The big-picture issues have the ability to throw a major wrench in your five-year planning. Here’s what to know.
How do you put together a credible five-year business plan given the monumental changes — record droughts, sky-high land values and huge export growth — of the last two years?
Terry Barr, senior director of industry research at CoBank, provided some guidance at the USDA’s Agricultural Outlook Conference in Arlington, Va., last month. The problem with any projection, as Barr pointed out, is separating short-term variations from long-term trends to produce a "new normal." Here are 8 key drivers that Barr thinks should drive a 5-year plan.
1. Assume declining federal ag support
The USDA’s projection for 2013 net farm income, for instance, assumes current agricultural subsidies will continue. But the likelihood, based on last year’s House and Senate farm bills is that the federal safety net will switch from direct subsidies to insurance.
And, that won’t be the only change over the next five years.
"Sequestration is only the first step in what’s likely to be a series of budget cuts," said Barr, noting that Congress will likely need to reduce revenue each year. "We may replace direct subsidies with insurance in the farm bill this year. But the next time around they will look to cut insurance payments."
2. Demand from ethanol producers may fall
U.S. energy policy currently favors the production of ethanol from corn as a hedge against foreign oil imports. But as the U.S. produces more oil and natural gas, energy prices are likely to fall. The International Energy Agency recently predicted that the U.S. will overtake Russia and Saudi Arabia as the world’s top oil producer by 2017. That will reduce the country’s dependence on foreign oil and presumably its need to conserve.
"We may have declining energy prices in the future. We need to re-examine energy policy; there could be massive structural change. Biofuels and renewables may not grow as fast as they have been growing. What are the implications for fertilizer companies? No one knows."
3. Global demand will shift
Developed countries, of course, aren’t the driving force behind U.S. ag export growth anymore.
Farmers have benefited in recent years from export growth fueled by an emerging middle class in developing countries. But the key driver for agriculture will be how many people escape poverty, not the size of the middle class cohort.
"That’s when people change their diets," said Barr, adding that once people achieve a middle-class wage, they may spend more on transportation. Also, as many developing countries continue to grow, they tend to replace meat imports with domestically produced meat. China and India, Barr noted, will account for 70% of the increase in the middle class from 2000 to 2030.
Another big wild car in any forecast is what China will do, given the huge impact that country has on the corn and soybean markets. What if China, instead of buying massive grain quantities, suddenly decided to ramp up its production of corn and soybeans? Barr was asked. He doesn’t think it will happen.
"They are committed to a value-added strategy for cotton and soybeans. They can bring them in and add value for Pacific Rim economies. But if China believes they have adequate stock levels, then they may buy for current consumption, and that would be bad news for cotton and soybeans."
4. Planted corn acres may still increase
Barr is also skeptical that farmers will plant fewer corn acres this year, as the USDA recently predicted. USDA economists think that farmers will switch to more stable soybean crops after last year’s drought, which took a bigger toll on corn. High corn prices remain a tempting target.
Also, a large South American soybean crop this year may do damage to price expectations before spring planting in this country, Barr said. And there may be more corn planted in the Southeast to "take advantage of early harvest in a market with short supply," Barr said.
Stocks of many grains may be low now, but Barr expects a sharp recovery that could put downward pressure on prices. "We have the ability to rebuild inventory quickly, especially if we get a record South American harvest, followed by a normal U.S. harvest," he said.
5. Land values may well tumble
Barr is one of the few ag economists who will say publically that he expects farmland values to fall in the near future. The recent run-up in land values, he said, was driven by higher-than-normal commodity prices combined with unique factors – zero interest rates and rapid expansion of natural gas exploration. This has led to vastly different patterns of land value changes across the U.S.
Even so, Barr doesn’t think we’ll see a big decline, like we did in the 70s.
"But if you look at pricing for corn and soybeans, you’d think you’d have to get a minimum 25% to 30% decrease if combined with rising interest rates…. If grain prices decrease, land prices will follow. We’d need continued crop production concerns and continued low interest rates to sustain current land values."
Speaking of interest rates, Barr said that the Federal Reserve will not be able to hold interest rates near zero indefinitely. He expects a "rapid run-up in rates," likely in 2014, to realign them with a recovering economy and declining unemployment.
6. Rising meat exports create risk and uncertainty
Barr isn’t predicting much of an increase in meat production over the next five years. Most of it will be concentrated in pork and poultry. The cattle industry, which reports the lowest inventory since 1952, need to rebuild its inventory. "This will take a year to a year and a half," he said.
Growing meat exports expose the sector to a wider spectrum of risks and uncertainty. The pork industry, which now exports 23% of its production, is a case in point. Japan is the pork industry’s 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.
7. Dairy has tough financial row to hoe
Meanwhile, last year’s run up in feed prices has made the entire dairy industry financially vulnerable. Barr said that dairy balance sheets, particularly in the West, aren’t strong enough to take the current imbalance between feed and dairy prices. Dairy farms are dipping into their balance sheets. "But they won’t be able to do that for more than another year," he said.
8. It will be tough to sustain current net farm incomes
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.
View Barr's presentation.
Read more AgWeb.com coverage of USDA's Agricultural Outlook Forum:
Drought Conditions Cease in Eastern Corn Belt
The historic 2012 drought is far from over, but it has at least subsided in parts of the country.
U.S. Cattle Herd Continues to Contract
Record-high feed prices will stick around most of this year, which will continue to put the squeeze on an already suffering livestock industry.
Low Prices Hit Farm Belt: Growers Get More Crop, Less Cash
Prices for corn and soybeans will fall this year on record production, easing food inflation while providing less cash for growers recovering from drought.
CME Concerned Over Sequestration Impact on Livestock Futures
The cuts could impact the physical delivery and cash settlement mechanisms of certain CME livestock and dairy products.
Sequestration Imperils Agriculture Programs, Vilsack Warns
The U.S. agriculture secretary delivered that message Thursday at his department’s Agricultural Outlook Forum 2013.
USDA Economist: Sharp Drop in Commodity Prices Coming
Commodity prices will fall "significantly" in 2013 due to strong corn and soybean production in 2013, but the weather remains a wild card.