some dry pockets, however, remain.

Typical La Niña weather patterns would suggest dry conditions this winter in South America, and a cold wet winter in the Midwest. Dryer weather might be expected in South America if the La Niña continues. La Niña summer weather in the Midwest tends toward hot and dry conditions. Both of these patterns would favor lower yields and higher prices.

Corn prices for the 1998 crop are expected to average about $2.05 in Indiana. Nationally, over 3 billion bushels of corn received LDPs and thus are not eligible for government loans. This means that those farmers are bearing the full costs of storage, and that the corn is likely to be sold earlier than it would have been under the old loan program. This will keep price rallies to a minimum. Expect corn prices to have only small price increases this winter. Any sustained increase will be dependent upon dry conditions in South America.

Indiana cash prices could rise 10 cents to 20 cents into the spring. If adverse weather develops, prices could move up 30 cents to 40 cents. In general, without weather problems expect very modest price enhancement.

For the new crop, planted acreage of winter wheat is expected to be down 3 million acres. Much of this is in Missouri, Illinois, Indiana, and Ohio. In addition, cotton acres are expected to drop in the South. This means that more acres will be avail-able to be planted to both corn and soybeans. At this time, economics would seem to favor corn because the bean/corn new crop futures price ratio is only 2.3 to 1. Normally, a ratio of 2.5 to 1 or less favors corn; however, many farmers are short on cash for spring planting and thus are talking about more beans to keep their input costs down. In addition, if prices are low at harvest, the government loans favor soybeans (around$5.40 per bushel soybean loan com-pared to $1.95 corn loan).

Using 80.5 million acres planted with yields of 130.5 bushels would provide a 1999 crop in the range of 9.6 billion bushels. Usage of the 1998 crop is forecast at 9.3 billion bushels. For 1999, feed use will drop as both cattle and pork numbers will be lower, exports could continue to increase, but total use would struggle to go much higher. Thus, carryovers could rise another 200 to 300 million bushels and push toward 2 billion bushels. This means 1999 new crop prices would be at or below those of the 1998 crop if weather is normal.

In general, producers should be ready to take advantages of small price rallies on the order of 20 cents in both the old and new crop. The year of 1999 may be a year to be conservative in marketing.

 

Soybeans Face Export and Acreage Hurdles

 

Soybean yields averaged 38.9 bushels per acre for the nation in 1998, somewhat above trend. Total production reached 2.76 billion bushels, a new record. Total supply was also

a record at nearly 3 billion bushels.

Exports are the most disappointing aspect of utilization this year. The USDA is projecting a decline of 7 percent in exports, yet the year-to-date total is down 24 percent. This means that USDA will need to lower their export usage in future reports and likely increase carryovers. Carryover is currently estimated at over 400 million bushels, which represents a 60-day supply, near the highest carryovers of the last decade.

The South American crop is expected to be down by 4 percent in Argentina and 2 percent in Brazil, primarily as a result of weather that will be closer to average after an exceptionally favorable weather pattern for last year’s crop. Devaluation of the Brazilian currency will make their beans more competitive in world markets.

Prices in Indiana are expected to average about $5.30 per bushel for the 1998 marketing year. The market will watch weather maps over South America for clues as to the overall direction of prices. If weather problems do develop there, cash soy-bean prices should move up 30 cents to 40 cents per bushel. Without a weather scare, prices are expected to only move up 0 to 30 cents this spring.

Producers are indicating an intention to plant more soybeans in 1999. With the pool of acres to come from winter wheat, this could result in 2 million more acres of beans, or a planted acreage of 74 million acres. With trend yields of 38.6 bushels per acre, this would generate a crop of 2.8 billion bushels, another record. Current use is 2.5 billion, with the prospects of adding 200 million bushels to carryovers or pushing them up near 600 million bushels. This would represent over 80 days of unused stocks at the end of the year. Prices would average about 25 cents lower than this year (around $5.05), with harvest prices dropping as low as $4.50 per bushel. LDPs would once again become the marketing strategy to consider.

