Focus on Ag

2013 Outlook: Farm Bill, Crop Production, Land Values, Livestock, Biofuels

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2013 is setting up to be another interesting year in the agriculture industry, following a very profitable year in 2012 for most crop producers in the Upper Midwest, and a fairly negative profit year for most livestock producers. Following are some items that are likely to be on the forefront in the agriculture industry for 2013.

 

New Farm Bill

The current farm bill expired on September 30, 2012, and some programs will be discontinued without a new farm bill, or an extension of the current farm bill. A new bill was not completed by Dec. 31, 2012. This means that the likely scenario is that the current farm bill will be extended into 2013, allowing some existing farm programs and other USDA programs to continue at current levels. Congress would then finalize a new farm bill during the 2013 Congressional session. However, do not be surprised if a farm bill extension is linked to the fiscal cliff budget agreement, which could result in the elimination or reduction of direct payments for 2013, and contain other future farm program budget parameters.

The new farm bill will likely involve some major changes in the risk management (safety net) programs available to farm operators, and most likely will eliminate the direct payments that have been paid to corn, soybean and wheat producers since the late 1990s. Most crop producers are hopeful that a strong crop insurance program will be the cornerstone risk management program of the new farm bill. The Milk Income Loss Contract (MILC) program for dairy producers will likely be continued, or replaced with some similar type of risk management program. Other livestock producers also hope that some type of livestock assistance program is included in the new farm bill to assist with low profit years, such as 2012.

The next farm bill will likely lower the maximum acreage in the Conservation Reserve Program (CRP) from the current level of 32 million acres down to a maximum of 25 million acres in CRP, in order to increase crop production acreage in the U.S. There are currently approximately 27 million acres enrolled in CRP, which is down from 29.5 million acres in CRP, as recently as September 2012. The Supplemental Nutrition Assistance Program (SNAP), including the food stamp program, which will be a major part of the new farm bill, currently utilizes over 75% of the USDA annual funding allocation. There are many other USDA programs for conservation, rural development, and export enhancement that may be discontinued, unless they are reauthorized by the new farm bill.

 

Crop Production

The breakeven cost of producing corn at trend line yields will likely be close to $5/bu. or higher for many producers in 2013, and near $12/bu. for soybeans, which are increased compared to 2011 and 2012 levels. The expected 2012 breakeven prices compare to just over $3.50 for corn and near $8 for soybeans as recently as 2008. There has been some concern recently, as the current local forward prices for fall 2013 have declined significantly in the past few weeks, and are now near $5.50 for corn, and just above $12 for soybeans.

The extended period of higher corn and soybean prices in 2011 and 2012 has slowed demand for feed usage, biofuels production and for exports, which could put further pressure on grain prices in 2013. Cash rental rates for farmland have increased dramatically in the past two years in many areas of the Upper Midwest, and can be a large variable in the producer breakeven prices for corn and soybean production across the region. Farm operators need to look for ways to control crop expenses for 2013, as well as put together a good grain risk management plan that uses crop insurance and sound grain marketing strategies in order to achieve breakeven and profitable price levels for the coming year.

 

Land Values

Land values ended the year at record levels throughout most of the Midwest, including numerous farmland sales in southern Minnesota1 above $10,000/acre in recent weeks. Certainly not all farmland is selling at those rates, but most tillable farm land in the Upper Midwest is being sold at considerably higher levels than comparable land was a year ago.

Most recent land value surveys show that land values in Minnesota, Iowa and surrounding States are 20% or more higher than comparable land values were at the end of 2011. Land values in many areas have risen 40-50% in the past three years.

Excellent farm profits from crop production in 2012, along with continued low real estate interest rates, and high demand for farm land are likely to keep land prices strong again in 2013. However, a significant drop in grain prices and a reduction in farm profitability in 2013, along with a potential slowdown in the national economy, could cause land prices to moderate later in the year.

 

Livestock Production

Profit margins in the livestock sector were quite strong at the start of 2012, but declined very rapidly as feed costs soared by mid-year, as a result of the 2012 drought. Market prices for pork and beef also fell late in 2012 following significant liquidation of livestock due to low profitability and the effects of the drought.

Livestock profits are likely to remain quite tight during the first few months of 2013, due to continued high feed costs and lower market prices; however, livestock profitability should improve by the latter half of 2013, with improved market prices for pork, beef and milk expected, along with some reduced feed costs. Most analysts expect demand for milk and meat products to remain quite strong in the coming year, both for domestic and export markets.

The big question mark for 2013 will be what happens to feed costs, which will likely be impacted by the continuation or extent of any drought conditions in the U.S. that could again cause feed prices to increase dramatically, as well as cause further stress on pasture conditions for cattle producers.

 

Renewable Fuels

2012 ended with a considerable amount of uncertainty in the renewable fuels industry. Profit margins were very tight in the ethanol and biodiesel industries, and some production plants in the U.S. have slowed or ceased production. Ethanol profitability has been hampered in 2012 by a combination of high corn prices and low petroleum prices. In 2012, the U.S. Environmental Protection Agency (EPA) continued the Renewable Fuels Standards (RFS) as approved; however, there continues to be a push from many groups to reduce or eliminate the RFS standards. There is a growing anti-ethanol sentiment among environmental and hunger groups, livestock organizations, taxpayer groups, large food companies and some members of Congress. It is likely that 2013 will be a pivotal year for the future direction of renewable energy policy in the U.S.

Best wishes in 2013 to everyone involved in the agriculture industry!

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