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A closer look at today's agricultural landscapeFinally, something to crow about. . . By Sara Wyant For those of you who travel the back roads and witness the changes taking place across the rural landscape, it's no surprise to see that U.S. agriculture has changed dramatically since the 2002 farm bill was written. And now, on the eve of the 2007 farm bill, members of Congress are trying to take a closer look at what those changes mean from a policy perspective and how they might play out in the future. "A lot of us on this committee have seen with our own eyes how agriculture has changed in recent times and how it is changing today," said Agriculture Committee Chairman Collin Peterson, D-MN. "American farmers and ranchers are more productive today than ever before. They are serving new, fast-growing markets. And increasingly, farmers are eager to meet our nation's growing fuel challenges." He said the hearing was helpful "in getting a picture of the overall agricultural landscape as we examine what current prices and trends may mean for the future." Certainly, no one has a crystal ball on how some of these predictions might play out on individual farms. Just when you think there's a good crop growing in the field or completed a successful calving season, nasty weather or disease problems can throw the best of projections into a tailspin. But there has been plenty of good news in recent years, giving many farmers "something to crow about." Over the longer-term, there seems to be renewed hope that perhaps more young people will want to come back to a career in agriculture. USDA's Chief Economist Keith Collins provided the Committee members with an overview of the current outlook. Some of his findings: U.S. farm income: Cash receipts for producers are forecast at a record $276 billion in 2007, up $37 billion from 2006 and $60 billion from 2003. Cash production expenses are up too: forecast to be a record $222 billion in 2007. That's up $17 billion from 2006 and $45 billion from 2003. With receipts rising faster than expenses, net cash farm income is forecast at $86 billion this year, up sharply from last year and four years ago. The three highest farm income years ever have occurred during the past four years. For most field crops, 2007 cash receipts are forecast to be a record high. For example, cash receipts for wheat, corn, soybeans, and rice are all expected to rise to all-time highs. In contrast, cash receipts for cotton and fruits and nuts are expected to decline this year due to large cotton supplies and weather problems for tree fruits like peaches, pears and oranges. Cash receipts from all livestock species are forecast to exceed $100 billion for the fifth straight year and exceed the previous record high set in 2005 by $14 billion. Receipts for cattle, dairy, and poultry are all expected to set record highs. Production costs: The $45 billion increase in cash production expenses since 2003 is mainly due to an $13 billion increase in farm origin inputs (livestock, feed), $12 billion more in energy-based input costs (fuel, fertilizer, electricity, and pesticides), $4 billion more in labor expenses, and $10 billion more in other operating expenses. Government payments: Government payments are expected to total nearly $14 billion, down only $2 billion from 2006. In 2007, producers are forecast to receive $5.3 billion in direct payments, $3.1 billion in conservation payments, $2 billion in disaster payments, and $1 billion in tobacco transition program payments. In addition, producers are forecast to receive $2.2 billion in counter-cyclical payments and marketing loan assistance benefits, with upland cotton accounting for nearly all of these payments. Debt-to-asset ratios: The balance sheet of U.S. agriculture is expected to strengthen again in 2007. Increases in debt are forecast to be offset by larger increases in farm asset values, with farm real estate values expected to rise 14 percent in 2007. The farm sector's debt-to-asset ratio should drop further to new a historic low level of 10.7 percent in 2007. Ethanol growing, but slimmer margins: U.S. ethanol production capacity is now estimated at 6.9 billion gallons, up 2 billion gallons from a year ago. Production capacity is expected to increase sharply over the coming 18-24 months, if the 76 plants currently under construction are completed. The new construction would add 6.7 billion gallons of additional ethanol production capacity, bringing total capacity to 13.6 billion gallons potentially as early as late 2009. Recent declines in ethanol prices have sharply reduced profitability for ethanol producers. USDA estimates that a 40 million gallon Midwest ethanol plant, receiving the late September price of $1.52 per gallon for ethanol and paying $3.00 per bushel of corn, was earning 17 cents per gallon above variable costs of production and 3 cents below total variable plus capital costs of production. In the current price environment, the 51 cents-per-gallon ethanol tax credit is important in sustaining ethanol demand and prices at levels that are forestalling some plant shut-downs. Returns to Biodiesel shrink: Twenty percent of 2007-08 soybean oil production is expected to be used to produce about 580 million gallons of biodiesel. This compares with only 8 percent of soybean oil production being used for biodiesel in 2005/06 when about 200 million gallons were produced. Similar to ethanol, biodiesel profit margins are eroding due to sharply rising soybean oil prices. Soybean oil is the feedstock for 85 to 90 percent of domestically produced biodiesel. The price of soybean oil has increased over 40 percent over the past year causing biodiesel returns above soybean oil costs plus other variable costs to decline from around 80 cents per gallon to near zero. Vegetable oil prices are expected to remain strong due to strong demand, particularly for biodiesel in the EU, which is likely to keep biodiesel production capacity low and slow expansion. Although EU demand for vegetable oils will continue to pressure the profitability of U.S. biodiesel production, the EU also presents an export opportunity. Due to the $1 per gallon tax credit for blending, U.S. produced biodiesel is competitive in the EU biodiesel market. Since March 2007, net exports of biodiesel have accounted for more than 25 percent of U.S. biodiesel production. As long as U.S. biodiesel remains competitive in world markets, U.S. production is likely to grow despite weak margins. More wheat, less cotton: For 2007-08, wheat acreage, which had been trending downward over the past 25 years, increased by over 3 million acres to 60.3 million. U.S. wheat production is estimated at 2.1 billion bushels, up from 1.8 billion bushels in 2006. Although U.S. production recovered from last year's drought-reduced level, the 2007 crop failed to live up to early expectations. Production prospects have also fallen sharply in several major wheat producing countries. Reflecting this tight market, the average farm price of wheat is forecast to be a record $6.10 per bushel in 2007-08, compared with $4.26 per bushel for the 2006/07 crop. Producers are expected to respond to record high prices by increasing wheat plantings again in 2008 by 5 to 7 percent, to about 64 million acres. Contracts on 2.5 million acres enrolled in the Conservation Reserve Program (CRP) expired on September 30 and a large portion of these expiring CRP acres are located in wheat producing States. Corn planted area for 2008 is expected to fall as prices and returns for competing crops, such as wheat and soybeans, have improved relative to corn in recent months. Given the current outlook for the 2008 crop corn and competing crop prices, corn planted area next spring could decline 6 to 8 percent from 2007 to around 87 million acres. Even with the potential for a 6 to 8 percent reduction in planted area next spring, 2008 corn area would still be 8 to 12 percent above the 1997 to 2006 average. Cotton area and production is likely to shrink again. In 2007-08, strong grain and improved soybean prices reduced cotton plantings 29 percent to 10.85 million acres, the lowest area planted since 1989. The Southeast and Delta regions each cut cotton plantings by more than 30 percent and North Carolina, South Carolina, Virginia, Louisiana, Mississippi, and Oklahoma experienced reductions of 40 percent or more. Lower acreage and production are projected to keep total cotton supplies in 2007-08 about unchanged from the previous year. Cotton planted area in the U.S. could decline as much as 8 percent to about 10.0 million acres in 2008. Editor's note: Columnist Sara Wyant is president of Agri-Pulse Communications, Inc. and publishes a bi-weekly newsletter, Agri-Pulse, on food and farm policy. For more information, you can e-mail her at Agripulse@aol.com. 10/29/07 Date: 10/25/07
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