Saturday, February 15, 2014

USDA Predicts Lower Prices For Foreseeable Future

Politico looks at the report in light of costs under the Farm Bill, but the projected crop prices look really bad for land prices (via Sowing Agricultural Seeds Daily):
New economic projections released by the Agriculture Department Thursday carry a sober warning of what lower corn prices could mean for the cost of the new farm bill over the next few years.
For the 2014-2015 marketing year beginning Sept. 1, the report projects a seasonal average farm price of just $3.65 per bushel of corn–compared to $4.50 for the current year. In 2015-2016, the price drops further to $3.30 per bushel before beginning a slow but steady climb back up to $4.10-$4.20 per bushel by 2023 and 2024
That’s a much steeper decline than many had expected and well below the corn prices assumed by the Congressional Budget Office in scoring the new farm bill.
Just a year ago, the department was forecasting about $1 more per bushel for corn in the same 2015-2017 period. If the revised projections prove accurate, it will surely impact the cost of new counter-cyclical programs signed into law last week by President Barack Obama.
The department’s economists will present a much fuller forecast next week at the annual Agricultural Outlook Forum held Feb. 20 and 21. Because Thursday’s report was prepared before the new farm bill was completed, its value is more as a harbinger of what could lie ahead.
Of special interest is the spike shown in government payments under the so-called ACRE revenue protection program under the old 2008 farm bill.
At one level, this is an academic exercise since ACRE has been supplanted by the new ARC or Agricultural Risk Coverage program under the new bill. But the design of both programs is quite similar, and just as Thursday’s report shows a spike in payments under ACRE, it is a warning that the same dynamic could repeat itself with ARC.
“As crop prices decline from recent high levels, incentives to enroll in the ACRE program rise,” the report reads. “Payments under the program associated with 2014-16 crops (paid in 2015-17) are projected to be large, over $9 billion annually in 2015-16 and more than $4 billion in 2017.”
Indeed, from 2015 to 2017, the report shows that total government payments to farmers would jump by about $21 billion over what the department had forecast a year ago.
$3.30 a bushel doesn't do much to pay for $10,000 an acre land.  It doesn't even do much in way of covering input costs. If these prices come to pass, there will be tremendous pain in rural areas.  It's not so much that things will be that bad compared to the late '90s, but they will be unimaginably bad compared to the last seven years.  Folks have gotten pretty used to things going extremely well, and tough times will be more brutal because of it.  Hopefully, the bankers and realtors are right when they say all this land was purchased with cash, but I don't see how that could be.  As Mr. Buffett says, when the tide goes out, we'll see who's swimming without a bathing suit.

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