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USDA Ag Outlook Farm Price Prospects in ’03 Promising, But No ‘Boom’ Expected While price prospects for 2003 look better for many producers than in other recent years, a boom is not in sight, according to Keith Collins, USDA’s chief ag economist, at the 2003 Ag Outlook Forum held recently in Washington, D.C. In 2002, net cash farm income (what the farm operator has left over to pay living expenses, capital costs and service debt) was as its lowest level since the mid-1980s, said Collins. The big drop indicates many producers faced tight budget constraints in 2002, particularly those in weather-affected areas. Income declines occurred in all regions and was especially pronounced for hog and dairy operations. However, aside from government support payments, Collins said three factors helped contribute to the economic resiliency of many farm households: 1) Three out of four farm households earn the majority of their income from off-the-farm sources. This reduces the impact of farm income changes–either up or down–on their well being. 2) Farms most dependent on farm income are the 10% of farms that produce two-thirds of the output, and these farms, on average, have household incomes that are well above the national average and remained so in 2002. 3) The value of farm assets continues to grow, giving some financially stressed producers a chance to weather a down period by selling some assets or borrowing against them. Collins said that in 2003, net cash farm income is expected to rebound by 11% to over $51 billion, as both crop and livestock receipts grow and government payments rise. If government payments are excluded, net income from the market is expected to be little changed, as farm production expenses rise, reflecting higher feed and feeder cattle costs and higher energy and fertilizer expenses. Ag economic outlook highlights from Collins: Macroeconomic factors—The exchange value of the dollar and slow economic growth around the world, have constrained demand for U.S. agricultural products and farm prices and will continue to do so over the next year or more. Ag export rebound—The slow growth in global GDP, some help from the declining value of the dollar, and stronger farm prices, are expected to push U.S. agricultural exports in 2003 to $57 billion, up from $53.3 billion in 2002. Economic positives—Interest rates are low; there is substantial liquidity in the economy; credit conditions appear to be easing; unemployment is starting to decline. Economy influences food spending—When the U.S. economy is very weak, growth in food consumption slows. It did pick up in 2002, but was still not very strong, rising only 1.6%. With the economy likely to move sideways this year, we can expect food spending to be similar to last year, perhaps slightly stronger. Stronger economic growth for the U.S., such as in the 3 to 3.5% range, until 2004. Changing food consumption patterns—In the future, American consumption patterns will shift, as factors like income, population diversity, age, and diet and health awareness drive change. A recent USDA study evaluated such factors and projected consumption patterns to 2020. A general conclusion is that as the economy continues to grow and change, stronger per capita consumption can be expected for such foods as fruits, vegetables, yogurt, eggs, poultry, grains, and nuts, while milk, red meats and potatoes may face declines. Value-added export growth—Exports are seen rising to the old record of $60 billion by 2005 and then to nearly $72 billion by 2010. But the growth is all in intermediate and consumer ready products, not bulk commodities, which are expected to face very strong competition (see graphic). For many of the bulk products, their best entry into export growth markets will be in value-added and processed form, such as feed grains and protein meals exported as meat.
Pull back in prices? Drought in key areas in 2002, notably in Australia, Canada, and the U.S., depleted crop supplies in traditional exporting countries, and drought in Africa expanded global food aid needs. Weather raised many U.S. crop prices, and these higher prices are carrying into the first half of 2003. But, a rebound in yields and strong competition from both traditional and newer competitors, will likely cause a pull back in prices. The major uncertainty in this conclusion is the ongoing drought in the west. Livestock market reversal—Cattle, hogs and broilers, all down markets for farmers in 2002, are likely to reverse and be better performers in 2003. The exception is dairy where milk supplies continue to run high. Cattle prices will depend heavily on weather developments this year; if drought conditions continue, producers may again send their heifers to feedlots instead of retaining them. Rise of nontraditional exporters— Even though drought sharply cut production in the United States, Canada, and Australia in 2002/03, gains in wheat prices have been much less than earlier expectations. Importers have switched to much lower priced wheat from Russia, Ukraine, and other “minor” exporters. Thus, U.S. prices are down sharply from the highs of early last fall, despite continued growth in global grain consumption (see graphic). China, the Former Soviet Union countries, India, Argentina and Brazil exported 30 million tons of grain and soybeans in 1994/95 and accounted for 13% of global grain and soybean exports. In the 2002/03 marketing year, these same countries will export over 100 million tons and account for 38% of global trade (see graphic). “To me, this figure is astonishing,” said Collins. “The rise of these countries, and others waiting in the wings, such as in Eastern Europe, underlie our flat long-term projections for U.S. bulk commodity exports. These rising competitors, combined with a recovery in yields in places like Australia and Canada, suggest continuing pressure on profit margins for many U.S. producers of bulk commodities, unless new demand opportunities are found.” Short-term observations about the farm economy must be weighed in light of a number of uncertainties that can result in changes, said Collins, including the impact of war with Iraq, and its impact on oil prices; investment, consumer spending and trade preferences by other countries; the global economy, and the behavior of exchange rates; foreign nations’ farm and trade policies, especially China for crop imports and exports, and places like Russia and Japan for meat imports; and finally, the weather –here as well as abroad. MSU Ag Economist: ’03 Wheat Prices Lower Than ‘02 McNew points out that U.S. wheat demand may remain sluggish this year: While U.S. consumption of wheat has grown about 1% per year in the past decade, U.S. wheat exports have declined 3.2% per year since 1992. He attributes the long-run decline in U.S. wheat exports to expanded production in countries that once imported wheat. Former Soviet Union countries have increased wheat production by 70% in the last five years, and gone from importing in the early 1990s to exporting 20 million metric tons of wheat into the world market in 2002. Other countries, like India and China, have also changed their import-export patterns, so world wheat trade has declined by 10% since 1995. The United States, Canada, Australia and the European Union have all had diminished exports. McNew is a coordinator of the online marketing simulator, www. commoditychallenge.com. USDA Grain Outlook for 2003/04
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