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Half Empty Or Half Full?

Prices are forecast to drop and production costs to rise. While 2006 isn't as promising as 2005, producers have much to anticipate.

The year 2005 was filled with a number of events that would trouble any economy. After a year filled with devastating hurricanes and droughts, record crops, soaring energy prices, continued closure of Asian markets to U.S. beef, etc., one would expect agriculture to be in serious trouble.

But according to USDA chief economist Keith Collins, the U.S. farm economy brushed off these challenges and posted record-high agricultural exports (even with beef exports at less than 40%), the second-highest farm income on record, and record-high farmland values and farm wealth.

“The reasons for this outcome include strong global demand for food, flexibility of the agriculture system to rebound from shocks…and cyclically tight markets for some commodities, such as meat,” Collins told attendees of the 2006 USDA Ag Outlook Forum in Washington, D.C.

Collins warns some of the challenges in 2005 will catch up to agriculture in 2006.

“While demand remains strong, the farm economy will be challenged by large stacks of crops built up by abundant harvests the last two years, livestock expansion, higher interest rates and energy costs, animal-disease issues and weather,” Collins says.

“…the value of 2006 farm marketings is expected to decline about $7 billion from last year's $239 billion, with two-thirds of the decline in crops,” he adds.

So, with the decline in farm revenues and cost increases, producers will see net farm income decline 22% from 2005's $83 billion, to $65 billion — the prior 10-year average (Figure 1), Collins says.

The livestock report

Delivering the livestock and poultry outlook for 2006, Joel Greene, livestock analyst for USDA World Agricultural Outlook Board, says the supply of red meat and poultry could reach 90 billion lbs. — more than 3% higher than 2005.

Meanwhile, he adds, increasing energy prices and interest rates could cut into consumer spending on higher-cost proteins, such as beef.

Increased supplies may also mean lower prices in the meat case as meat groups compete for sales, and meat consumption is expected to approach 224 lbs./capita.

“A strengthening dollar, along with still relatively high meat prices, could affect export growth,” Greene warns. “The U.S. has already hit a bump in the road with Japanese beef trade.”

Cattle-herd expansion is continuing for the second year, after an eight-year decline. USDA's National Agricultural Statistics Service Cattle report says the number of cattle and calves on farms as of Jan. 1 was 97.1 million head — 2% above Jan. 1, 2005. Meanwhile, beef replacement heifers totaled 5.9 million — up 4%.

“However,” Greene says, “the relatively light calf crops and moderate calving expectations imply a relatively slow buildup so far in this cattle cycle.”

Price expectations

So what's it mean for USDA's 2006 price projections? Greene says returns over cash costs to cow-calf producers were strong in 2005, and will remain positive. Forage conditions, especially in the Southern Plains drought areas, are questionable and could affect the rate of expansion.

“The number of cattle and calves on small grain pastures on Jan. 1 fell 32% compared with a year earlier,” Greene says. “Indicative of the developing forage problem was the strong placement of cattle into feedlots the last quarter of 2005.”

Cattle in feedlots on Jan. 1 — more than 14.1 million head — were the third highest on record. Placements are expected to be 2% higher this year than last, with most of the growth in the first half of the year.

Canadian feeder cattle also will account for some of the increase, as the U.S. is expected to import 1 million feeder and fed cattle under 30 months of age.

Collins also predicts higher carcass weights. With all the increases, cattle slaughter and beef production are forecast to increase 5% in 2006.

Following the trend of 2006 cattle-price projections, fed-cattle marketings are expected to decline slightly from last year.

“Choice-fed cattle prices are expected to decline only 2%, to about $85/cwt.,” Collins predicts. “Retail beef prices are expected to be down 3-4%.”

International relationships

Collins expects beef exports to grow in 2006, with exports to Taiwan and Japan expected during the first half of 2006. Still, exports will only be at about 40% of 2003 levels (Figure 2). The forecast assumes shipments to Japan and Taiwan, but not South Korea, Collins says.

J.B. Penn, Under Secretary of Farm and Foreign Agricultural Services, says even with the loss of the beef market, U.S. agricultural trade reached new levels in 2005 at $62 billion in sales. Penn forecasts another record year in 2006, with $64.5 billion in sales.

Much of this success has come from free-trade agreements (FTA) — multilateral, regional and bilateral.

The multilateral World Trade Organization (WTO) FTA under negotiation would give the U.S. the ability to trade more freely with all WTO member countries (see sidebar). The agreements would expand access to more than 100 million consumers, Penn says.

“And, negotiations are already in process that would add a couple hundred million more,” he adds.

One of the most promising bilateral FTAs the U.S. intends to pursue is with South Korea, which has the largest potential for U.S. agricultural and food sectors.

“Korea is our sixth-largest agricultural market, and its consumers are relatively affluent,” Penn adds.

Also on the radar are bilateral FTAs with Thailand and the United Arab Emirates, while the most recently signed FTA is with Colombia. Possible future FTAs include Egypt and Malaysia.

Why ag needs WTO

High on U.S. radar this year is the multilateral World Trade Organization (WTO) negotiations — a worldwide effort to reduce trade barriers. The effort is especially important to agriculture, says Robert Portman, U.S. Trade Representative, because it has some of the highest barriers.

“Globally, there's a 62% average tariff on agricultural products,” Portman says. “In some countries…it's more than 100%.”

Successful conclusion of the WTO Doha Round is important to agriculture because it is attempting to rid countries of trade-distorting export subsidies.

“The U.S. average tariff is 12%,” Portman says. “We're a relatively open market because we have productive farmers, good farmland and the ability to export.

“We have subsidies in this country, but in terms of trade-distorting support, the European Union uses three times the amount of trade-distorting support we use,” he adds.

The U.S. has laid out a specific timeline for conclusion of the Doha Round. The timeline is critical, because presidential Trade Promotion Authority (TPA) expires in 2007. TPA gives Congress an up or down vote on trade deals, assuring countries the agreements they negotiate with the U.S. won't be subject to renegotiation.

Penn says the goal is to complete the Doha Round by December to allow time for presentation and voting in Congress before TPA expires.

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