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Looking Ahead To 2013

Written by: Kent Thiesse

2013 is setting up to be another interesting year in the agriculture industry, following a very profitable year in 2012 for most crop producers in the upper Midwest, and a fairly negative profit year for most livestock producers. 2012 ended with a Farm Bill Extension, but without a new Farm Bill, to replace the current Farm Bill that officially expired on September 30, 2012. Following are some items that are likely to be on the forefront in the agriculture industry for 2013 :

 

The New Farm Bill --- The current Farm Bill expired on September 30, 2012, and some programs would have been discontinued without the extension of the current Farm Bill. The new Farm Bill was not completed by December 31, 2012, as most late December Congressional action was focused on addressing tax and spending issues associated with the Federal “fiscal cliff”. Congress voted to extend the current Farm Bill through September 30, 2013, allowing some existing farm programs and other USDA programs to continue at current levels. Congress will continue to work toward finalizing a new Farm Bill during the 2013 Congressional session. The Farm Bill Extension was linked to the “fiscal cliff” budget agreement, but did not address spending issues for the new Farm Bill. The Extension legislation will continue funding for farm program direct payments for 2013 at a reduced payment level; however, funding for 2012 disaster assistance, as well as some other USDA programs, was not maintained by the Farm Bill Extension, even though the programs are still in existence.

 

The new Farm Bill will likely involve some major changes in the risk management (“safety net”) programs available to farm operators, and will likely eliminate the direct payments for corn, soybean and wheat producers that have existed since the late 1990’s. Most crop producers are hopeful that a strong crop insurance program will be the “cornerstone” risk management program of the new Farm Bill. The Milk Income Loss Contract (MILC) program for dairy producers will be continued for 2013 as part of the Farm Bill Extension, but will likely be replaced with different dairy risk management program in the new Farm Bill. Other livestock producers also hope that some type of livestock assistance program is included in the next Farm Bill to assist with low profit years, such as 2012.

 

The next Farm Bill will likely lower the maximum acreage in the Conservation Reserve Program (CRP) from the current level of 32 million acres down to a maximum of 25 million acres in CRP, in order to increase crop production acreage in the U.S. There are currently approximately 27 million acres enrolled in CRP, which is down from 29.5 million acres in CRP, as recently as September, 2012. The Supplemental Nutrition Assistance Program (SNAP), including the food stamp program, which will be a major part of the new Farm Bill, currently utilizes over 75 percent of the USDA annual funding allocation. There are many other USDA programs for conservation, rural development, and export enhancement that may be discontinued, unless they are reauthorized by the new Farm Bill.

 

Renewable Fuels --- 2012 ended with a considerable amount of uncertainty in the renewable fuels industry. Profit margins were very tight in the ethanol and biodiesel industries, and some production plants in the U.S. have slowed or ceased production. Ethanol profitability has been hampered in 2012 by a combination of high corn prices and low petroleum prices. In 2012, the U.S. Environmental Protection Agency (EPA) continued the Renewable Fuels Standards (RFS) as approved; however, there continues to be a push from many groups to reduce or eliminate the RFS standards. There is a growing “anti-ethanol” sentiment among environmental and hunger groups, livestock organizations, taxpayer groups, large food companies, and some members of Congress. It is likely that 2013 will be a pivotal year for the future direction of renewable energy policy in the U.S.

 

Crop Production --- The breakeven cost of producing corn at “trend line” yields will likely be close to $5.00 per bushel or higher for many producers in 2013, and near $12.00 per bushel for soybeans, which are increased compared to 2011 and 2012 levels. The expected 2012 breakeven prices compare to just over $3.50 per bushel for corn and near $8.00 per bushel for soybeans as recently as 2008. There has been some concern recently, as the current local forward prices for the Fall of 2013 have declined significantly in the past few weeks, and are now near $5.50 per bushel for corn, and just above $12.00 per bushel for soybeans. The extended period of higher corn and soybean prices in 2011 and 2012 have slowed demand for feed usage, biofuels production, and for exports, which could put further pressure on grain prices in 2013. Cash rental rates for farm land have increased dramatically in the past two years in many areas of the Upper Midwest, and can be a large variable in the producer break-even prices for corn and soybean production across the region. Farm operators need to look for ways to control crop expenses for 2013, as well as put together a good grain risk management plan, which utilizes crop insurance and sound grain marketing strategies, in order to achieve “breakeven” and “profitable” price levels for the coming year.

 

Livestock Production --- Profit margins in the livestock sector were quite strong at the start of 2012, but declined very rapidly as feed costs soared by mid-year, as a result of the 2012 Drought. Market prices for pork and beef also fell late in 2012 following significant liquidation of livestock due to low profitability and the effects of the drought. Livestock profits are likely to remain quite tight during the first few months of 2013, due to continued high feed costs and lower market prices; however, livestock profitability should improve by the latter half of 2013, with improved market prices for pork, beef and milk expected, along with some reduced feed costs. Most analysts expect demand for milk and meat products to remain quite strong in the coming year, both for domestic and export markets. The big question mark for 2013 will be what happens to feed costs, which will likely be impacted by the continuation or extent of any drought conditions in the U.S. that could again cause feed prices to increase dramatically, as well as cause further stress on pasture conditions for cattle producers.

 

Land Values --- Land values ended the year at record levels throughout most of the Midwest, including numerous farm land sales in Southern Minnesota1 above $10,000 per acre in recent weeks. Certainly not all farm land is selling at those rates, but most tillable farm land in the Upper Midwest is being sold at considerably higher levels than comparable land was a year ago. Most recent land value surveys show that land values in Minnesota, Iowa, and surrounding States are 20 percent or more higher than comparable land values were at the end of 2011. Land values in many areas have risen 40-50 percent in the past three years. Excellent farm profits from crop production in 2012, along with continued low real estate interest rates, and high demand for farm land are likely to keep land prices strong again in 2013. However, a significant drop in grain prices and a reduction in farm profitability in 2013, along with a potential slowdown in the national economy, could cause land prices to moderate later in the year.

 

Best wishes in 2013 to everyone involved in the agriculture industry !

 

 

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Note --- For additional information contact Kent Thiesse, Farm Management Analyst and

              Vice President, MinnStar Bank, Lake Crystal, MN. (Phone --- (507) 381-7960) ; 

              E-mail --- kent.thiesse@minnstarbank.com)  Web Site --- http://www.minnstarbank.com/