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Agriculture AN EIGHTH DISTRICT PERSPECTIVE WINTER 1986/87 Highlighting the Outlook for Agriculture in 1987 The U.S. Department of Agriculture (USDA) held its annual Outlook Conference on December 2-4, 1986, in Washington, D.C. Most speakers emphasized two points about the future. The first was that ongoing improvements in technology would continue to increase the supply of farm products at a rate faster than the growth of demand for them. A second, and closely related theme, was that the problem of chronic surplus production could be solved only by basing taxpayer subsidies to farmers on a criterion not related to the quantity of farm products produced. Taking both of these statements at face value, the conference appeared to draw a fundamental conclusion: unless export sales of U.S. farm products increase dramatically and soon, the only solution to the persistent farm problem of declining prices and income accompanied by mounting farm surpluses and taxpayer subsidies is a set of major changes in U.S. farm legislation. With little improvement in exports expected through the end of the decade, the cost of government farm programs could well continue along its recent path of $20 billion or more annually. In what follows below, highlights of several commodity forecasts are presented. Farm Income The USDA expects net farm income in 1987 to be between $29 billion and $34 billion. With the estimated value of 1986 net farm income at $29 billion, the USDA is projecting as much as a 15 percent increase for the year ahead. The increase, if it occurs, will be the result of two factors. Although the crop programs will encourage farmers to take as much as 35 percent of their acreage out of production, large deficiency and diversion payments will increase direct payments from farm programs to a record $14-16 billion. In addition to swelling receipts, farm programs will increase net farm income by reducing input costs: in complying with program provisions to idle land, farmers will be purchasing less fuel, fertilizer and seed. Livestock Cattle and hogs are two commodities for which prices received by farmers have increased in recent years and are expected to continue increasing in 1987. The U.S. cattle inventory has declined in five consecutive years; its January 1, 1986, value was the lowest since 1963, and preliminary reports indicate a further reduction in 1987. In recent years, some of the effects of this inventory decline have been offset by dairy cow slaughter resulting from legislated payments to reduce the size of dairy herds. This effect is expected to be much smaller in 1987 such that the declining cattle numbers point to reduced beef supplies and steadily rising beef prices next year. Cattle prices are expected to be near $65/cwt. by spring. A similar story applies to hogs. Breeding hog numbers on June 1, 1986, were the lowest since the June 1 survey was established in 1964, and low farrowing intentions suggest a decline in pork output and higher pork prices for much of 1987. Hog prices are expected to range between $55 and $60 through the first three quarters before declining in the fourth quarter. Poultry output and prices are expected to increase next year. Producers, who have earned generally good returns in recent years, should continue to do relatively well as low grain prices reduce feeding costs and reduced red meat supplies help strengthen the demand for and increase the prices of poultry products. Eighth District Crops Corn—The enormous volume of surplus product continues to be the dominant factor in the corn market. Carryover stocks are expected to be 5.5 billion bushels by September 1, 1987, or 2 billion bushels greater than the carryover that precipitated the PIK program only four years ago. Viewed in a somewhat different way, carryover stocks will be about 70 percent of one year’s production. Although U.S. exports are expected to increase WINTER 1986/87 FEDERAL RESERVE BANK OF ST. LOUIS