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Weekly UpdatesGeneral Financial Overview
Montana's agricultural sector had an excellent year, producing an estimated $3.2 billion of sales in 2008 and an estimated $1 billion in net farm income. Nationally, farm household income for 2008, which includes off-farm income, is projected to increase by 10 percent, substantially larger than the 2001-2007 average. The 2009 Montana agricultural outlook for both crops and livestock is promising with lower, but still relatively strong prices for crops and livestock.
Grain/Wheat Outlook
World and U.S. average grain prices increased by nearly 6 percent in the 2007-2008 marketing year compared to the previous marketing year (Vocke and Allen, 2008). Better planting conditions, more acres available for planting, and more moderate weather patterns during the summer of 2008 contributed to a substantial worldwide expansion in wheat production. Between 2007 and 2008, world wheat production increased by nearly 13 percent while U.S. wheat production increased by nearly 21 percent (Table 1). Montana and U.S. shares of world wheat production and sales have remained relatively constant at around 0.7 percent (world) and 7 percent (U.S.), respectively. The futures markets for wheat suggests that wheat prices will be lower in 2009, but well above the most recent five-year historical average price (2004-2008).
In Montana, wheat production increased by nearly 10 percent from 149.8 million bushels in 2007 to 164.7 million bushels in 2008 (National Agricultural Statistics Service for Montana, 2008). Forecasters were concerned about the Montana wheat crop in early summer. Lack of snow cover and relatively dry conditions meant that winter wheat, spring wheat, and barley crops were progressing more slowly than in 2007. However, moderate to light rainfall, coupled with warm weather in late July and August, improved the winter and spring wheat forecast. At harvest time, winter wheat production was 13 percent higher than in 2007, primarily because 16 percent more acres were planted. Spring wheat production increased by 8 percent from 2007 because more acres were planted and average yields were slightly higher. Barley production increased by over 19 percent because of substantially higher average yields. The production of other grain crops (durum and oats) decreased, but prices for those corps were relatively strong.
The major factors likely to impact the 2009 wheat market are a substantial supply response to the high grain prices experienced in 2008, a strengthening dollar, and bio-fuels production. A year ago, world and U.S. wheat stocks, projected to be at historically low levels, were a major factor. This year, global year end stocks of wheat are projected to be 22 percent higher than at the end of 2007, while U.S. wheat stocks are expected to be 97 percent higher than last year (602 million bushels). Substantial increases in wheat production in the European Union (21.6 percent) and Russia (25 percent) more than offset reductions elsewhere. While U.S. exports experienced a 15-year high in 2007/2008, a stronger dollar and more favorable weather conditions in other wheat producing regions of the world will likely reduce the level of U.S. wheat exports in 2009.
Finally, the use of corn and oil seeds for the production of bio-fuels is still affecting crop and livestock markets. The increased demand for corn for producing ethanol has led to an increase in the price of corn from $2 per bushel in 2005 to over $4 per bushel in 2008. However, the increase in demand for corn for ethanol that led to higher corn prices was closely linked to increases in oil prices over the same period. Lower oil prices are adversely affecting the demand for ethanol, ethanol prices, and the demand for corn for ethanol. So it is likely that corn prices will be somewhat lower than they were between January and July of 2008. Ethanol is unlikely to be produced in Montana, but in-state production of other bio-fuels may be feasible, using canola, safflower, camelina, or other oilseeds as feedstocks. Somewhat lower prices for corn may also lower feed costs for cattle, resulting in upward pressure on stocker and feeder cattle prices.
Cattle Outlook
U.S. cattle inventories have been relatively stable since 2007 (Table 2). Beef prices in 2008 have been influenced by higher feed grain prices, import and export demand, and domestic consumption. Higher feed grain prices have been driven by the sharp increase in the price of corn, which is expected to moderate somewhat 2009. One factor that has led to lower corn prices is the use of wheat to feed livestock. The use of wheat as cattle feed is expected to increase by about one billion bushels in 2009.
U.S. beef exports for 2008 were 32 percent higher than in 2007 and are expected to remain steady to slightly lower in 2009. Most recently, beef exports have been adversely affected by a stronger U.S. dollar, declining global demand for more expensive cuts of grain-fed beef, and tighter credit markets. The expected decline in exports in 2009 is linked to anticipated reductions in demand in Mexico and other smaller and emerging markets.
