Rural Economic Outlook Promising But Drought A Concern

Looking ahead to 2013, beef cattle prices likely will remain strong, but producers must manage production costs, especially feed, closely.

November 20, 2012

5 Min Read
Rural Economic Outlook Promising But Drought A Concern

Wheat prices are expected to hold well into next year, and farmland values are expected to stay strong. Beef cattle prices likely will remain strong as well but producers must manage production costs, especially feed, closely. Farmers and ranchers also will face more rules and regulations as the pace for regulatory change continues to increase for farms and small businesses.

That’s the gist of an economic outlook presented by a quartet of Oklahoma State University (OSU) Extension economists recently at the third annual Rural Economic Outlook Conference in Stillwater.

Derrel Peel, Breedlove Professor of Agribusiness and livestock marketing specialist, said drought continues to weigh heavily on the beef industry with continued herd liquidation, and record-high grain, forage and replacement cattle prices. Producers are experiencing reduced cow-calf profitability, and feedlot and packer margins have been poor. Herd liquidation also has resulted in higher wholesale beef prices, more limited beef demand and weaker beef exports.

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That’s a recap, he said for 2012. For 2013, the industry wonders if drought will persist, accompanied by even more liquidation. Or will more normal weather mean higher heifer retention? He anticipates tighter cattle supplies into 2014. “Beef demand is the key unknown and is tied to the general economy.”

Cattle and beef prices, he said, will push higher because of limited supplies next year. “Beef production is down by 4.5%. Beef demand will limit price increases, however.”

Other factors that could affect the cattle markets are how much higher beef prices will move before hitting a barrier and whether and how much feed prices will moderate. Higher cow and heifer prices also will influence the cattle market and breeding cow and heifer demand.

Cow-calf operators have opportunities for good profit but must manage costs. “Stockers offer good value with gain but packers and feedlots will continue to struggle and loss of capacity is likely. Production challenges will be bigger than marketing challenges.”

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Peel said the industry will be a long time in transition. “We expect a long period of limited cattle supply.”

Land values, said Damona Doye, Sarkeys Distinguished Professor and Extension economist and regents professor, are variable across the country but have held up in Oklahoma. Nationally, cropland value is up 14.5% with pastureland up 4.5%. In Oklahoma, cropland is up 16.8% with pastureland up 10.6%.

Values in Oklahoma are higher where there are mineral rights. “North Central Oklahoma has the highest land values in the state,” she said.

Nationally, the corn states show the highest value for cropland. Improved pastureland to the east also is valued higher than native pastures in the west. Pastureland in Oklahoma is valued at $1,150/acre, same as the national average.

“The highest land rental values are also found in states with the highest cropland values, the Midwest.”

In Oklahoma, dryland cash rent rates were up 10% in 2012, compared to 2011. A breakdown by crop shows wheat land at $32.81/acre cash rent. Alfalfa is $41.40 and grain sorghum is $29.03/acre.

Doye said pastureland for rent was limited last year because of drought. “If folks had pastureland to rent, however, they could command high rental rates.”

In spite of farmland values holding up, investing in rural land is not always a good option. “The investment does not always provide a good return,” she said. “We have seen times when farmland outperformed the stock market, but timing is the key.”

She said renters and landowners need to communicate accurately. “That’s why we need to see more written lease agreements.”

Crop outlook for 2013

Kim Anderson, Extension economist and wheat marketing specialist, said wheat prices should remain profitable into 2013. Drought will continue to affect the market even though wheat stocks currently are adequate.

Corn supply will continue to influence wheat, Anderson said. Drought and “the ethanol effect,” will keep pressure on corn supplies. “Corn will have to buy acres and that will keep prices up.”

If corn stocks decline, wheat may move into the feed market.

“If we don’t get corn and beans planted next spring, we could see $10 wheat,” he said.

Anderson quoted one-time colleague Luther Tweeten about the effect government programs have on the wheat market. “He said, ‘policy comes and policy goes, but weather determines prices.’”

Shannon Ferrell, OSU assistant professor of ag economics, discussed changes in agriculture law and the changing population dynamics facing farms and ranches. “The pace of (regulatory) change for farms and other small businesses is changing. Agriculture will face more rules and regulations.”

The economic impact of regulations, he added, is not considered.

Regulatory change also comes in conjunction with changing farm population dynamics. A recent survey shows that 55% of farms in Iowa are owned by “people old enough to retire, 65 years or older.”

He said older farmers are less productive than younger ones.

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“We have to think about how to turn over farms to the next generation,” he said. “We have to manage that transition, and manage it in time for the next generation to learn.”

As the farming population ages, he said, the next generation may be well into middle age by the time they take over farm management. “We have to actively engage the next generation,” he said.

Rising input costs also create hardships for young farmers. Land prices, for instance, have risen steadily since 2003. And recent increased prices for agriculture commodities have been largely offset by increased production costs.

“More young farmers are now embracing a leasing mentality to bridge the expense gap to get into farming,” he said.

The shift to renting or leasing farmland should include educating landowners on the advantages of adopting new production technology. 

Ferrell said change is inevitable and has been for thousands of years. He quoted the Greek philosopher Heracleitus: “Nothing endures but change.”

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