moderately, the level of corn exports for the 1986-87 marketing year will be about 40 percent lower than the 1979-80 level. The 1986 yield of 119.8 bushels per acre established a new record. Even with an 85 percent participation rate by farmers in the corn program, with its 20 percent acreage reduction and 15 percent acreage diversion, trend yields would produce a 1987 com crop that, at best, would not add to surplus product. The season average corn price is projected to be in the $1.35 to $1.65 range. Soybeans—Global production is expected to exceed use such that surpluses should rise. The U.S. share of world exports is expected to decline because of increased production both by export competitors and importers. Even though the effective soybean loan rate will decline to $4.56 per bushel in 1987, down from $5.02 in 1985, an expected market price between $4.50 and $4.90 makes the ratio of soybean to grain prices relatively high and may induce some production shifting in South America from grains to soybeans. This shifting, of course, would exacerbate the global excess supply conditions and continue to put downward pressure on soybean prices. Rice—The marketing loan program has made U.S. rice prices competitive in world markets and is expected by the USDA to increase U.S. rice exports and reduce surplus stocks. Consumption also is expected to be larger than production during the remainder of the 1980s, which will further reduce recent surplus stocks. Cotton—The 1986 cotton program encouraged lower U.S. production and reduced domestic prices to levels more near the world market. These two forces are expected to spur exports and reduce surplus stocks to about 5.5 million bales, or 3.8 million bales lower than a year earlier. The U.S. share of the world export market is expected to rise from a 10 percent share in 1985-86 to 29 percent in 1986-87. The USDA is prohibited, by law, from making public forecasts of cotton prices. Wheat—The acreage reduction incentives of farm legislation and declining prices have caused fundamental changes in the U.S. wheat market in recent years and no immediate turnaround is foreseen. Since 1982, harvested acreage has declined from 81 million acres to 61 million acres, production has fallen to 2.1 billion bushels from 2.8 billion bushels and the 1982-83 export volume of 1.8 billion bushels has been cut in half to just over 900 million bushels. The continued reductions in loan rates under the 1985 Farm Act will put 1987 wheat prices, at the farm gate, between $2.20 and $2.40 per bushel, down from $3.16 the previous year. The lower farm prices are expected by the USDA to increase exports significantly, even in the face of large Table 1 Features of Major Commodity Programs 1986 1987 1.92 3.03 17.5 2.5 1.11 50 60 40 0.73 0 100 1.82 3.03 20 15.0 1.21 40 50 50 2.00 50 50 2.40 4.38 22.5 2.5 1.98 50 60 40 2.28 4.38 27.5 0 2.10 40 50 50 0.55 0.81 25 0 0.26 40 75 25 0.52 0.79 25 0 0.27 30 50 50 7.20 11.90 35 0 4.70 40 75 25 6.84 11.66 35 0 4.82 30 50 50 Com Loan rate ($/bu.) Target price ($/bu.) Acreage reduction program (%) Paid land diversion (%) Estimated deficiency payments ($/bu.) Advance deficiency payments (%) Percent of advance paid in cash Percent of advance paid in certificates Diversion payments ($/bu.) Percent of diversion paid in cash Percent of diversion paid in certificates W h eat Loan rate ($/bu.) Target price ($/bu.) Acreage reduction program (%) Paid land diversion (%) Estimated deficiency payments ($/bu.) Advance deficiency payments (%) Percent of advance paid in cash Percent of advance paid in certificates C o tto n Loan rate ($/lb.) Target price ($/lb.) Acreage reduction program (%) Paid land diversion (%) Estimated deficiency payments ($/lb.) Advance deficiency payments (%) Percent of advance paid in cash Percent of advance paid in certificates R ic e Loan rate ($/cwt.) Target price ($/cwt.) Acreage reduction program (%) Paid land diversion (%) Estimated deficiency payments ($/cwt.) Advance deficiency payments (%) Percent