Pricevolatilitywillcontinue.cfm Pricevolatilitywillcontinue.cfm Price volatility will continue, FAPRI analysis says
Home News Livestock Crops Markets Hay, Range & Pasture Home & Family Classifieds Resources This Week's Journal



Farm Survey


AgriMartin
Journal Getaways


Reader Comment:
by Greater Franklin County

"Thanks for picking up the story about our Buy One Product Local campaign --- we're"....Read the story...
Join other discussions.

Price volatility will continue, FAPRI analysis says

By Doug Rich


OUTLOOK CONFERENCE--Brent Carpenter, Missouri Farms Research Associate at the University of Missouri, was the moderator for the Missouri Agriculture Outlook Conference March 11, in Jefferson City, Mo. The Food and Agricultural Policy Research Institute presented projections based on its 10-year baseline report. (Journal photo by Doug Rich.)

For grain, livestock and dairy producers, 2010 can't get here soon enough.

That is when the Food and Agricultural Policy Research Institute (FAPRI) projects the economy will begin to turn around, pulling the agricultural sector along with it.

FAPRI presented results from their 10-year baseline projection for the U.S. agricultural and biofuel markets at a meeting in Jefferson City, Mo., on March 11. Brent Carpenter, Missouri Farms Research Associate at the University of Missouri, who moderated the outlook seminar, pointed out that the baseline is not a forecast of what will happen, but a projection of what could happen if current policies remain in place.

According to the baseline report, net farm income begins to recover in 2010 and increases slowly over time. Total farm receipts will slightly outpace the growth in production expenses over that time. Before that happens, net farm income is projected to fall by $18 billion in 2009.

Over the 10-year span projected in the baseline, government payments will be a smaller part of farm income than they were in 2005 and 2006.

Recovery

"It will not be a very quick turn around; it takes a while to get projects in place," John Kruse, managing director of agriculture service with IHS Global Insight, Inc., said.

Looking at the global agricultural situation, Kruse said price volatility is here to stay for the next three to four years. Kruse said global uncertainty is one of the biggest factors affecting prices for ag products on a global basis, but speculation, low world stocks, and new sources of demand that have tightened up excess production will play a role, also.

It takes a while for technology to respond to higher prices, Kruse said. But new technology like 8-way trait stack for corn could provide a 7.5 percent yield increase. RoundupReady2 soybean varieties could provide a 10 percent yield increase.

"It does not take much growth in yields to erode profits," Kruse said. "The squeeze on crop prices may just be beginning."

According to the baseline report, crop receipts will not exceed 2008 levels until 2014.

Expect some changes in the cost of production. In 2009, it is projected that 45 percent of variable costs for corn production will be spent on fertilizer and 22 percent on seed. Lori Wilcox, research and operations program director at FAPRI, said over time seed costs will increase and fertilizer costs will decrease with the introduction of more stacked trait varieties.

Oil

"As we get to about 2015, there is a $90 per barrel cost of oil looming out there," Kruse said. "Long term, the price of oil is coming back to its old behavior."

Biofuels will continue to be an important part of a grain price and usage picture over the next 10 years, according to FAPRI.

Pat Westhoff, FAPRI co-director, noted that no new ethanol plants were started in 2008 and a few plants will be idled in 2009. The growth in corn-based ethanol production will slow down, but still reach 15 billion gallons by 2016. The future of cellulosic ethanol production is very uncertain, according to the baseline report.

"We will consume only what is required by the Renewable Fuels Standard to follow the law," Westhoff said.

The baseline report states that ethanol blends must be price-competitive with regular gasoline at retail to encourage the required increase in use.

"The blending wall and how fast we are approaching it is an issue," Kruse said.

Total gasoline consumption in this country is about 140 billion gallons. A 10 percent blend would be about 14 billion gallons. Kruse said 90 percent of that amount or 12.5 billion gallons is the blending wall.

