2002 U.S. Ag Markets: A Rerun of 2001?

Global farm production and demand will be a factor in whether U.S. farm markets strengthen in the 2002/03 marketing year, says USDA chief economist

U.S. farm markets may strengthen somewhat in the 2002/03 marketing year, but will still look very similar to 2001/2002, especially if global farm production continues at levels of the past few years, and given no significant increase in demand in sight.

So said Keith Collins, chief economist of the U.S. Department of Agriculture, at the USDA’s 2002 Agricultural Outlook Forum held in Washington, D.C. in February.  Collins’ address is generally one of the more anticipated reports of the annual forum.

Collins said that the high value of the dollar is expected to continue to impair the U.S. competitive position in world markets. The dollar is up 25% over the past 6 years, and a further slight appreciation is expected in 2002 as the U.S. continues to attract capital inflows as the recovery after September 11 advances, and as the United States remains the global safe haven. “The combination of lagging recovery of foreign economies and a high value of the dollar will constrain U.S. export expansion,” said Collins.  “The strong dollar not only makes U.S. products more expensive, it insulates foreign competitors from market price declines, and thus serves as an incentive for them to maintain or even expand their farm production.”

With continued slow growth in foreign Gross Domestic Production, along with the strong dollar and generally good production forecast in many countries, USDA in 2002 expects a modest increase in U.S. exports to $54.5 billion, up from nearly $53 billion this past year.

 Wheat market to be “brutally competitive”
Collins said that U.S. wheat acreage has fallen steadily from 88 million in 1981 to 59.6 million last year, and 59.5 million expected in 2002. “The problem for wheat is that a number of other countries can also grow wheat pretty well, and that number is increasing,” said Collins.

Normally, the mix of winter wheat and spring wheat and Northern Hemisphere and Southern Hemisphere production spreads the supply risk sufficiently to avoid large production declines. He said that there have been only two periods during the past 20 years when several major exporters have had significant production problems simultaneously.

During the 1987/88 and 1988/89 marketing years, the combined production of the major competitors dropped 12%, their stocks declined almost 40%, and U.S. wheat exports rose 50% from 1986/87.  The other period was 1994/95 and 1995/96. There were weather problems then, but the major factor is that several years of low prices had shifted land to oilseeds and other crops, and the European Union had cut its production area through a set-aside program, steadily drawing down competitor stocks. U.S. exports did not jump in 1994 and 1995, but were steady as wheat prices reached record levels.

The stage was set for strong U.S. wheat exports and higher U.S. and world prices in 2001/02, said Collins. Because of weather that reduced plantings and yields, wheat production in the traditional U.S. exporter competitor nations of Argentina, Australia, Canada, and the EU fell by 20 million tons or 12%. Yet, this season’s U.S. wheat exports are expected to be the smallest in 5 years, with prices below $3.00 again.  “Wheat missed an opportunity. Why? Russia, Ukraine, and Eastern Europe increased wheat production 31 million tons, and their net exports are up 10 million tons. Add another 3 to 4 million tons from India and Pakistan, and it is no surprise U.S. wheat exports and prices have not rebounded,” Collins said.

A big price rebound in 2002/03 at this point looks unlikely, he said, because stocks remain large in Pakistan, India and Central Asia, EU wheat planting was up sharply last fall, and with a rebound from last year’s drought to an average yield in Canada, the world wheat market will likely be “brutally competitive” in 2002/03, said Collins. U.S. wheat exports could fall to 900 million bushels during the next marketing year, the lowest since 1971/72.  And if stocks remain about the same, average farm prices could decline about 5 cents per bushel from the average price of $2.80 per bushel expected in 2001/02.

Corn, Bean Demand Continues to Expand
Collins said that world use of energy and high protein feeds appears to continue to expand, and be little affected by the global economic slowdown and fear of animal diseases. The demand growth has reduced world coarse grain stocks again, even though world coarse grain production was up slightly in the last year, mainly due to large crops in Central and Eastern Europe, which offset lower U.S., Canadian, South American and Chinese crops.

