Most agricultural economists expected U.S. farmers to plant more corn and less everything else this spring, but the scope of the change caught many analysts, including those at the Food and Agricultural Policy Research Institute, off guard.
FAPRI analysts had predicted U.S. cotton producers would plant 13.4 million acres in 2007, 12.2 percent less than in 2006, but even that number was eclipsed by USDA’s forecast that U.S. cotton plantings could drop to 12.1 million acres or 20 percent below 2006. Three weeks before the release of the March 30 Planting Intentions report FAPRI economists said the acreage and price forecasts generated by its economic models may have been overtaken by events.
“Based on January information, we had projected smaller shifts,” said Pat Westhoff, the analyst who oversees the preparation of the agricultural economic baseline by the FAPRI centers at the University of Missouri-Columbia and Iowa State University, Ames. “There have been a number of pessimistic news items about cotton since then, so I am not surprised that the report suggests farmers intend to make larger shifts in acreage out of cotton and into corn than we had projected. Still, I was not expecting the cotton and soybean numbers to be quite this low or the corn number to be quite this high.
“As always, it is important to remember that this report is not the final say on 2007 acreage. Weather conditions this spring and market reactions to the report and other news will mean that actual plantings will certainly differ from this report of farmers’ intentions.”
While FAPRI said cotton plantings would certainly drop by 12 percent or more, it said soybeans would feel the rise in corn the most, falling to 70.5 million acres from 75.5 million acres in 2006. (USDA forecast 67.1 million acres of soybeans.) Wheat area increases to 60.1 million acres in 2007 but drops in following years to 57 million by 2016.
The baseline, prepared annually for Congress, is a collaborative effort of several institutions. Texas A&M, Texas Tech, the University of Arkansas and Arizona State also contribute.
FAPRI analysts say the current outlook depends on the price of corn not becoming too high, removing profits from ethanol plants. Baseline projections show ethanol production remains profitable, but increasing production and falling petroleum prices result in lower ethanol prices.
The baseline projects high crop prices will increase net income for grain farmers; however, higher feed costs cut profits of livestock feeders.
Overall, net farm income dropped $26 billion dollars in 2006 from a record high of $85 billion in 2004, with higher input costs largely responsible. Net farm income could rise $7 billion in 2007 to $66 billion and could remain above $60 billion in later years.
Cash receipts for cattle and calves reached a record $50.7 billion in 2006, but are expected to decline to $47.9 billion by 2010.
“As more expensive corn increased the cost of feeding cattle, feedlots bid down feeder cattle prices,” said Scott Brown, MU FAPRI livestock analyst. “This trend continues through the baseline, as feed costs remain high.”
Poultry producers reacted quickly to higher feed costs, reducing production in the third quarter of 2006. “Slowing growth in poultry is a rarity,” Brown said. “Broiler production is expected to grow only 1.6 percent annually through the baseline, compared with 3 percent annual growth for the previous 10 years.
Three years of profits for hog producers will end in 2007, according to the baseline. The price of producing pork is expected to go up 6 cents a pound, or 16 percent.
Food cost increases remain moderate in spite of higher grain prices. Annual growth in the food Consumer Price Index will average near 2 percent long term, near the general inflation rate, Brown said.
While grain prices play a part in food cost increases, 80 percent of consumer food costs come from other factors, including labor, fuel and packaging.
Fruit and vegetable costs spiked in 2006 and are expected to continue high, given weather-related losses.
Cost of food eaten away from home outpaced home meals in 2005. This trend is expected to continue.
Federal spending for farm programs is lowered by higher grain prices. Direct payments, counter-cyclical payments and marketing loans peaked at $16 billion in the 2005 crop year. Those same payments total $7.7 billion for the current marketing year. Payments are expected to drop to $6.7 billion by the end of the baseline in 2016, with direct payments accounting for $5.3 billion.
The baseline, which will be used to analyze the 2007 farm bill, has been given to the Senate and House agricultural committees and USDA.