Ripple effect from ethanol boom is apparent in 10-year baseline outlook

WASHINGTON – High corn prices are expected to bring major shifts in crop production the next two years, bringing an additional 8.4 million acres to corn in 2007.
Ethanol, derived mostly from corn, has become a driving force in the 2007 agricultural economic baseline prepared for the U.S. Congress by the Food and Agricultural Policy Research Institute.
Corn use for ethanol is expected to almost double in the 2007 crop year from that of the 2005 crop and could exceed 4 billion bushels, or 32 percent of the nation’s corn crop, by 2009.
Increasing ethanol production drives the corn price from a $2 per bushel average in the two previous crop years, to slightly above $3 per bushel in every year of the 10-year baseline.
Corn prices. Current prices are above those levels exceeding $4 per bushel.
“Those prices are higher than our projections, as the market encourages producers to plant more corn in 2007 to feed the growing ethanol industry,” said Pat Westhoff, Food and Agricultural Policy Research Institute analyst.
U.S. farmers have not planted 85 million acres of corn since 1949. The research institute projection of 86.7 million acres in 2007 fell midrange in current trade projections. The institute projects almost 90 million corn acres in 2008.
While corn gains acres, soybeans give up the most, falling to 70.5 million acres in 2007 from 75.5 million acres in 2006.
Wheat acres, most of which were planted this past fall, increased to 60.1 million acres in 2007, but are expected to drop in following years to 57 million acres by 2016.
University participants. The Food and Agricultural Policy Research Institute baseline was prepared by think tanks at the University of Missouri-Columbia and Iowa State University in Ames.
The University of Missouri maintains computer models of the U.S. agricultural economy. Iowa State tracks global markets.
Economists at other universities participate.
“So much depends on the price of petroleum,” Westhoff said. University of Missouri Food and Agricultural Policy Research Institute uses a baseline assumption that the oil price falls to $50 per barrel in 2016.
Forecasts on oil, interest rates and other macroeconomics come from the private forecasting firm Global Insight. The research institute assumes normal weather and continuation of present farm policies, including current biofuel incentives through the 10-year baseline.
Computer runs of 500 alternative scenarios show prices can be much higher, or much lower, than averages in the baseline, depending on weather, oil prices and other factors.
Taxes. “Current tax polices that support biofuel are slated to expire in 2008 and 2010,” Westhoff said.
“If the credits expire, the results could be sharply lower biofuel production, corn and soy oil demand and crop prices.”
The current outlook depends on the price of corn not becoming too high, removing profits from the ethanol plants. Baseline projections show ethanol production remains profitable; but increasing production and falling petroleum prices result in lower ethanol prices.
Lower ethanol prices and higher corn prices would squeeze projected margins for ethanol plants, eventually slowing growth in plant capacity.
High crop prices increase net income for grain farmers; higher feed costs cut profits of livestock feeders.
Net farm income. Overall, net farm income dropped $26 billion dollars in 2006 from a record high of $85 billion in 2004, with higher input costs largely responsible.
Net farm income could rise to $7 billion in 2007 to $66 billion and could remain above $60 billion in later years.
Cash receipts for cattle and calves reached a record $50.7 billion in 2006, but are expected to decline to $47.9 billion by 2010.
“As more expensive corn increased the cost of feeding cattle, feedlots bid down feeder cattle prices,” said Scott Brown, livestock analyst.
“This trend continues through the baseline, as feed costs remain high.”
Poultry. Poultry producers reacted quickly to higher feed costs, reducing production in the third quarter of 2006.
“Slowing growth in poultry is a rarity,” Brown said.
“Broiler production is expected to grow only 1.6 percent annually through the baseline, compared with 3 percent annual growth for the previous 10 years. Three years of profits for hog producers will end in 2007. The price of producing pork is expected to go up 6 cents a pound, or 16 percent.
“Food cost increases remain moderate in spite of higher grain prices. Annual growth in the food Consumer Price Index will average near 2 percent long term, near the general inflation rate,” Brown said.
While grain prices play a part in food cost increases, 80 percent of consumer food costs come from other factors, including labor, fuel and packaging.
Fruit and vegetable costs spiked in 2006 and are expected to continue high, given weather-related losses.
Cost of food eaten away from home outpaced home meals in 2005. This trend is expected to continue.
Federal spending. Federal spending for farm programs is lowered by higher grain prices.
Direct payments, counter-cyclical payments and marketing loans peaked at $16 billion in the 2005 crop year. Those same payments total $7.7 billion for the current marketing year.
Payments are expected to drop to $6.7 billion by the end of the baseline in 2016, with direct payments accounting for $5.3 billion.
The baseline, which will be used to analyze the 2007 farm bill, has been given to the Senate and House agricultural committees and U.S. Department of Agriculture.
Institutions cooperating in the analysis are: Texas A&M University maintains representative farm models to track impact of policy changes at the local level; Texas Tech University tracks the cotton trade; University of Arkansas follows rice production; and Arizona State University tracks fruit and vegetable markets.
Changes. The current ethanol boom required major additions to the Food and Agricultural Policy Research Institute models.
“We made lots of changes in our models to keep up with the rapidly evolving industry,” Westhoff said.
“U.S. energy policies may have a bigger impact on U.S. farm income than the farm bill.”