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Agriculture AN EIGHTH DISTRICT PERSPECTIVE WINTER 1986 The Outlook for Agriculture in 1986 To understand the outlook for agriculture in 1986, it is instructive to look at the sector’s status at the end of 1985. Bumper harvests, not only in the U.S. but around the world, produced large additions to U.S. surplus stocks and a worldwide decline in agricultural trade; it is now estimated that crop supplies in the U.S. at the end of 1985 will far exceed total usage during 1986. Livestock prices were relatively weak in 1985 as a number of factors led to a larger slaughter of heavier animals. Overall, most farm prices declined in 1985 and, as a consequence, real net farm income fell from $15.5 billion in 1984 to an estimated $11 to $13 billion in 1985, near its 1982 value. With falling commodity prices and income, real farm asset values fell by 4 to 8 percent. Finally, at the time official price and production forecasts were released by the U.S.D.A. in early December, Congress had not yet passed new farm legislation which, of course, could have substantial effects on prices, output and income. In this environment of uncertainty, we report brief summaries of the outlook for farm income and major commodities in 1986.1 Farm Income The table on the next page shows that, except for a one time increase in 1984 associated with inventory rebuilding after PIK, real net farm income continues along its persistent secular decline. Although forecasts for 1985 and 1986 place real net farm income near $11 billion, only slightly below the $11.9 billion figure for 1982, several important changes in the composition of farm income must be noted. While production expenses have been fairly constant since 1982, cash receipts from product marketings have d e c lin ed about 5 p e rc e n t and d ire c t governm ent paym ents have m ore than 'These forecasts are taken from printed materials distributed at the U.S. Department of Agriculture’s Annual Outlook Conference held in Washington, D.C., from December 3-5, 1985. Some important Eighth District commodities are not included in the summary because printed copies of the relevant outlook speeches were not distributed. doubled to between $6 to $10 billion. In fact, net outlays for price support programs are estimated to be $16.8 billion for 1985, only slightly lower than the record of $18.9 billion in 1983. Moreover, with bin-bursting stock levels, it is reasonable to expect a larger share of farm income to be derived from government support in 1986. Crops For both feed and food grains, stocks in excess of prePIK levels and uncertainty concerning potential reductions in loan rates and target prices dominate the outlook. With an expected 4 percent increase in world coarse grain production over this year’s record level and world wheat production only slightly below the previous record high, world grain trade continues to decline, and price competition among exporters is keen. So long as the U.S. loan rate serves as an effective price floor, many U.S. producers will find it more profitable to place grain under loan while foreign producers expand exports by selling below the U.S. loan rate. Moreover, if acreage reduction programs are employed to retard growth in U.S. stocks and to minimize the costs of price support programs, U.S. exports of the major grains will continue to decline. Finally, it is important to note that, despite a 20 percent decline in the value of the dollar since March, grain exports have been flat or declining, and it is expected that grain exports in 1986 will be at or below the levels of a decade ago. Red Meats and Poultry Cattle prices and beef