of advance paid in cash Percent of advance paid in certificates SOURCE: Agricultural Outlook, USDA/ERS, December 1986 supplies abroad. Dairy—The attempt by the government to purchase dairy herds and remove these producers from the industry for at least five years has resulted in lower milk production. The decline has been small, however, because the least efficient producers were the most likely to sell their herds, and lower feed costs have caused some expansion in output by remaining producers. Even though further reductions in the support price are scheduled, lower feed costs will largely offset these declines such that production is little affected. Overall, an expected 3 percent decline in milk output in 1987 and increased commercial use of milk should reduce government purchases of surplus production. —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 FEDERAL RESERVE BANK OF ST. LOUIS WINTER 1986/87 EIGHTH DISTRICT AGRICULTURAL DATA Percent Change Prices and Costs1 CONSUMER PRICE INDEX (% change) Nonfood Food Sept. 1986 0,3% 0.4 Oct. 1986 0.1% 0.4 Nov. 1986 0.2% 0.5 Average for 1985 0.3% 0.2 Year-To-Date 19862 Same Month Year Ago 0.2% 3.6 0.6% 4.4 PRODUCTION COSTS FOR FARMERS (% change) Agricultural machinery and equipment Mixed Fertilizers Other Agricultural chemicals Gasoline 0.0 -1 .0 0.3 9.0 -0 .1 - 1 .0 - 0 .3 -8 .2 0.1 - 0 .6 0.3 0.2 0.0 - 0 .2 -0 .1 0.3 0.6 - 3 .6 5.8 -4 5 .4 0.7 - 4 .5 4.6 -4 5 .2 PRICES RECEIVED BY FARMERS (% change) All products Livestock Crops -2 .4 -2 .1 -4 .0 -0 .8 - 0 .7 0.0 2.5 0.0 5.2 - 0 .4 - 0 .5 - 0 .5 -3 .1 5.8 -1 3 .6 - 2 .4 5.1 -1 0 .5 FEEDER CATTLE Wholesale price - Kansas City ($/cwt.) $65.50 $59.65 $64.13 $64.55 5.2 2.0 FEEDER PIGS Wholesale price - So. Missouri ($/head) $59.63 $53.23 $50.00 $37.11 74.5 57.9 BROILERS Wholesale price - 12-city ($/lb.) 60.95$ 62.46$ 57.50$ 50.81$ 18.0 7.1 TURKEYS Wholesale price - New York, 8-16 lb. young hens ($/lb.) 81.21$ 83.17$ 80.68$ 75.48$ - 7 .2 -1 3 .3 CORN Wholesale price - No. 2, yellow - St. Louis ($/bu.) $ 1.47 $ 1.46 $ 1.68 $ 2.66 -3 5 .1 -3 2 .8 SOYBEANS Wholesale price - No. 1, yellow - Central Illinois ($/bu.) $ 4.96 $ 4.89 $ 5.08 $ 5.56 - 4 .5 0.6 WHEAT Wholesale price - No. 1, hard winter Kansas City ($/bu.) $ 2.53 $ 2.60 $ 2.68 $ 3.39 -2 1 .6 -2 0 .0 LONG-GRAIN RICE Wholesale price - Arkansas ($/cwt.) $11.50 $11.75 $11.88 $17.70 -3 1 .1 -3 1 .1 - 0 .8 - 5 .5 COTTON Average price received by U.S. Farmers ($/lb.) 47.40$ 47.10$ 52.90$ U.S. Exports Sept. 1986 Oct. 1986 Nov. 1986 Average for 1985 81.0 30.2 103.9 11.7 387.0 125.0 89.7 92.1 7.8 314.0 115.0 96.6 68.1 N.A. 571.0 145.8 53.7 81.7 5.2 418.7 55.84$ Percent Change Corn (mil. bu.) Soybeans (mil. bu.) Wheat (mil. bu.) Rice (rough equivalent, mil. cwt.) Cotton (thou, bales) Year-To-Date 19862 - 35.8o/o 2.7 - 5 .4 69.6 191.3 Same Period Year Ago -4 5 .5 % 21.4 - 2 1 .7 27.9 143.3 3 Non-Real-Estate Farm Debt Outstanding Banks Outstanding ($ millions) u.s. Eighth District4 Arkansas Kentucky Missouri Tennessee $33,737 2,780 537 629 1,166 344 PCAs3 Percent Change 9/84 - 9/86 9/85 - 9/86 -1 3 .8 % - 9 .6 - 3 .7 - 3 .6 -1 5 .5 - 8 .9 -1 8 .8 % -1 3 .4 -1 4 .5 - 2 .6 -2 4 .5 -1 3 .7 Outstanding ($ millions) Percent Change 9/84 - 9/86 9/85 - 9/86 $12,517 NA 240 234 238 240 - 25.4% NA -3 2 .4 -2 8 .2 -3 1 .5 -2 3 .6 - 36.4% NA -4 9 .0 -4 8 .3 -4 8 .3 -4 2 .8 A g r ic u ltu r a l B a n k L o a n P e r f o r m a n c e 5 Percent of Farm Loans Overdue at Agricultural Banks 9 /8 6 U.S. Eighth District4 Arkansas Kentucky Missouri Tennessee 3.1% 3.2 1.2 4.4 3.0 1.6 Percent of Total Loans Written Off at Agricultural Banks 9 /8 4 9 /8 5 3.1% 3.5 1.9 3.9 4.3 3.1 2.6% 3.0 1.3 3.0 3.9 2.4 9 /8 6 9 /8 5 1.27% .96 .72 .52 1.82 .75 1.48% .90 .59 .63 1.42 1.23 Agricultural Production Loan Interest Rate6 PCAs Banks 11/86 Eighth District Average 10.0% 11/85 11.9% 12/86 12/85 11.2% 12.20/0 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. 9 /8 4 .68% .55 .33 .44 .91 1.05
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