How do you put together a credible five-year business plan given the monumental changes—record droughts, high land values and increased export growth—of the past two years? Terry Barr, CoBank senior director of Industry Research, provided guidance at USDA’s Agricultural Outlook Forum. The challenge is separating short-term variations from long-term trends to produce a new normal, Barr said, noting there are eight issues that should drive a five-year plan.
Assume declining federal ag support
USDA’s projection for 2013 net farm income assumes
current subsidies, but it’s likely the federal safety net will switch to insurance. That’s only the beginning.
Ethanol industry loses momentum
Energy policy favors corn-based ethanol as a hedge against oil imports. The U.S. is predicted to be the world’s top oil producer by 2017. Declining energy prices are a possibility, Barr said.
Global demand will shift
Farmers have benefited from export growth fueled by an emerging middle class in developing countries, but the driver for ag will be how many people escape poverty—not the size of the middle class. "That’s when people change their diets," Barr said. Also, as developing countries grow, they replace meat imports with domestically produced meat.
Corn acres might increase
Barr is skeptical farmers will plant fewer corn acres, as USDA predicts. USDA thinks farmers will switch to soybeans after the 2012 drought. A large South American soybean crop might damage price expectations before planting, Barr said. More corn might be planted in the Southeast to gain an early harvest in a market with short supply. Grain stocks might be low, but we can rebuild inventory quickly, he said.
Land values might tumble
The run-up in land values was driven by high commodity prices, zero interest rates and natural gas exploration. This led to new patterns in land value changes. Barr doesn’t expect a big decline.
If grain prices drop, land will follow. The Federal Reserve can’t keep interest rates low indefinitely. He expects a "rapid run-up in rates," likely in 2014, to realign them with a recovering economy.
Rising meat exports create risk
Barr doesn’t expect much of an increase in meat production during the next five years. Growing exports expose the sector to increased risks. The pork industry exports 23% of its production. Japan is the No. 1 export market, and the value of the yen has dropped 18% in recent months. That’s going to make export sales to Japan an uphill battle, he said.
Dairy has tough financial row to hoe
The past year’s run up in feed prices made the dairy industry vulnerable. Barr said dairy balance sheets, particularly in the West, are not strong enough to withstand the imbalance between feed and dairy prices.
Current net farm income difficult to sustain
Barr’s bottom line for the next five years? Ag will remain a strong sector of the economy, though "we probably can’t hold $125 billion in net income" projected by the USDA for 2013.