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FAPRI Projects Above Average Income for U.S. Farms

Baseline projections given U.S. Congress show strong year, although not as high as 2004. Compiled by staff

Published on: Mar 16, 2005

The year 2004 went into the agricultural records book as one of the best ever. The year 2005 is not likely to come close on crop yield, livestock demand, net farm income or almost any other measure, according to a baseline projection presented to the U.S. Congress this week.

"We project a trend line that is more normal," says Pat Westhoff, policy analyst with the Food and Agricultural Policy Research Institute.

FAPRI issues an annual update of the 10-year baseline of expected yields, production, costs and prices. The FAPRI baseline, an economic indicator against which changes in agriculture are measured, will get a workout in the coming year, as uncertainty and volatility face U.S. farmers, says Abner Womack, co-director of FAPRI at the University of Missouri-Columbia.

FAPRI economists gave baseline books and briefings to the agricultural committees of the U.S. Senate and House of Representatives, Tuesday, Mar. 15. The baseline, which runs to 2014, spells out in detail the record-setting 2004 for crop production, livestock prices and farm income.

In the coming year, net farm income is projected to drop sharply from $74 billion in 2004 to $59 billion. "But, that is not the story," says Westhoff. "Even after correcting for inflation, net farm income remains above the average level of the 10 years prior to 2004.

"In nominal terms, net farm income remains above $50 billion throughout the baseline period." Record crop yields in 2004 led to sharply lower prices received per bushel for grain and oilseeds. The lower prices triggered government counter-cyclical payments, which boosted farm income.

Farmers will be caught in a profit squeeze as input costs rise, particularly for fuel and fertilizer, due to a jump in petroleum prices. Input prices paid by farmers for all production items rose by 5.3% in 2004. Beside the oil-based products, that includes feed, purchased livestock, labor, and other inputs. Total costs are expected to increase another 1% per year in 2005 and 2006.

Farmers buying land for expansions were helped by declining interest rates the past four years. However, prime interest rates are forecast to increase from 4.3% in 2004 to 8.4% in 2010.

In their projections, FAPRI economists assume normal conditions, including normal weather, and continuation of current government policies and payment provisions. Also, the economists assume the current 2002 farm bill, which is set to expire in 2007, will continue unchanged and that the next farm bill will continue present provisions.

Soybean production hit record levels in 2004; however, FAPRI assumes more normal trend lines for the decade. FAPRI projects the soybean baseline on normal growing conditions, with no significant yield impact from Asian soybean rust. Continued expansion of soybean production in South America will keep a limit on U.S. soybean exports.

Corn prices have been helped by expanding use of corn for ethanol production. Corn for fuel is projected to go from 1.4 billion bushels in 2004 to 2 billion bushels by 2014.

Plentiful grain supplies will be good news for livestock feeders. Livestock producers saw record prices last year in spite of turmoil in the beef market with the closing of the borders to export and imports because of concerns for BSE, or mad-cow disease.

"Cattle prices exhibited amazing strength in 2004, as strong U.S. beef demand more than offset a more than 2 billion pound drop in beef exports," says Scott Brown, FAPRI livestock analyst.

Beef production was down sharply, which helped prices. However, Brown says that the beef-cow cycle has reversed and the U.S. beef herd has started rebuilding after eight years of decline. More beef will have a negative impact on prices through most of the baseline. Nebraska direct steer prices which averaged $84.75 per hundredweight in 2004 will hit a low of $71 in 2012 before turning upward.

"Cattle price outlook is heavily dependent on a return to normal trade for both beef and cattle imports with the opening of the Canadian border," Brown says.

The baseline assumes beef trade with Japan and Korea will resume before the end of 2005, but that full trade won't return until 2007.