Farm input costs going down
While the prices for almost all of the commodities Wisconsin farmers produce are going down this year, at least the prices they pay for most of their inputs are also declining.
Bruce Jones, director of the Renk Agribusiness Institute and a professor of Agricultural and Applied Economics at the UW-Madison, noted that the prices farmers paid for farm inputs declined through most of 2015. It was the first relief from rising input prices farmers have gotten since 2008, he added during a recent presentation in Madison on the outlook for farm prices in the coming year.
The drop in farm input costs is related to the worldwide decline in crude oil prices, he said. The prices for diesel fuel, gasoline and LP gas were down substantially in the last year. Oil prices stayed close to $50 a barrel for most of 2015 and have dropped even lower in recent weeks.
'Those low crude prices are going to continue.' Jones said the U.S. Department of Energy is projecting oil prices to stay at these low prices for 2016, which is good news for farmers whose corn and soybean prices are predicted to trend lower than 2015 at harvest time this year.
Brenda Boetel, a professor of Agricultural Economics at the UW-River Falls, noted that corn prices are down about 10 percent from a year ago and will remain at that level through the spring. Corn acreage is likely to increase in 2016; the USDA is forecasting an additional 2.1 million acres of corn planted in the coming year, she said.
Assuming a trend yield of about 168 bushels to the acre and projected harvest from about 82 million acres, there would be a 13.9 billion bushel harvest in 2016, up 1.8 percent from 2015, she said. If demand closely matched production, the stocks of corn would build, dropping prices from 5-10 cents a bushel at harvest compared to what they were last year.
In the soybean market, prices today are down 15 percent from a year ago with soybean meal prices down 27 percent. Boetel said that South American production and increased U.S. acreage combined with a large carryover from last year will continue to push bean prices lower in 2016.
Soybean acreage is expected to fall in the coming season to 82 million acres. With a trending production line of 46.7 bushels per acre, production would be about 4.9 percent lower in 2016 over 2015. The harvest price is expected to be 25 cents per bushel lower than in 2015, in the neighborhood of $8.65 per bushel, she predicted.
The current soybean-to-corn ratio is 2.31 which indicates slightly higher corn returns as compared to beans.
Jones said the prices farmers pay for their fertilizers has been trending slightly downward since 2012, and he predicted this trend will continue into 2016 since farmer demand for fertilizer is likely to be lighter due to low prices for corn and soybeans and an unchanged supply picture.
Natural gas, one of the primary inputs to the production of fertilizer, continues to be low priced.
While the oil-based portion of farmer inputs will likely remain low in the coming season, Jones said the price of seed has been trending upward. 'In recent years seed prices have not increased as fast as they did when corn and soybean prices were high,' he noted. 'There is little reason to expect big increases in seed prices in the coming year because low prices for corn and soybeans will discourage farmers from upping their orders for seed.'
Rent for cropland
Rent for cropland has risen in recent years, following the price of corn as it made record per-bushel prices a couple of years ago. Now that corn and soybean prices are about half of what they were five or so years ago, Jones said, cash rents have leveled off and are starting to decline. The adjustment in rent is needed because farmers' margins from raising cash crops have dropped dramatically as crop prices dropped.
'Cash rents are not likely to fall as much as cropping margins, however, because of competition for rented land,' he said. The competition among farmers for workland will prevent rents from dropping to levels that will allow farmers to break even.
Since 2013 margins have been below what we could use to pay rents, he said. 'There is no economic incentive to pay the rents we've been paying.'
Credit, another of the necessary inputs for farming, is expected to be plentiful but will cost farmers more in the coming year. Jones said farmers who can meet the cash flow and collateral standards of lenders should have no trouble getting loans. But the Federal Reserve Bank, after years of holding interest rates at zero, is finally allowing interest rates to rise.
Big jumps in interest rates are unlikely, he said, because the Fed will not want to choke off economic growth. Jones predicts that interest rate hikes of 25-50 basis points could be in the works for 2016.
Jones and Boetel were both presenters at the ninth annual Wisconsin Agricultural Economics Outlook Forum held Jan. 21 on the UW-Madison campus. It was sponsored by the Renk Agribusiness Institute, Wisconsin Farm Bureau, UW-Madison College of Agriculture and Life Sciences, Wisconsin Farmers Union and UW-Extension.