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0108 FG: Opportunity costs, variables and crystal balls: Where are we headed in 2008 and beyond?

Darren Olsen, Editor Published on 01 February 2008

When you stop and look at agricultural opportunities over the past 30 years, it is hard to find a time that producers have had so many positive opportunities.

Forces outside animal and human consumption have come into play and are fueling a need for commodities that hasn’t been seen for generations. That leaves most producers with one very big question: “How do I make the most of this situation?” That, in many ways, depends on the individual and their abilities, but there are some trends and ideas that might make 2008 better.

Opportunity costs
The idea of opportunity costs are as old as business dealings themselves. Most people know what they are instinctively, but have a hard time pinpointing how they affect decisions. While there is an almost endless list of things you can do with crops, a look at four of the biggest alternatives: forage (alfalfa or other hay crops), corn, soybeans and wheat.

Forage. Over the past year, forage crops have ridden the ethanol wave just as many of the main production crops have. Today, hay prices hover near recent historic highs and with producers looking to shift to wheat and corn, older acres a quickly being shifted to these crops. One problem this year with alfalfa is its close relationship to the dairy industry. Last year’s record milk prices are softening and look to be about 15-20% lower for 2008. A recent quote from the latest USDA milk report stated, “High feed costs remain a big concern for producers, especially as lower milk prices are being projected as a result of declining dairy product commodity prices.”

In addition, the milk-to-feed ration is looking to be at its lowest point in the past five years. Producers will be looking for the least expensive way to keep cows producing, so that will be a downward pressure point on hay. However, with fewer hay acres predicted for 2008 along with a larger dairy and beef herd nationally, hay looks to not drop as much as milk prices.

Corn. Corn, in the last two years, has become the golden child of agriculture. The ethanol craze has risen corn to a higher pedestal that, at least for the next two years, looks to remain intact. The biggest downer for the near future for corn is the economy in general. As Wall Street and other worldwide financial institutions continue to reel under the lending markets, oil prices are also coming down somewhat. If a recession really comes into play, the ethanol market could loose a lot of steam.

What is holding it up now are the government subsidies and if they are shifted to other parts of our economy, that could bring the golden grain out of the sunlight pretty fast. All you have to do is drive past the abandoned ethanol plants in Southeast Idaho realize that the potential exists. But, as long as the government is concentrating on energy policy, I feel the let down would be at least more gradual than the recent housing market. For 2008, look for corn prices to be higher than past averages but watch the economy closely.

Soybeans. Soybeans are this year’s dark horse in the race. Their appeal to the ethanol market is already starting to wane as cellulose-based ethanol comes closer to a reality. If this is the case, then why does the price stay so high? That question can be answered on a broader international look. Soybean production throughout the world is slipping below predictions for 2008 as Brazil pulls back its projected harvest totals. In addition, soybean oil and other plant derivatives are being used throughout the developing world economies at a faster than expected pace. This, coupled with the weak dollar are making soybean exports, at least for the current time, look very good to international markets. No one is certain how long this will last, but this year looks good for soybeans.

Wheat. I would also group barley and other small grains into this commodity. With the world under a wheat shortage, look for this 2007 surprise crop to stay relatively high in both demand and price this year. As long as Australia and Argentina continue to struggle to hit production estimates, small grains will hold above recent averages.

If one looks at the above list, it appears there no apparent winners or losers in the bunch. In reality, that is true. Whatever crop goes into the ground this year has the opportunity to be profitable, more so than in the past. What will really play into the profitability for most people will be how they deal with the variables. Again, every production area is different, but there is a general consensus that there are factors that will need to be dealt with in 2008 if maximum profitability is to be reached.

Fuel. While ethanol is the golden child of agriculture right at the moment, producing it and keeping fuel in all of the machinery to produce any crops will be one of the dark points this year. Fuel costs are expected to surpass those in 2007 and some management practices might be foregone because of it. Every trip across a field lowers the overall profitability of that crop. For forage producers, this can be an even bigger hit as several vehicles need to pass every acre several times a year for maximum production. Every pass that can be eliminated will prove important to the 2008 season.

