2008 was a heady year for Pat Westhoff and other analysts at the University of Missouri’s Food and Agricultural Policy Research Institute.
The analysts — along with most of the nation’s grain and soybean producers — were able to bask in the glow of significantly higher commodity prices and record or near-record net farm income. But that warm and fuzzy feeling was short-lived.
“In 2007 and 2008, I was getting calls from outlets like the New York Times, asking why food prices were rising so dramatically,” said Westhoff. “Now I’m mostly getting calls from farm publications wanting to know what’s going on with grain prices.”
Westhoff, co-director of FAPRI and the featured speaker at the mid-year board of directors meeting of the Delta Council in Stoneville, Miss., said those prices “came down hard” when the U.S. economy began to run out of steam in the fall of 2008. Receipts for corn, soybeans and wheat dropped by $2 to $4 per bushel.
Net farm income, which may have surpassed the previous record of $87 billion in 2008, could finish 2009 at an eight-year low of $54 billion because of the decline in cash grain and livestock prices and higher input costs. Food prices, the cause of so much attention in 2008, are marginally lower than in 2008.
While they’re not as likely to rise as dramatically as they did in 2007 and 2008, corn and soybean prices could be moving higher in the months ahead — if energy prices continue to move up — Westhoff and FAPRI economists believe.
General economic conditions will also play a role in the outlook for corn, cotton, soybean and wheat prices. FAPRI, which was established by Congress to provide independent analyses of farm programs and the ag economy, relies on an outside entity, HIS Global Insights, for its forecasts for general economic activity.
“In 2010, Global Insight and most other economists are expecting a full recovery of the U.S. economy with a return to 2.1 percent in real GDP growth,” says Westhoff. “A 2.1 percent increase is not the most robust economic growth by far, but it is strong enough to help you in lots of other respects.”
If you look at other macroeconomic indicators, he noted, you can see that inflation is expected to be higher (1.4 percent compared to a negative .4 percent for 2009); unemployment could continue to rise (it hit 10.2 percent in October compared to 9.2 percent for 2009 to date); and oil prices could rise from an average of $60 per barrel in 2009 to $67 in 2010.
For much of 2007 and 2008, corn prices generally tracked oil prices. “Throughout most of that time, there was such a strong correlation between corn and oil prices you could divide the price of oil in dollars per barrel by 20 and get the corn price,” Westhoff noted. “The only exception was the last months of 2008 when oil prices fell faster than corn prices.”
The traditional relationship between the price of oil and the price of corn, which tends to be transferred into the markets for most of the other commodities grown in the United States, has been skewed somewhat by the Renewable Fuel Standard, which mandates the use of corn to produce more than 10 billion gallons of ethanol in 2009.
“The movement of corn and soybean prices will depend a lot on how fast the general economy recovers and on what happens to oil prices,” he said. If oil prices continue to go up as they have over the last couple of weeks, we could see stronger corn and soybean prices over the next year.”
Westhoff also discussed the outlook for the next farm bill, which could be the subject of congressional hearings as early as next year. Given the record federal budget deficit of $1.417 trillion recorded for fiscal 2009 and the prospects for more, Congress will be forced to look at a number of areas, including farm programs, for spending reductions.
Looking at where those cuts could come, Westhoff provided a chart showing FAPRI’s projections of the categories of farm program spending between 2009-10 and 2017-18. The categories include direct payments, $45.4 billion; counter-cyclical payments, $6.4 billion; marketing loan benefits, $3.6 billion; ACRE payments, $16.6 billion; and crop insurance net indemnities, $53.1 billion.
“Farm program payments have been a very important segment of the agricultural economy over the years,” he said. “If there were to be any cuts in farm programs in front of us, those are places where people could go to try to find savings.”
To see Westhoff’s presentation at the Delta Council’s mid-year board meeting, go to http://www.deltacouncil.org/Westhoff.pdf.