Ag producers expect higher revenues, costs

Toby Madden | Regional Economist

Published July 1, 2007  | July 2007 issue

Many farmers and ranchers reported record farm revenues in 2006, due to large harvests and strong prices. The first half of 2007 showed continued strength, as prices increased and timely rains and good crop conditions made crop producers optimistic. Farmers shifted into corn production to feed the growing appetite of ethanol producers. A few livestock and dairy producers are trying to adjust to the changes in the marketplace and locate near the ethanol producers for the feed co-product. Rising input costs, especially for feed and fuel, temper the outlook for 2007.

While farmers are off to a great start, ranchers are hurting. Most of the district is out of drought, and spring plantings occurred sooner than the five-year average for most district crops. The result is above-average crop progress. However, the calving and lambing season had a few tough days of spring storms, and calf prices were soft as feedlots reduced offer prices to try to compensate for higher feed costs. Meanwhile, as a South Dakota banker noted in the Minneapolis Fed's first quarter (April) agricultural conditions survey, "Fuel costs rising [are] a big concern" for both farmers and ranchers.

The respondents to the survey expect increased farm income in 2007. In addition, respondents expect increased capital investment and household spending. This optimism may be due to rising prices. Prices for most district agricultural products rose this year after they softened in 2006. Corn prices exploded to about $3 per bushel in the 2006/2007 season, up from an average price of $2 in the 2005/2006 season. The increase in corn prices is partially attributable to the demand from increased ethanol production. According to many survey respondents, the feed co-product from ethanol production is causing many livestock producers to change their feed mixture. Meanwhile, milk prices are on a roller coaster, dropping from $15.14 per hundred pounds in 2005 to $12.90 in 2006. They rose significantly in 2007 to $17.80 in May. The expected average price in 2007 is in the $18.55-$18.95 range. Hog prices dropped from $50.05 in 2005 to $47.26 in 2006, but are expected to rebound to the $49-$51 range in 2007.

Strong 2007 prices are expected to continue in 2008. Prices for milk, cattle and hogs are expected to be on par with 2007, and crop prices are expected to strengthen further in the 2007/2008 season. According to a member of the Minneapolis Fed's Advisory Council on Agriculture, all this optimism has led to higher land prices. According to the agricultural conditions survey, 2007 average farmland prices increased 13 percent from 2006.