Grain prices increased dramatically in the last two years and are expected to remain well above pre-2006 levels, report economists with the Food and Agricultural Policy Research Institute (FAPRI).

Higher prices increase revenues for crop producers but also increase feed costs for livestock producers. Overall, net farm income goes up, some government farm program payments drop and consumers see higher food costs.

Those current and future farm changes are in a 68-page 2008 FAPRI Baseline Briefing Book delivered to the U.S. Congress and USDA today by the agricultural economists from a multi-university think tank.

The independent analysis, which projects the agricultural economy for 10 years, is requested annually by Congress.

“Agricultural market outlooks appear more uncertain than in past years,” says Pat Westhoff, co-director of MU FAPRI, Columbia, MO. “Petroleum prices and biofuel policies drive most of the changes.”

In 2007, high corn prices due to rising ethanol production led to big increases in corn acreage at the expense of soybeans and cotton.

This year, corn faces price competition from soybeans and wheat in a battle for acres, Westhoff says. FAPRI expects 2008 soybean acreage to increase about 6 million acres with wheat acreage increasing, as well. Corn retreats 2 million acres from its post-World War II high recorded in 2007.

Plantings of 12 major crops are expected to increase 4 million acres in 2008, following a 3 million acre increase in 2007. Most new acres come from double-crop soybeans and wheat, reduced fallow ground and expiring contracts on Conservation Reserve Program acres.

The consumer price index (CPI) for food rose 4% in 2007, more than the CPI for all goods and services. “Much of that increase came from rising energy prices, which increased costs all along the marketing chain including the farm level,” says Scott Brown, FAPRI livestock analyst.

The biggest change in agriculture is a shift to supplying biofuels, both in corn for ethanol and soybeans for biodiesel. FAPRI reports that trend will continue because of high petroleum prices and mandates in energy legislation.

Corn receives major attention in the report. Ethanol demand for corn almost doubled from 2005 to 2007, with nearly 4 billion bushels to be used from the crop to be harvested this fall. FAPRI projects corn for ethanol will almost equal the bushels fed to U.S. livestock by 2015, Brown says.

“In spite of rising production costs, net returns to corn farmers remain very high by historical standards,” Westhoff says.

Soybean production dropped sharply last year, with an acreage shift to corn. However strong domestic and international demand for vegetable oil, caused in part by growing biodiesel production in the U.S. and Europe, helped reverse that shift.

Wheat prices increased when crop failures around the world led to large exports of U.S. wheat. FAPRI expects wheat exports will drop when foreign crops recover. Projected wheat prices remain higher than in years before 2006, because of higher prices for corn and other crops.

Since a farm bill has not passed Congress, the analysis assumes the present 2002 Farm Bill is extended. Major parts of the outlook are influenced by the Energy Independence and Security Act passed in December 2007, which mandates increased use of ethanol and soy biodiesel.

FAPRI assumes current biofuel mandates, taxes and tariffs remain in place. However, the economists assume cellulosic ethanol mandates will be waived as advances in technology remain slow.

“There’s no doubt, but the energy bill has greater influence on crop prices than a farm bill,” Westhoff says. “World energy demand drives the economy, which shifts U.S. domestic uses and world trade.”

Growth in ethanol production means distillers grains and other coproducts displace increasing amounts of corn in feed rations. In general, prices for coproducts keep pace with corn prices, so they do not give large cost-savings as some expected, Brown says.

Weakening value of the dollar has increased world demand for U.S. agricultural products. Exports of soybean, corn remain high as prices have increased less in foreign currencies than in dollars.

The devalued dollar has not helped domestic livestock producers who face record-level prices for grain and oilseed meal in rations.

“Higher corn prices force feedlots to lower what they can pay for feeder cattle,” Brown says. “Coming years could be financially difficult as high and rising input costs coincide with lower feeder cattle prices.”

Returns for beef producers have declined from the high levels in 2003-2005. Cow-calf returns are expected to remain in the red for most of the baseline years. After an increase the last two years, beef cow numbers are projected to decline throughout the baseline.

Hog producers face lower returns. Pork supplies remain high through 2008, despite recent decisions to cut sow numbers, Brown says. “Given expected input costs, hog prices need to average $50-55/hundredweight to provide historic average returns.” FAPRI projects prices of $44 for finished hogs in 2008.

Dairy producers face lower prices after record prices of $19/hundred lbs. for milk in 2007. Strong international demand provides a cushion to an expected decline in milk prices, Brown says.

“Projecting future prices was uncertain in the best of times,” Brown says. “We assume average weather in the baseline; however a drought in any year when grain stocks are tight would change everything.

“We know we will be wrong, we just don’t know when and how much.”

FAPRI no longer projects a single line on a commodity but averages 500 what-if scenarios involving changes in weather, exports and oil prices. That stochastic outlook helps economists explain to Congress the risks and opportunities in a course of action. “The difference between the 90th and 10th percentile can be quite dramatic,” Brown says.

Food costs rose 4% last year, which exceeded the overall CPI inflation. While all components of CPI for food rose in 2007, the dairy, egg and cereal and bakery goods led the increase. The food CPI is expected to rise 3.7% in 2008. However, food inflation increases should slow to 2.5% in 2009 and 2.1% by 2017.

While there is a correlation between farm value of commodities and retail food prices, other factors influence food inflation, as well, Brown says. Recent fuel-related costs combined with farm values to push food prices higher.

FAPRI at the University of Missouri in Columbia prepared the briefing book, with help from other states. FAPRI at Iowa Sate University gave international and crop insurance outlooks. Other sectors include rice by the University of Arkansas, fruits and vegetables by Arizona State University and cotton by Texas Tech University. Texas A&M University translated national trends to farm and ranch levels.

MU FAPRI is funded in part by the U.S. Congress and the MU College of Agriculture, Food and Natural Resources.

The full report is at http://www.fapri.missouri.edu/.