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 by the Doane economists January/February 2005 Crop yields in 2004 were phenomenal. Producers in almost all parts of the country harvested record crops of corn, soybeans and cotton, and net cash farm income soared to new highs. The combination of large crops, modest gains in production costs and rising government payments all contributed to the positive economic returns. This good income for farmers puts a positive spin on the outlook for almost all other sectors of the agriculture industry.
The corn yield in 2004 soared far above the previous record level, settling at a national average of more than 160 bushels per acre. Even with prices declining through most of the year, total net returns per acre from corn production were high. Even though corn prices have declined sharply compared to last spring, we are not expecting farmers to cut corn acreage in 2005. Net returns to corn remain very high; corn yields are rising at a much faster rate than those for other crops; new biotech varieties and improved seed treatments make growing continuous corn more practical; and concerns about Asian rust may discourage some farmers from planting soybeans. There is a very good story to tell about corn demand. Total domestic and export use this year is expected to reach about 10.9 billion bushels. Exports and feed use are both projected to be up, and exports are also on the rise. The solid gains in demand may well continue. Ethanol production is continuing to rise, and more ethanol plants are under construction. Congress may finally pass an energy bill that includes the Renewable Fuels Standard, which will require even more ethanol production and use. Solid gains in exports also seem likely, with China backing away from selling corn to other countries and probably becoming a net importer itself. With corn stocks at the end of 2004-05 projected to be near 1.8 billion bushels, it will be a struggle for corn prices to stage a very sizable recovery. It will take weather problems next season for prices to get much above the loan rate, and if growing conditions in 2005 are anything like they were in 2004, corn prices will fall even further. Even so, the safety net provided by the farm program will largely protect farm income. Already, farmers are collecting loan deficiency payments, direct payments and counter-cyclical payments, which may play an important role in farm income in 2005 and beyond.
Recent developments may have shifted the outlook for the soybean market. Yields came in strong in 2004, with records in many parts of the country. Great prices in the spring encouraged farmers to boost soybean acreage. While prices had declined to near the loan rate by harvest time, farmers had plenty of opportunities to take advantage of the price strength over the summer. The small 2003 crop triggered good prices in 2004. Bad weather pushed 2003 yields down to near 1993 levels, and prices had to rise to ration the limited supplies. The price rise was given another boost when soybean crops in Brazil and Argentina were hurt by adverse weather and widespread disease problems. The combination sent U.S. soybean prices up to the $10 mark early in 2004. However, the huge 2004 soybean crop has put a different spin on the market, with stocks nearly tripling and prices moving below the loan rate of $5 per bushel. With U.S. soybeans facing strong competition from South America, soybean acreage was expected to stagnate near 2004 levels. But late in the season, the discovery of Asian rust in several states across the South threw a wrench into the outlook. Concerned about the possible impact that Asian rust can have on soybean yields and on per-acre pesticide costs, at least some producers will cut back on soybean acreage in 2005. The impact will be felt mostly in the Southern states stretching from Louisiana through the Carolinas, but some downward adjustment in acreage is also expected for the Corn Belt states. OUTLOOK FOR COTTON As was the case with corn and soybeans, U.S. cotton yields soared to new record levels in 2004, leading to a big buildup in stocks. The cotton market feels the pinch from both sides, with production up more than 4 million bales and demand down by almost 2 million. As a result, cotton stocks went from a fairly snug 3.5 million bales at the end of 2003-04 to an excessive level of 7.5 million by the end of 2004-05. With this change in fundamentals, cotton prices plunged to near 40¢ per pound compared to 70¢ per pound at the beginning of 2004. Domestic cotton use has been declining for years as imports of finished goods have taken a larger share of the market. With that backdrop, exports are critical. Exports have been hurt by a recovery in production in China, and longer term there is the chance that the United States will lose some of the policies that help keep U.S. cotton competitive in world markets. If the recent WTO ruling is upheld, Congress may have to end or at least modify the Step 2 program and possibly the GSM credit guarantees. That could hurt U.S. cotton exports in future years. With prices down sharply from last year, some decline in cotton acreage had been expected for 2005. However, the discovery of Asian rust will probably push some farmers to plant more cotton in place of soybeans. The result could be a year over year increase in cotton acreage, even though supplies are already excessive. Another good yield in 2005 could hold the cotton market down for the foreseeable future. FARM POLICY AND INTEREST RATES Farm programs are set in the 2002 Farm Bill, and no significant changes are expected for 2005 or 2006. The Federal Open Market Committee has been pushing interest rates higher since the Fed funds rate hit a bottom of 1.0 percent at the end of 2003. With respect to some offsetting factors, this will probably continue through the new year as well. Overall, interest rates are expected to continue to rise in 2005, but no huge jump is expected. Best guess right now is that rates will increase by 1.5 to 2.0 points and the Fed Funds rate will end the year at about 4.25 to 4.50 percent. This will push the prime rate from its current rate of 5.25 percent to 6.75 to 7.25 percent. AM
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