Looking Ahead to 2012

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2012 is setting up to be another interesting year in the agriculture industry, following a fairly profitable year in 2011 for most crop and livestock producers in the Upper Midwest, with the exception of some erratic weather problems in some areas during the year. Here’s what to look for in the agriculture industry for 2012:

 

Crop Production

The breakeven cost of producing corn at trend-line yields will likely be close to $5/bu. for corn for many producers in 2012, and $11/bu. for soybeans, which are increased compared to 2010 and 2011 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 2012 have declined significantly in the past three months, and are now near the breakeven levels. Of course, there is a wide variation in the breakeven level for crop producers. Farm operators need to look for ways to control crop expenses for 2012, as well as put together a good grain risk-management plan, which uses crop insurance and sound grain marketing strategies to achieve breakeven and profitable price levels for the coming year.

Crop producers also need to pay attention to the level of cash rental rates are for 2012, and may want to consider a flexible cash lease as an alternative to a straight cash rent lease. A good flex leaseadjusts the final land rental payment, based on actual crop yields and prices during the year of production. There are many good examples of flexible cash leases and sample cash rental lease agreementsavailable. It is important for producers to know their breakeven price before finalizing land rental contracts with high cash rental rates. Producers also need to be very wary of entering into long-term land-rental agreements with high fixed cash rental rates beyond 2012, which may add considerable financial risk the in future.

 

Livestock Production

Profit margins in the livestock sector improved considerably in 2011, and should remain quite solid in 2012. Market prices for pork, beef and milk should remain fairly strong in 2011 due to strong product demand, both domestically and for export markets. Purdue University is estimating a profit margin in hog production of $17/head for 2012, which follows profit margin estimates of $10 for 2011 and $14 in 2010. Prior to that, hog producers had annual profit losses of $24 in 2009 and $17 in 2008, due to high feed costs, slow pork demand and the H1N1 virus. The beef cattle industry has also seen very strong market prices in 2011, due to increasing demand and tight beef supplies, which will likely continue into 2012. Dairy production profits have also been quite good in 2011, with the fluid milk price being near or above $20/cwt in recent months, which compares to an average milk price of $16.28/cwt in 2010, and $12.82 in 2009, which resulted in major losses for dairy producers.

The big question mark for 2012 will be what happens to feed costs, which will likely be impacted by final 2011 crop production numbers and usage, as well as 2012 crop planting intentions. Livestock producers may want watch for any decline in grain markets, in order to take advantage of lower corn and soybean meal prices to lock in a portion of their feed needs for 2012. Again, watching breakeven market price levels is very important when making forward price decisions for marketing hogs and cattle. Most analysts expect demand to remain fairly solid both in the U.S. and abroad for meat and dairy products in 2012.

 

Land Values

Land values ended the year at record levels throughout most of the Midwest, including one sale of farmland in Northwest Iowa for over $20,000/acre in recent weeks. While that sale was totally unique and not typical, average land values have increased by 20-30% or more in many areas during 2011. Recently, Iowa State University released their annual Land Value Survey, which showed the average farm land value in Iowa at $6,708/acre, as of Nov. 1, 2011, which was an increase of 32.5% compared to a year earlier, and is the highest annual increase ever recorded in the Iowa survey. The highest farmland values were in northwest Iowa, with an average land value of $8,338/acre. Most recent farmland sales in southern Minnesota for top-quality farmland have been in the $6,000-8,000/acre range, with some sales a bit higher. Excellent farm profits in 2011, continued low real estate interest rates and high demand for farmland are likely to keep land prices strong in 2012; however, a significant drop in grain prices and reduction in profitability in 2012 could cause land prices to moderate later in the year.

 

Renewable Fuels

2011 was a fairly profitable year for most of the ethanol industry. However, 2012 shows signs of being a bit more unstable, with challenges related to erratic input costs, unstable fuel prices and government uncertainty. The 45¢/gal. blenders credit (VEETC) for ethanol production, the 54¢/gal. tariff on imported ethanol and the $1/gal. tax credit for biodiesel will expire at the end of 2011, and are not likely to be renewed. All of these incentives were extended by Congress for one year at the end of 2010.

The bigger concern in the ethanol industry is probably what Congress does with the Renewable Fuels Standard (RFS) – if anything – during 2012. The RFS calls for a total of 15.2 billion gallons of renewable fuel use in the U.S. in 2012, with a maximum of 13.2 billion gallons from corn-based ethanol production. Ethanol production for 2011 already exceeds that mandate, and is now estimated at over 14.4 billion gallons for 2011. Ethanol production from cellulosic and other sources has been slow to develop, and development may be even more difficult if all incentives are removed for production. 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 2012 will be a pivotal year for the future direction of renewable energy policy in the U.S.

 

Government Programs

Congressional leaders made some progress on the next farm bill late in 2011. However, no agreement was reached, so farm bill discussions will likely continue well into 2012, and possibly beyond. The current farm bill will govern USDA farm programs through the 2012 crop year. Many analysts are anticipating reductions in future farm program payments, due to the large Federal budget deficit and the current high profitability in crop production in many areas of the U.S. The guaranteed direct payments on crop base acres for corn, soybeans, wheat and other crops are likely to be eliminated in the next farm bill. Many farm-state members of Congress and farm organization leaders are working hard to make sure that a solid crop insurance program and farm safety-net program are maintained in the next bill to protect producers against significant revenue reductions from low yields and market prices. Many hope to continue some type of revenue safety-net program for livestock producers, as well. Another question mark in the next bill will be the Conservation Reserve Program (CRP). There is currently a maximum of 32 million acres eligible for CRP, and 29.6 million acres are now enrolled in CRP; however, some members of Congress want to reduce the maximum CRP acreage to 25 million acres or lower in the future.

 

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at kent.thiesse@minnstarbank.com.

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