production have been dominated in recent years by producers holding cattle on feed longer in anticipation of higher prices. The higher prices failed to materialize and resulted in large inventories of overweight cattle. Thus, despite reduced sla u g h te r n u m b ers, beef p ro duction WINTER 1986 FEDERAL RESERVE BANK OF ST. LOUIS 1986 Farm Outlook Summary Year* 1982 1983 1984 1985f 1986f Net 2 4 .6 1 5 .0 3 4 .5 25 - 29 22 - 26 R e a l n et ($ 1 9 7 2 ) 1 1 .9 7 .0 1 5 .5 11 - 13 9 - 11 Farm Income ($ bil.) Commodity Prices C o rn ($ p e r bu.) 2 .6 8 3 .3 8 2 .6 5 2 .6 5 2 .3 5 - 2 .5 5 W h e a t ($ p e r bu.) 3 .5 5 3 .5 6 3 .3 8 3 .0 5 - 3 .2 5 3 .0 0 - 3 .2 0 1 8 2 .5 2 1 8 7 .1 9 1 8 8.21 1 2 5 .4 0 1 2 0 - 15 0 6 4 .2 2 6 2 .3 7 6 5 .3 4 5 8 .0 0 6 5 .0 0 2 .4 3 2 .3 8 2 .4 0 5 5 .0 7 4 7 .3 3 4 8 .8 6 1 .7 5 1 .7 0 0 .2 8 0 .2 9 S o y b e a n m e a l ($ p e r ton) C h o ic e F e d S te e rs ($ p e r cw t.) R e ta il-c h o ic e b e e f ($ p e r lb.) B arro w s an d gilts ($ p er cw t.) R e ta il-p o rk ($ p er lb.) B roilers (<P p e r lb.) 2 .3 3 2 .4 0 4 4 .5 0 45 - 48 1 .6 2 1 .6 2 1 .6 8 0 .5 7 0 .5 0 0 .5 0 ' A For corn, wheat and soybean meal, the years are marketing years; for example, the figures for 1986 actually apply to the 1985-86 marketing year. F Denotes forecast. increased. At the same time, poor returns to hog producers have led to sharp reductions in breeding inventories despite low feed costs. In contrast, poultry production was up 5 percent in 1985. With a continuation of changes in production costs and consumer demand that favor poultry over red meats, poultry production is expected to expand 4 percent in 1986 while red meat output will remain unchanged. As the data in the table indicate, these production levels imply some increase in cattle and hog prices, but little change in retail red meat prices. Broiler prices are expected to hold near their current levels. farm debt are expected to reduce the volume of outstanding farm debt 3 to 4 percent in 1985, with further reductions expected for 1986. Real estate debt is expected to fall between $2 to $7 billion in 1985, the largest annual decline since 1944, while nonreal estate debt should fall $1 to $5 billion. The largest declines will be at Federal Land Banks and PCAs, respectively, while FmHA and, to a lesser extent, commercial banks expand market share. Return to assets for farmers is expected to be unchanged at about 4.3 percent in 1985, while total return to equity is expected to fall slightly. For 1986, equity is expected to fall again while debt/asset ratios rise slightly. Farm Credit Farmer paydowns of existing debt and write-offs of bad —Michael T. Belongia Agriculture—An Eighth District Perspective is a quarterly summary of agricultural conditions in the area served by the Federal Reserve Bank of St. Louis. Single subscriptions are available free of charge by writing: Research and Public Information Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, Missouri 63166. Views expressed are not necessarily official positions of the Federal Reserve System. 2 FRASER Digitized for WINTER 1986 FEDERAL RESERVE BANK OF ST. LOUIS EIGHTH DISTRICT AGRICULTURAL DATA Percent Change P ric e s a n d C o s ts 1 Sept. 1985 Oct. 1985 Nov. 1985 A v e ra g e for 1984 Year-To-Date 19852 Same Month Year Ago C O N S U M E R P R IC E IN D E X (% c h a n g e ) N o n foo d 0 .2 % 0 .3 % 0 .5 % 0 .3 % 3 .7 % 3 .9 % Food 0 .3 0 .2 0 .9 0 .3 1 .0 1 .4 P R O D U C T IO N C O S T S F O R F A R M E R S (% c h a n g e ) All inputs F e rtilize r -1 .3 0 .0 0 .7 0 .0 -3 .7 0 .0 -2 .0 -2 .6 0 .2 -6 .5 -7 .8 0 .2 -0 .1 A g ricu ltu ral c h e m ic a ls 0 .0 0 .0 0 .0 -0 .8 -0 .8 F u