As times of high revenue roll to a stop, producers adjust.
Net U.S. farm income is expected to decline by 24 percent in 2014, or $30 billion, from the 2013 record of $130.5 billion, and prices for most crops are likely to remain below recent peaks for the next 10 years, according to the Food and Agricultural Policy Research Institute’s projections for agricultural and biofuel markets.
FAPRI expects cash expenses to also fall in 2014, but the decline in gross farm income is expected to be greater. After 2014, expenses are projected to rise slowly for the next 10 years. While nominal net farm income levels off at around $90 billion, real income continues to decline, falling back to the 2007 level by 2023.
Adding uncertainty to the long term projections are unrest in the Ukraine and new crop insurance options in new farm bill, the report said. Direct and countercyclical payments and the average crop revenue election (ACRE) program have been replaced by two new options, price loss coverage (PLC) and agriculture risk coverage (ARC). A new crop insurance program for cotton, STAX, will begin in 2015-16.
On average, FAPRI’s projects the cost of PLC and ARC at a little over $5 billion per year. Net CCC outlays (covering commodity programs, the conservation reserve and other programs) dip in 2015 but rebound to about $8 billion per year for the next 10 years.
ARC spending is greatest in 2014 and 2015 but declines to just over $1 billion in later years. Given the price projections in the analysis, average PLC costs increase from about $2 billion for the 2014-15 crop to about $4 billion for the 2023-24 crop. The provision that limits ARC payments to 10 percent of the benchmark revenue per acre puts an upper cap on program payments.
Given the uncertainty over spending on the new PLC and ARC programs, net CCC outlays can be far greater or less than the projected average, FAPRI says. If prices and revenues are far above average, the conservation reserve program may be the only major CCC outlay. On the other hand, low prices or per-acre revenues could trigger payments that exceed the levels of recent years.
Under the previous farm bill, up to 32 million acres could be enrolled in the conservation reserve. The new farm bill reduces that cap in steps to 24 million acres by 2017. Since the actual enrollment was far below the legislated cap in 2012 and 2013, the projected enrollment is near the new limit.
Commenting on the report, Pat Westhoff, director of the University of Missouri’s FAPRI, says producers should expect volatility in the soybean and corn markets over the next five years. On average, corn prices could drop to $4 per bushel and soybeans to $10 per bushel for the next five years.
Those are significant declines from when corn prices peaked at $6.89 per bushel for the drought-reduced crop harvested in 2012. “Believe it or not, 2012, a drought year, was the best net return year for corn growers,” Westhoff said. “For the average U.S. producer, high prices and crop insurance indemnities offset the lower yields.”
Soybean prices shot to $14.40 per bushel in 2012-2013, but will drop to an average of $9.76 for 2014-2018, according to FAPRI.
Lower prices and returns could slightly reduce the total amount of land planted to corn, soybeans and other crops in 2014, FAPRI says. However, adverse weather kept farmers from planting some acres in 2013, so if conditions are more favorable this spring, that could push acreage higher.
Corn acres are expected to drop this year by 4.1 million, with an expected 91.3 million acres planted in 2014. More yield per acre and higher beginning stocks would continue to push prices down in 2014. Soybean acreage is expected to increase by 2.2 million acres to 78.7 million acres in 2014.
FAPRI’s baseline assumes that EPA’s proposal to modify the 2014 Renewable Fuel Standard will be adopted and that a similar approach will be used to set biofuel use mandates in subsequent years. Projected growth in ethanol production over the next several years is limited.
Westhoff said FAPRI’s price projections for the grain markets are “more pessimistic than a year ago” but more optimistic than USDA projections.
Cotton returns, which peaked in 2011-12, are projected to decline for the third straight year in 2014-15, due to lower prices. The new farm bill eliminates the DCP and ACRE programs and does not extend the new PLC and ARC programs to cotton.
Instead, the STAX program will provide a new crop insurance option for cotton producers beginning in 2015-16. FAPRI noted that policy changes in China, especially if unanticipated, could have large impacts on world cotton trade and prices.
High prices and yields resulted in record levels of per-acre revenues for U.S. rice producers in 2013-14. Concerns about drought in California and other factors have pushed rice prices even higher. However, U.S. rice prices are projected to fall in 2014-15 and 2015-16, which will bring U.S. prices more in line with those of other rice exporters.
Projected U.S. wheat production will average about 2.2 billion bushels for the next several years, according to FAPRI, but will vary based on weather and market conditions. Wheat imports have increased, in part because of changes in Canadian regulations. U.S. wheat exports have increased in 2013-14, but could be under pressure in 2014-15 from competing international supplies of wheat and low corn prices.
Reduced cattle numbers, caused in part by multiple years of drought, will limit beef production in 2014 and result in record cattle prices, according to FAPRI. Cattle prices and returns to cow-calf operators are likely to remain high until herds have a chance to rebuild, which will take time.
Lower projected feed costs will help improve the profitability of livestock production. One uncertainty is the effect of porcine epidemic diarrhea virus on the pork sector.
Food price inflation was less than expected in 2013. Food prices are projected to increase by 2 percent in 2014.
FAPRI’s 10-year baseline projections considered U.S. agricultural markets, farm program spending, farm spending and a variety of other indicators.
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