Needless to say, U.S. farmers would like to see a smaller crop somewhere in the world in the coming 8 months because the implications of such low prices in an already depressed sector would add to the financial difficulty. Adverse weather seems to provide the greatest odds of a price rally as continued weakness in the world economy makes demand-based rallies less likely.

 

Wheat Prospects Could Brighten

 

Wheat has been the crop with the most severe carryover problem.  Even though wheat acreage dropped sharply in 1998, extremely high yields at 43.2 bushels per acre provided a 2.6-billion-bushel crop. Usage is projected to be higher by nearly 200 million bushels due to more wheat feeding and to stronger exports. Carryovers will reach an estimated 150 days of use on June 1 of this year. These are among the largest carryovers in the past decade.

Acreage of winter wheat is expected to be down about 3 million acres. The amount of spring wheat seeded will largely depend on price relationships of soybeans and wheat this spring.

Assuming a 3-million-acre lower total seeding and trend yields at 40.5 bushels per acre, a crop of only 2.2 billion bushels would be produced. With a usage rate currently at 2.4 billion bushels, carryovers could drop, with somewhat higher prices for the 1999 crop.

Season average prices for the 1999-2000 crop year would be expected to average in the $2.70 to$2.90 range, or 20 cents higher than the current marketing year.

 

Hog Hopes Rise from Financial Disaster

 

After unexpectedly huge supplies of pork in November and December, pork supplies are expected to moderate in 1999. Spring supplies are expected to be near unchanged. Far-rowing intentions for winter were down 1 percent and for spring down 7 percent. If so, this means that pork supplies would fall throughout the year.

Hog prices are expected to be in the lower $30s for March, and reach the mid-$30s by May. Summer prices are expected to be in the very high$30s, with prices finishing the year in the low $40s.

Further improvements in price can be anticipated for the year 2000. Average price for 2000 will likely reach the mid-to-higher $40s, with some prices above $50 in the summer and fall of 2000. In the past three cycles, the time period from price low to price high has averaged 19 months. Assuming December 1998 as the low price point, this same timing would suggest high prices by the summer of 2000. The magnitude of the price increase, of course, will be affected by the degree to which the industry liquidates the breeding herd this year.

While the outlook has improved sharply, losses are expected at least through April 1999 and will continue to add to the financial pit into which hog producers have been thrown. At this point it appears that most operations which are well managed and have had a history of profitability will be able to continue in the industry. However, some operations face huge discouragement and financial difficulties they just cannot over-come. Expect nearly 20 percent of the nation’s hog producers to leave the industry this year. In Indiana this number will be smaller, about 15 percent.

 

Beef Means Better for 1999

 

For 1999, USDA is estimating beef production will drop to 24.1 billion pounds, down 6 percent. Reduction in production will be evident throughout the year starting with a 4-percent reduction in the first quarter and then 7-percent to 8-percent reductions in each of the quarters from second to fourth. Per capita supplies will fall from 68.2 pounds per capita to 63.3 pounds in 1999, a 7-percent plunge.

For 1999, the beef trade deficit will remain about the same, as beef exports grow by 8 percent and beef imports grow about 7 percent.

Beef will have strong competition, particularly in the first half, with the continuation of record pork supplies. Prices should average in the higher$60s for the year. The lowest prices will occur in the first quarter and average in the $63 to $65 range. Second quarter prices should strengthen to the $65 to $69 range, with last-half prices in the higher $60s.

Feeder cattle at Oklahoma City averaged $72 in 1998 and are expected to rise to an average of near$80 in 1999. Most of the strength in feeder cattle will result from the much smaller 1998 calf crop and the strength in the finished cattle market.

Calf prices at Oklahoma City for 500-pound steers averaged a disappointing $81 per live hundredweight. For 1999 they are expected to be in the higher $80s to low $90s. Indiana calf prices are $3 to $5 below those of Oklahoma City.