U.S. corn exports are expected to expand slightly in 2001/02, due to lower South American production and WTO-constrained exports by China.  For 2002/03, global coarse grain production and use are expected to rise again, Collins said.  Production should increase, mainly due to larger corn crops in the United States and China. Larger corn and barley crops in Canada will likely reduce Canadian corn imports, he added, and there will ample supplies of wheat for feeding. As a result, USDA is currently expecting U.S. corn exports to reach about 2 billion bushels in 2002/03, slightly above this year’s level.

Collins said that overall oilseed trade may grow at a somewhat higher rate in 2002/03 than this year, based on expected strong production gains in world oilseed crops, especially canola and sunflower, as yields for these crops rebound from drought-reduced levels in 2001/02.

Underlying demand for protein meals and oils is expected to increase 3-4 percent over 2001/02. The strong protein market is helping to push U.S. soybean exports to a record high 1.02 billion bushels this season, and a similar level of exports is expected for the 2002 crop.

USDA expects both corn and soybean acreage to expand in 2002 relative to 2001, Collins said.   Most of the gains are expected to come in corn, which could reach 78.5 million acres and produce a 9.9 billion bushel crop. Soybean area may increase only slightly from last year’s 74.1 million acres, even with a continuation of the $5.26 per bushel loan rate, and produce a crop near 3 billion bushels.

Producers likely expect slightly higher corn prices in 2002 than they were expecting as the planting season approached a year ago, while soybean prices likely will remain below the loan rate, the same situation as a year ago, said Collins. In addition, the price of nitrogen fertilizer has declined from last year, favoring a small shift toward corn production.

“When all is said and done, the 2002/03 corn market appears to be the strongest among major crops. Although production may approach 10 billion bushels and exports only rise slightly, domestic demand is expected to be quite strong with corn used in ethanol to rise 30%. Corn carryover stocks should decline again, and the corn price average 5% higher than the 2001/02 marketing year,” said Collins.

For soybeans, despite exports remaining close to the record level of 2001/02, stocks may rise again, and thus prices will average near the 2001/02 marketing year level.  Large South American soybean inventories going into 2002/03 and further acreage and production expansion in 2003 is expected to keep oilseed prices under pressure, Collins said. Area in South America is expected to continue to expand as long as U.S. prices are around $4.25 or above.

Collins said that availability of large supplies from the Southern Hemisphere has changed the oilseed sector for at least three reasons: (1) today, there is less reliance on the United States as the major supplier; (2) large, new crops available twice per year may lead to lower prices as alternative supplies reduces risk for foreign buyers; and (3) more competition for U.S. fall sales is likely as South American crops and stocks grow.

With increased availability of foreign soybean supplies, the global stocks/use ratio has remained relatively high and stable. Concerns about a possible slowdown in China’s imports and a possible shift in China’s grain acreage toward oilseeds also overhang the market.  Collins said China is key to ensuring consumption keeps pace with production increases. Protein consumption in China has increased at above 10% per year since 1997, led by increases in livestock production and shifts toward feeding more optimal rations. Growth in Chinese production of soybeans and other oilseeds has not kept pace, leading to strong gains in Chinese imports.

Feds Keeping Farm Balance Sheet Stable
Collins said that the U.S. farm economy is in reasonably good financial shape entering 2002, despite continued low market returns for some commodities. Net cash farm income, a measure of cash flow, reached a record-high $59.5 billion in 2001. While large government payments were instrumental in setting last year’s record for net cash income, markets have been strengthening as well.  Net cash income excluding government payments has risen from $34.2 billion in 1999 to $38.4 billion in 2001, a 12% gain.

For 2002, government payments will again be important in supporting farm income. “Taking an average of the added calendar year 2002 payments that would likely be paid out under the Senate and House passed bills suggests added payments in the range of $5.5 billion, in addition to payments of $10.7 billion already scheduled to be made under 1996 Farm Bill provisions. This would mean net cash farm income of about $56.4 billion, about the same as the average level in recent years,” said Collins.

Farm production expenses are also under control and are expected to total the same as last year, he said. Excluding feed costs, total farm production expenses are expected to decline in 2002.  Fertilizer costs are expected to drop by $0.5 billion as natural gas prices have declined; fuel and oil costs are expected decline by $0.2 billion; and interest expenses are likely to decline by $0.5 billion.

