FAPRI: Farm Prices Depend on General Economy Recovery

August 23, 2009 07:00 PM

AgWeb.com Editors

Uncertainty in the general economy continues to drive the agricultural market outlook in a midyear baseline from the University of Missouri Food and Agricultural Policy Research Institute (FAPRI).
"For most U.S. crops, market prices have declined from last year's peaks but remain well above pre-2007 levels,” said Pat Westhoff, senior economist and co-director of FAPRI.
"On the livestock side, the baseline shows recovery in 2010 for meat and dairy prices but depends on general economic recovery and continued reduction of supplies,” said Scott Brown, FAPRI livestock economist.
"Lower petroleum prices have reduced production costs,” Westhoff said. Those lower prices also reduce demand for biofuel. This lowers demand for corn and soybeans, major sources of those fuels.
The mid-August FAPRI baseline is a limited updating of the 10-year baseline released in March 2009. The agricultural commodities outlook changed markedly since the completion of the FAPRI long-term baseline, Westhoff said.
A worldwide recession led to weak domestic and international demand for many U.S. agricultural products. That weak demand occurred at the same time the farm sector faced production costs exceeding historical averages.
"Hog farmers and dairy producers are enduring a prolonged price squeeze,” Brown said. "Some have used all of their equity and have tapped all of their credit.” Price recovery for meat and milk requires continued growth in consumer demand. In response to low prices, both sectors are reducing what was record production.
In the updated FAPRI baseline, prices for barrows and gilts average $57.59 per hundredweight in 2011, up from $42.82 projected for 2009.
In dairy, the all-milk price average goes from $12.47 per 100 pounds in 2009 to $16.37 by 2011.
Brown gave a word of caution. As the economy recovers, demand for agricultural products increases, raising prices. At the same time, demand and prices for oil also increase. Oil prices, which hit $145 per barrel leading into the recession, are projected for 2009-10 to average $61.31 per barrel. By 2015, the end of the baseline, the price rises to $94 for West Texas intermediate crude.
For outlook on petroleum prices and macroeconomic assumptions, FAPRI economists rely on IHS Global Insight Inc. a private group.
Based on the oil price rise, ethanol prices at Omaha, Neb., are projected to increase from $1.65 per gallon this marketing year to $1.76 in 2010-11 and to $2.09 by 2015.
Corn prices for this marketing year are projected at $3.47 per bushel, down from $4.05 last year. By the end of the shortened baseline, prices are back at $3.98.
Corn plantings continue to rise through the baseline from 88.5 million acres next year to 90.4 million acres in 2014. Added acres come largely from cotton and sorghum plantings.
Soybean acres remain stable, going from 77.9 million acres next year to 78 million acres in 2014.
Soybean prices, projected at $9.44 per bushel for this marketing year, decline to $9.12 next year, then rise steadily to $9.74 by 2014.
In the cattle sector, Brown said the outlook depends on where you are in the supply chain. Unlike hogs, where production is often coordinated, the cow-calf, backgrounding and feedlot operations remain separate.
"Feedlots have been bleeding red ink for a long time,” he said.
The baseline projects price recovery for fed cattle based on a declining to steady supply. Fed cattle projected at $85 per hundred this year will rise to $93 in 2010 and $98 in 2011. All are based on Nebraska direct sales.
Feeder steers at Oklahoma City are projected at $103 per hundred this year, followed by $115 in 2010 and $123 in 2011.
The 11-page 2009 baseline update is available at www.fapri.missouri.edu.
The FAPRI baseline serves as reference for comparing what-if scenarios of proposed legislation before the U.S. Congress, including "cap and trade” or "climate change.”
"This update should not be confused with a full FAPRI baseline,” Westhoff said. "This review is less exhaustive and covers only U.S. markets.”
The economists assume that weather remains average and that current policies remain in effect. The baseline does include the policy change allowing USDA to buy dairy products to support prices.
Also, the update recognizes export restrictions on U.S. pork because of the H1N1 virus. Current crop production levels are based on the August 2009 USDA report. Commodity supply, utilization and prices are based on USDA 2008-09 market-year reports.
The next FAPRI baseline process begins in November for release in early 2010.

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