Fertilizer. Fertilizer prices were near records in 2007 and are projected to be up even further in 2008 (latest figures were 30-40% higher), with shortages an increasing reality. The more corn-on-corn and soy-on-soy the nation producers, the higher the need for fertilizer will be. This, coupled with the fact that it takes copious amounts of energy to producer commercial fertilizer are cutting into profits more than most had accounted for this year. If you have not contracted you fertilizer for 2008, I would advise doing so as soon as possible. It is becoming a necessity.

The economy. It doesn’t matter how good crops look this year, the overall economy can bring prices down across the board. Right now, we are experiencing a roller coaster ride and many people are getting sick of it. The problem is that we are headed down and than can mean changes to the overall outlook for 2008.

Beyond the overall economy, there are two things related to it that will play an important role in crop prices in the near future. First, the dollar, in comparison to other currencies, remains low. This makes our crops much more appealing to international markets. As long as it stays lower, expect larger international orders to keep coming in. The downside is that if it slips too low, we can loose our edge as a world power and be more at the mercy of ‘what they are willing to pay’ rather than ‘what can we get from it’.

Second would be property values. What is interesting to watch is how farm land values have continued to increase as the housing market has reached its lowest point in a generation. The overall value of crops has given farm land its highest value since the late 1970s. If taxes are based on land value in the area you are in, you might want to seek some professional advice as to how you could be affected. Also, if you are looking to rent land, prices might be higher than you realized. Be sure to be informed before you make rash decisions involving land issues.

Here is where no one has the answers. History shows that this factor is the biggest variable in many areas of the country. With the West remaining dry and many people looking for drought continuing in the South and possibly spreading to the Midwest, nothing is certain. Many western hay farmers are looking to wheat this year, as alfalfa tends to be a water hog and limited irrigation might be a reality this year.

In addition, every passing storm over the corn belt area wreaks havoc on the markets. While driving through Iowa last June, corn futures fluctuated 20% in a week all because of shifts in the weather patterns and when the rain was falling. Don’t underestimate the power of Mother Nature on prices.

Political climate. Like it or not, the current election cycle will have some type of bearing on prices. Each candidate for president brings with them their own ideals about agriculture and those ideals will be reciprocated in policies they will either introduce or allow to come into law.

In addition to this, the current Farm Bill is under strain. There are several debatable points still running their course through the committees and President Bush has brandished the veto stamp is certain items are pushed through. Don’t expect any sudden development with this legislation if congress and the president can’t come together soon. The problem is there are bigger concerns right now (namely the economy mentioned above) that are taking priority. In a nutshell, things are getting worse before they get better with this one.

Crystal balls
When looking at all the information currently available, 2008 looks to be a good year for most producers. Barring natural disaster, prolonged drought or rippling economic upheaval, most producers will have what they need to make it a good year. Where decisions will lie with each producer remains to be seen, but keeping a few things in mind will help smooth out the bumps that might come:

1. Go with what you know.
Most professionals interviewed agree that with most crops looking up, it is probably better to work with crops you are familiar with and have a good history of raising. With the inputs of production reaching record highs, growers can’t afford to be making management mistakes. Higher profits can easily be eclipsed with poor judgement.

2. Secure contracts and loans early.
If you are needing financing or are looking at securing future pricing, you need to be making those contacts now. With the financial world oversensitive to loaning practices, money will be harder to come by that in the past few years. You need a good business plan in place along with ways to deal with the unexpected if you are wanting lenders to take you seriously. This will be especially true if you are making radical changes to cropping systems that will mean additional outlay for equipment or land.

3. Don’t put all your eggs in one basket.
With the economy on eggshells and the world taking a close look at our political and production climate for 2008, prices could swing at a moment’s notice. In the past, producers have buffered downturns and gotten unexpected increases by remaining diversified in the production plans. It is hard to fight against the wisdom of time, although a fast buck and a high return are tempting. Just be sure you are secure in your decisions and can live with a variety of outcomes.

Above all, seek the advice of financial and production advisors if you have questions regarding local opportunities and contingencies you might not have thought about. With the year shaping up as it is, opportunities abound if you look for them.  FG