 

Milk Prices to Weaken After Records

 

After record high milk prices, which reached $15.40 per hundredweight for all U.S. milk in 1998, prospects for 1999 are somewhat lower. Prices are expected to drop about $1 per hundredweight in 1999. After virtually no increase in production in 1998, production is expected to increase by 2 percent in 1999. Usage, on the other hand, will increase about 1.8 percent, allowing only modest increase in stocks.

Low feed prices in combination with moderate reductions in the price of milk will keep the dairy industry in strong profits for 1999. Production increases could become larger by the last half of 1999, with profit prospects weakening relative to the first half.

 

Poultry: Some Improvement

 

Egg production increased 2.4 percent in 1998, with further increases of this magnitude expected for 1999. Demand is expected to continue to remain strong, but not by

enough to keep prices from dropping this year. Prices are expected to drop 5 percent to 8 per-cent with the industry operating near a breakeven situation.

Turkey producers have experienced losses over the past two years. Poult placements for 1999 are about 10 percent lower than last year, and this means a sharp cutback in supplies. With the recovery in prices and moderate feed costs, turkey producers should see a return to profits in 1999.

Chicken production was up only 1.8 percent in 1998, with prices up 7 percent. Russia had been buying about 17 percent of U.S. production, but that ended with the collapse of their currency last summer. For 1999, production is expected to be up about 6 percent with prices and profits headed down.

 

Weaker Land Values, But Not Cash Rents!

 

The Indiana land market appears to have weakened somewhat in the last half of 1998. After making new highs in our June survey, another survey of the same expert panel in December suggested that land values for average and high quality land had dropped around 2 percent since summer and about 5 percent for low-quality land. Confirming these results is the Chicago Federal Reserve Bank, which surveyed its commercial bank loan officers and reported Indiana land values to be down about 3 percent at the end of the third quarter of 1998.

The weakness is related to depressed crop prices and a growing concern about price prospects for the 1999 crop. Offsetting the weakened tone for operating returns is the decline in interest rates, with anticipation of even lower rates, stronger than expected government payments, and continued strength of the general economy which is keeping the development demand of farm-land strong.

Land values seem to be at a sensitive point where positive news could stabilize them or more negative news could cause further erosion. Positive developments could include improvement in the Asian economies, a reduced size of Southern Hemisphere crops due to dry weather, and lower interest rates. On the negative side, continuation of the current low prices into the 1999 crop could result in a shift to more bearish long-term attitudes. This is a time to do some forward planning. As a part of that planning buyers and owners should ask, “How would a reduction in land values of 10 percent to 20 percent affect the financial health of my business?”

Poor crop returns last year and prospects for the same in 1999 would seem to suggest downward adjustment in cash rents. However, our December survey does not indicate this to be the case. Respondents reported rents unchanged to some-what higher for 1999.

Cash tenants seem to be caught in a trap, needing to keep rents constant or risk not farming the land in 1999, because there apparently is a pool of willing cash renters ready to pay last year’s rates or higher. If crop prices do not improve, this will present a growing dilemma for a number of cash tenants as they evaluate at what rental rate they should not take the risk of farming a piece of land.

Given current markets and prospects for government payments, cash tenants who continue to bid rents higher are likely taking on consider-able additional risk in 1999. We estimate that with cash rents similar to last year ($112 per acre for 123 bushel corn land), the cash tenant raising a corn-soybean rotation has only a 30 percent chance of generating a return that will cover the cash rent plus operating expenses of $117 per acre ($148 per acre for corn and$85 per acre for soybeans) and pro-vide $80 per acre for machinery ownership and family living expenses. If the current observation of steady to slightly higher rents is valid, clearly many tenants have prospects of not recovering costs in 1999.

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* This article was prepared by the Agricultural Economics Outlook staff: Mike Boehlje, Larry DeBoer, Craig Dobbins, Otto Doering, Howard Doster, Chris Hurt, Marshall Martin, Phillip Paarlberg, David Petritz, Wally Tyner, and Joe Uhl.