We are approaching that amount very quickly. Kruse said the blending wall should be extended to include cellulosic ethanol.

With ethanol consumption hovering around the RFS level, the amount of corn used for feed will exceed that use for ethanol. Bushels of corn used for feed will level off at around 5.21 billion bushels and corn used for ethanol will stay around 4.47 billion bushels by 2013.

Biodiesel

On the soybean side, Westhoff said, the crush demand for soybeans is very weak right now.

"We have lower demand for soybean oil in general and soybean oil prices have collapsed, relative where they were a year ago."

This is due partly to weaker biodiesel production here and overseas but also to slower economic growth overseas.

Production of biodiesel from feedstocks other than soybeans is expected to expand over the next 10 years. The baseline report states that biodiesel feedstocks will be increasingly diverse with greater shares coming from fats and oils other than soybean oil. As domestic mandates for biodiesel use grow, so will biodiesel use. Eventually this will use up exportable supplies of biodiesel.

"The amount of biodiesel we make from other sources is much greater than it was just a couple of years ago," Westhoff said. "Animal fat will have a much more important share of the biodiesel market."

Soybean exports are down a little bit but not dramatically down. Westhoff said lower crop yields in South America paint a better picture for soybean exports in 2009 than was expected.

Livestock

"In the livestock sector, it is hard to find too much to be optimistic about," Scott Brown, University of Missouri market and policy research assistant professor, said. "We hammered profits in the meat sector in 2008."

The dairy sector suffered their worst returns on record in 2008. Low milk prices along with historically high production costs put the dairy sector under severe economic stress.

Last year was also the worst financial year for hog producers since 1998. Record exports were not enough to overcome higher feed costs. Pork exports have more than tripled since 2001.

"There was phenomenal pork exports growth in 2008 and it came at a very critical time for the industry," Brown said. "I don't think pork exports will fall apart in 2009 but it is to do, back to back, what we did in 2007 and 2008."

Feed costs also hurt the beef industry in 2008. The baseline projects that feed and non-feed costs will moderate this year, but stay above levels seen earlier this decade. Beef cow numbers will continue to decline through 2014. According to FAPRI, the beef industry will return to profitable levels in a few years when beef cow numbers fall to 13 percent below the peak reached in 1996.

"In the past, we could count on three things: Death, taxes and a two percent increase in chicken consumption," Brown said. "That is not true anymore."

Brown said chicken is the one meat that has seen the biggest slide in demand relative to historical growth. This was a big shock to the chicken industry to see demand that much below year ago levels.

"This was the reason we saw the chicken industry the most unhappy with high feed prices," Brown said.

Of the three major meats, chicken has seen the biggest drop in domestic demand. According to the baseline, the difficult financial situation will result in less chicken and turkey production this year and slower than average production growth in 2010. As the economy begins to rebuild in 2010, so will export for poultry products.

Brown said the key drivers in the meat sector are U.S. income growth, income growth around the world, exchange rates, new demand for crops and market speculation.

In summary, the baseline report projects that, for most crops, prices will remain above pre-2007 level but below recent peaks. If U.S. and world economies recover, prices for livestock and dairy products should begin to increase. Recovery should begin in 2010 if the current farm bill stays in place, the current energy bill stays in place, that expiring biofuel tax and tariff provisions are extended and there are no livestock disease outbreaks that affect the export markets.

Doug Rich can be reached by phone at 785-749-5304, or by e-mail at richhpj@aol.com.



Google
 
Web hpj.com

Copyright 1995-2014.  High Plains Publishers, Inc.  All rights reserved.  Any republishing of these pages, including electronic reproduction of the editorial archives or classified advertising, is strictly prohibited. If you have questions or comments you can reach us at
High Plains Journal 1500 E. Wyatt Earp Blvd., P.O. Box 760, Dodge City, KS 67801 or call 1-800-452-7171. Email: webmaster@hpj.com

 

Archives Search



Inside Futures

Editorial Archives

Browse Archives