e ls an d e n e rg y 0 .0 -0 .5 1.5 -0 .1 3 .5 2 .5 P R IC E S R E C E IV E D B Y F A R M E R S (% c h a n g e ) All pro du cts 0 .0 1 .7 -2 .4 -0 .3 -6 .7 -7 .4 L ivestock 0 .0 4 .7 3 .0 0.1 -4 .8 -3 .5 -1 .8 -0 .9 2 .7 -0 .7 -8 .8 - 1 1 .6 $ 6 0 .2 8 $ 6 2 .3 6 $ 6 2 .8 6 $ 6 5 .2 8 -5 .2 -3 .9 $ 3 1 .1 0 $ 3 6 .4 9 $ 3 1 .6 7 $ 3 9 .1 2 -1 1 .0 -1 3 .5 C rop s FEED ER CATTLE W h o le s a le p rice - K a n s a s C ity ($ /c w t.) F E E D E R P IG S W h o le s a le p rice - S o . M issouri ($ /h e a d ) B R O IL E R S W h o le s a le p rice - 12-city ($ /lb .) 5 2 .2 0 $ 4 8 .3 0 $ 5 3 .7 0 $ 5 5 .5 4 $ 1 0 .0 3 .0 8 2 .3 7 $ 9 0 .2 0 $ NA 7 4 .4 6 $ -7 .3 9 .2 TURKEYS W h o le s a le p rice - N e w Y o rk, 8 -1 6 lb. young h en s ($ /lb .) CORN W h o le s a le p rice - N o. 2, ye llo w - St. Louis ($ /b u .) $ 2 .3 8 $ 2 .2 7 $ 2 .5 0 $ 3 .2 7 -9 .1 -9 .8 $ 5 .1 9 $ 5 .0 5 $ 5 .1 9 $ 7 .0 5 - 1 3 .1 - 1 6 .3 $ 3 .0 7 $ 3 .1 5 $ 3 .3 5 $ 3 .8 0 - 1 0 .9 -1 3 .0 $ 1 7 .5 0 $ 1 7 .3 5 $ 1 7 .2 5 $ 1 8 .4 3 -4 .6 -5 .5 -0 .2 -9 .7 SOYBEANS W holesale price - No. 1, yellow - Central Illinois ($/bu.) W HEAT W h o le s a le p rice - N o . 1, hard w in te r K a n s a s C ity ($ /b u .) L O N G -G R A IN R IC E W h o le s a le p rice - A rk a n s a s ($ /c w t.) CO TTO N A v e ra g e p rice re c e iv e d by U .S . F a rm e rs ($ /lb .) 5 5 .0 0 $ 5 6 .7 0 $ 5 6 .0 0 $ 6 5 .5 8 $ P e rc e n t C h a n g e U .S . E x p o rts July 1985 Aug. 1985 Sept. 1985 A v e ra g e for 1984 Year-To-D ate 19852 -6 1 .1 % Same Period Year Ago -2 5 .7 % C o rn (m il. bu.) 9 7 .0 9 2 .0 8 1 .0 16 2.1 S o y b e a n s (m il. b u.) 1 9 .2 2 6 .3 3 1 .5 5 9 .6 -6 3 .9 6 6 .7 W h e a t (m il. bu.) 6 9 .0 9 0 .0 7 7 .0 1 3 4 .2 -4 2 .5 - 6 8 .7 R ic e (ro u gh e q u iv a le n t, mil. cw t.) C o tto n (thou, b ales) 5 .0 5 .4 6 .7 5 .4 4 5 .9 -1 7 .4 2 6 8 .0 2 0 6 .9 2 0 0 .3 5 8 0 .4 -6 9 .7 - 2 8 .4 3 NonReal Estate Farm Debt Outstanding Banks O utstanding ($ millions) U .S . Percent Change 9/84 - 9/85 A rk a n s a s K e n tu c k y Outstanding Percent Change ($ millions) 9/84 - 9 /85 9/83 - 9/85 $ 1 6 ,0 2 0 - 1 8.70/o -3 .7 0 /0 - 5 .9 % 0 .0 % -4 .3 5 .8 NA NA NA 557 -1 1 .3 7 .4 355 -2 4 .6 7 .3 -1 7 .0 12.0 -2 .4 326 - 2 8 .0 1 ,3 8 0 -1 0 .7 -9 .3 347 - 2 4 .5 -3 .9 377 -5 .3 -4 .4 314 - 2 5 .1 -1 7 .3 652' M isso u ri 9/83 - 9/85 3 ,0 7 5 $ 3 9 ,0 8 6 E ig h th D istrict 4 PCAs3 Tennessee - Agricultural Bank Loan Performance5 Percent of Farm Loans 9/85 Overdue at Percent of Total Loans W ritten Off at Agricultural Banks Agricultural Banks 9/84 9/83 9/85 9/84 .680/0 9/83 U .S . 3 .1 % 2 .6 % 2 .3 % E ig h th D istric t 4 3 .5 3 .0 2 .4 .9 4 .5 5 .39 A rk a n s a s 1 .9 1.3 2 .1 .7 2 .3 3 .2 9 1 .2 6 % .4 5 % K e n tu c k y 3 .9 3 .0 2 .3 .5 2 .4 4 .5 5 M isso u ri 4 .3 3 .9 2 .7 1 .7 7 .91 .5 3 Tennessee 3.1 2 .4 3 .4 .7 5 1 .0 5 .7 9 Agricultural Production Loan Interest Rate6 Banks E ig h th D istrict A v e ra g e PCAs 11/85 11/84 9/85 9/84 1 1 .9 % 1 3 .3 % 1 1 .7 % 1 2 .6 % 1 The consumer price index components are seasonally adjusted. All other data are not seasonally adjusted. 2 Percent change from December of previous year, based on the most recent month available. 3 Source: Farm Credit Banks of Louisville and St. Louis, Farm Credit Administration. 4 Includes all of AR and parts of IL, IN, KY, MO, MS and TN. 5 Agricultural banks are defined as those with more than 25 percent of total loans in agricultural loans. 6 Interest rate data are for different dates. PCA rates are weighted averages for Arkansas and Missouri, not adjusted for stock purchase requirements. Source: Farm Credit Banks of St. Louis.
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