The U.S. farm balance sheet looks fairly strong, with the value of U.S. farm real estate rising 3% during 2001, bringing total farm assets to $1.024 billion, 12% higher than at the end of 1998.   Collins said that while farm debt-to-asset ratio rose slightly in 2001 to 15.8% from 15.5% in 1999 and 2000, it remains well below the level reached during periods of farm financial stress in the 1980s. “Although farm debt increased the past two years, most farmers are not as heavily leveraged as a decade ago, face lower interest rates and are in better financial health,” Collins said.

He pointed out that all major lenders to agriculture, including USDA, continue to experience very low levels of delinquencies, foreclosures, chargeoffs and loan restructurings.  According to Collins, no agricultural bank failed in 2001, and only five failed during 1994-2000.  In the mid 1980s, 60-70 banks were failing annually. While surveys find banks healthy, liquid and ready to make loans, Collins admits bankers in a number of regions still express pessimism about their borrowers financial positions. Farmers are repaying loans with the help of government payments, and are somewhat hesitant to take out new loans, “which shows prudent behavior on their part,” he said.

Key Factors to the U.S. Farm Economy
Keith Collins, USDA’s chief economist, says that the following key factors important to the U.S. ag economy bear watching in the coming months:

•  The pace of Chinese imports and exports and crop supplies in the major exporters. Global stock levels mean little: concentrate on stocks in the major exporters and production prospects in Central and Eastern Europe.

•  Resolution of the U.S. farm bill debate, which will potentially affect relative loan rates and planting incentives.

•  USDA’s March 28 planting intentions report, which will give a preliminary indication of U.S. planted area for 2002.

•  Transparency of China’s biotech regulations to be implemented beginning March 20.

•  Evolution of WTO implementation in China, particularly with respect to the relative incentives provided to grains and oilseed producers, which may affect domestic production of these crops. A possible scenario would be for an increase in the incentive to produce oilseeds relative to grains, reducing grain supplies and also reducing reliance on imported oilseeds.

•  South American crop developments.

•  The global economy.

Hot Button Issues in Agriculture
The USDA’s Agricultural Outlook Forum, held each February, features agricultural experts from across the country who discuss the leading issues driving U.S. agriculture.  Following are some of the speech titles from this year’s forum:

• Acceptance of Agricultural Biotechnology in World Trade

• Farm Income, Finance, and Credit Outlook for 2002

• Future Prospects for Farm Financial Conditions

• Changing Farm Lending Scene

• What’s Holding Up Land Values

• Feasibility and Cost of Marketing Identity-Preserved Crops

• Producer Opportunities in Niche Markets—“Dear Client, What Would You Like?”

• IP Challenges to the Grain-Handling Infrastructure

• New National Center For Value-Added Agriculture

• Direct Marketing to Chefs in Upscale Restaurants

• Translating New Agricultural Products and Uses Into Rural Economic Viability

• Bio-Security, a National Priority in a New Era

• Producer Initiatives to Deal With Production Contracts

• The Economic Outlook for Bio-Fuels

These and other speeches from the 2002 Forum can be downloaded from the Internet, at www.usda.gov/oce/waob/agforum.htm.

USDA’s Focal Point for Ag Economic Intelligence
The World Agricultural Outlook Board (WAOB) sponsors the annual USDA Ag Outlook Forum. The WAOB was created in 1977 to serve as the focal point for economic intelligence on the outlook for U.S. and world agriculture. Prior to 1977, responsibility for USDA’s food and fiber outlook information was fragmented among several agencies. While these agencies’ missions did not change, the Board was created to coordinate and disseminate USDA’s outlook analysis and assure its accuracy, timeliness and objectivity. The Board is a unit of the Office of the Chief Economist of USDA.

World ag supply/demand estimates, long-term commodity projections, a weekly weather and crop bulletin, major world crop areas and climatic profiles, and other information related to global farm markets can be found on the WAOB web site, www.usda.gov/oce/waob.