The new year is shaping up to be one of tight margins and lower profits. Here is a look at some of the issues facing the ag sectors, and what you can do to prepare.
Crop production
Profit margins will continue to be tight, and will require careful scrutiny of all inputs. Unless demand begins to grow or grain supplies shrink, farmers can expect corn prices of about $3.50-$4 a bushel, soybean prices of $8-$9 a bushel, and wheat prices at about $4.75.
Farmers may need to reconsider their seed selection, and whether certain traits, including GMOs, are worth the added expense. Fertilizer and nutrient application will still be important to achieve high yields, but the costs will need to be weighed against projected gains.
Suppliers of fertilizer, seed technology, equipment and chemicals will insist that their product is necessary, but farmers will need to make those decisions carefully. Farmers may also want to consider shifting their acres to different crops, including small grains and forages, depending on their operation and projected profit potential.
Land rents and purchases
The long-term trend of higher land values will likely continue in many parts of Farm and Dairy coverage, but the percent of increase is decreasing, and there is a possibility that land values could post an overall decrease in the near future. The tight profit margins will continue to pressure land values, and will give farmers a little bargaining power for lower rents.
However, landowners will likely see their own expenses increase, due to higher property taxes and higher interest rates on their loans, following a federal rate hike that began in December. Some experts predict there will be less competition for acres in 2016, but farmers who forfeit a farm may have a difficult time getting it back when profit margins improve.
Dairy production
Domestic growth and a reduction in foreign exports will make for some tight dairy margins. Milk prices in 2015 dropped $7 per hundredweight, from 2014’s record high. Foreign competitors such as the European Union and New Zealand are benefiting from their weaker currencies.
The dairy futures indicate the export battle will continue for the foreseeable future. Producers will need to hone their management plans, and boost efficiency.
Lower grain and feed prices will play into dairy farmers’ advantage, but milk prices will remain low. Class III milk contracts offer an average value of $15.75 per hundredweight for 2016, and only $16 per hundredweight in 2017.
Business and production management will both be critical, and farmers can increase their per-cow return by mastering both. Seek advice, attend workshops and make sure your operation is as efficient as possible.
Beef production
Livestock prices reached a peak in 2014, following herd reductions as a result of higher feed prices, droughts and disease in the U.S. hog herd.
Production is now rebounding and prices are declining. Demand is also somewhat weak due to slow economic growth and perceived health concerns.
Risk management and marketing will be critical in 2016. Beef producers are still seeing the second highest calf prices in history, but producers will need to pinpoint their cost of production and identify break-even prices.
Second, they’ll need to consider marketing alternatives beyond just cash sales. They may want to explore forward contracts, futures/options and hedging, contract feeding, livestock risk management insurance and even some value-added markets.
Fed cattle prices averaged near $155 in 2014 and are projected to average near $149 in 2015, and near $135 in 2016.
Pork and poultry
U.S. pork production is expected to increase from 24.508 billion pounds in 2015, to 24.925 billion pounds in 2016. Exports are expected to increase from 5 billion, to 5.2 billion pounds, while imports will decline modestly to a billion pounds.
The average price of hogs was near $76 in 2014, and near $50 for 2015. In 2016, prices will likely dip a little further, to $48, with the highest prices in the first half of the year.
Poultry producers will continue to rebuild from devastating losses resulting from Highly Pathogenic Avian Influenza that affected about 50 million head of poultry.
The USDA expects U.S. broiler production to increase 2 percent, to a record 18.4 million tons, while exports are expected to rebound 8 percent. Poultry producers will benefit from lower feed prices and what is currently a healthy flock.
Trade and the economy
A newly negotiated trade deal with Pacific nations and a bright economic forecast could bring some relief. The deal, known as the Trans-Pacific Partnership, was announced in the fall of 2015, and includes historic trade opportunities among 12 nations, or about 40 percent of the world’s economy.
With reduced tariffs and increased exports, economists expect the deal could add $225 billion to the global domestic product by 2025, boosting the U.S. GDP by about $77 billion.
U.S. manufacturing exports are projected to grow, and there are significant opportunities for ag exports, especially with Japan. The USDA estimates TPP will result in a 6.6 percent increase in ag trade by 2025, providing an additional $8.5 billion to the ag industry.
Meanwhile, overall economic conditions for Ohio and the nation appear strong. Unemployment continues to decline, federal interest rates have begun to rise, and the nation is nearing 80 months of economic expansion — following the end of the Great Recession, in June 2009.
(Sources: Ohio State University dean’s preview meeting, Dec. 7; OSU’s Beef Cattle Letter; Farmdoc daily, University of Illinois at Urbana-Champaign; U.S. Department of Agriculture; and Wells Fargo: Tough markets create opportunities for adaptable producers.)
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