Cattle imports into the United States from all sources declined by 17 percent to 2.2 million head in 2008, primarily because of reductions in imports from Australia, Mexico and Uruguay (LDP, 2-17-09). Drought-induced herd liquidations in Australia have subsided, and Australian producers are now attempting to rebuild their herds. The result has been a 25 percent decline in Australian imports through the fourth quarter of 2008. Cattle imports from Uruguay are also lower. Imports from Mexico have dropped sharply. Mexican producers are currently expected to take advantage of better grazing conditions to increase their herd size and to decrease the shipments of cattle to the U.S. in 2009. Cattle imports from Canada increased by 7 percent. U.S. beef imports in 2009 are expected to increase 6 percent to 2.68 billion pounds.
Mandatory Country of Origin Labeling (MCOOL) was introduced on September 30, 2008. MCOOL is also likely to affect cattle and beef imports, especially from Mexico and Canada. It requires retailers to inform consumers at the point of purchase of the origin of the commodity and to maintain sufficient records to support labeling claims for one year. It is clear that MCOOL will increase farm-to-retail costs because careful tracking is mandated. MCOOL may also cause imported animals to be discounted by packers and discourage Canadian and Mexican producers from sending feeder animals to the U.S. This may be good news for U.S. beef producers, as packers are likely to bid higher prices for U.S. produced (born, raised, and slaughtered) beef. Consumers will be evaluating different products and deciding which products they prefer and at what price. Stay tuned!
Montana's cattle inventory remained steady at about 2.6 million head in 2008. Montana's share of the U.S. cattle inventory remains around 2.5 to 3.0 percent (Table 2). Futures prices for the cattle market suggest calf prices will be somewhat weaker in 2009.
Montana beef producers have been adversely impacted by two major events: record high hay prices and the discovery of brucellosis in Western Montana. Increases in hay prices have been driven by increased demand, caused by high corn and feed barley prices; and lower hay supplies. In May 2008, the stock of hay in the United States was lower than at any time since 1960. The occurrence of brucellosis has affected Montana producers who sell breeding stock to producers in other states and countries. All breeding stock must be vaccinated and tested prior to shipping. Some cattle operations are incurring somewhat higher production costs.
Growth in U.S. beef consumption is predicted to be slow over the next few years. Slower or negative growth rates in the U.S. and global economies will cause consumers to watch their food budgets more carefully. In addition, beef is expected to face continued competition for the consumer's dollar from pork and chicken.
2008 Farm Bill
The 2008 Farm Bill was signed into law by President Bush in May, 2008. While the 2008 Farm Bill retained many of the old commodity programs with some minor changes, two new programs have been established: the average crop revenue election (ACRE) and supplemental revenue assistance (SURE) programs. The ACRE program essentially offers producers an alternative to the countercyclical price support program with a support program based on total farm revenue. The SURE program replaces previous adhoc disaster programs with a standing (permanent) disaster program.
Financial Crisis
In the summer of 2008, with strong grain and livestock cash and futures market prices, many Montana agricultural producers were guardedly optimistic about their financial prospects in 2009. Their optimism was muted in late-September. In just 14 trading days in late September and early-October, futures prices for wheat and corn declined by over 20 percent, ethanol prices declined by 24 percent and cattle and hog prices declined by more than 10 percent. Expectations about farm revenues from market sales in 2009 are now considerably less optimistic, although lower oil and gas prices hold out the prospect of lower production costs. With net profits expected to be somewhat lower in 2009, lenders may become more cautious. Even though agricultural producers often have close customer-borrower relationships, producers should not be surprised by requests from their banker for more information before obtaining operating and equipment loans.
Sources
Stillman, R. (2008). Livestock, Dairy, and Poultry Outlook, Economic Research Service, United States Department of Agriculture, LDP-M-173, November 17, 2008.
National Agricultural Statistics Service, Montana, 2008
Vocke, G. and Allen, E. (2008). Wheat Outlook, Economic Reporting Service, United States Department of Agriculture, WHS-08j, November 13, 2008.
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