Interim U.S. Acreage Forecast Update

Things have changed since our May U.S. Agriculture forecast: we now have a new farm bill, USDA's June Acreage report, and a significant upward shift in Global Insight's energy forecast, not to mention persistent wet weather and flooding in the Midwest. While the size of the 2008 crop is still an unknown, the wet conditions and planting delays are likely to place pressure on yields, with corn and soybean season-average prices setting new records. Whether one is looking at the futures or projecting season-average prices, it looks like the economics are favoring increased corn acres in 2009/10. Global Insight currently projects 92.3 million and 70.1 million acres of corn and soybeans for 2009/10, respectively. While hard red winter wheat is expected to expand significantly, difficulty getting soft red winter wheat planted may keep wheat acreage flat to slightly declining. Unlike 2007 and 2008, total principal crop acreage may only grow about 0.5 million acres, despite high commodity prices, with limited soft red winter wheat acreage in 2009/10 to double-crop soybeans on. Cotton acreage is expected to recover somewhat with higher season-average prices in 2008/09, but the recovery will be limited by growth in input costs and pressure from competing corn and soybean prices.

The 2008 Farm Bill

The mangled passage of the farm bill seemed to add more difficulty to an already arduous process of getting agreement from the variety of special interests, the farming community, and the political parties. What emerged—the Food, Conservation and Energy Act (FCEA)—resembles the 2002 farm bill with a few twists. Most significantly, the specific import tariff on ethanol was extended to 2010, while the ethanol tax credit was reduced from $0.51 per gallon to $0.45 per gallon. Global Insight had assumed that the specific import tariff on ethanol would be extended so there is no impact on the forecast from this, but, all else being equal, there is a slight downward impact on corn ethanol use from the lowering of the ethanol tax credit.

FCEA also introduced a new program, called the Average Crop Revenue Election (ACRE) program. The ACRE program replaces the current system of target prices and loan rates with a system of payments based on targeted crop revenues. The targeted level of revenue is based on the two-year moving average of national average prices for each crop and the five-year Olympic average of state level yields for each crop. Producers receive a payment if they experience a loss on their operation and if the national season-average price multiplied by the state average yield per planted acre is less than the benchmark revenue. In 2009, farmers can opt to participate in the ACRE program. They must commit to be in the program through 2012, give up 20% of their direct payments and all counter-cyclical payments, and accept a 30% reduction in loan rates. The decision to participate depends on the producer's expectations of the future level of prices and relative benefits under ACRE versus the traditional programs. Curiously, this may result in more participation by farmers in the northern states, because the benefits from ACRE outweigh the revenue forgone under the old program, while southern states producing cotton, rice, and peanuts may opt for the old program because those program benefits exceed expected returns from ACRE. With commodity prices so high in the forecast, this has no impact on the acreage projects, but could play a role if there were a precipitous drop in commodity prices.

FCEA also made some minor changes to the soybean, wheat, and cotton target prices and the wheat loan rate, and introduced a new cotton user payment designed to stimulate increased domestic mill use of cotton. There were also changes to the timing of direct payments that result in payments being made only in October of the year in which the crop is harvested, instead of allowing an advance of 22% as early as December of the preceding year. Finally, the base acreage eligible for direct payments was reduced from 85.0% to 83.3% to meeting budget guidelines for marketing years 2009/10, 2010/11, and 2011/12, but returns to 85.0% in marketing year 2012/13. The most significant implication of these changes with the current high prices is a slight reduction in direct payments and a shift in the timing of those payments.

USDA's June Acreage Report

There were three surprises in the June acreage report: less damage from flooding on corn acreage planted and harvested than anticipated, fewer acres of soybeans than expected, and less of an increase in double-cropping than expected. Prior to the report, reports by other groups suggested more significant crop damage, particularly for corn. Instead of an 11.0 billion bushel corn crop, Global Insight expects that we may be closer to an 11.5 billion bushel crop, assuming some impact of the excessively wet weather on corn yields. Another wild card that could shave the size of the corn crop could be an early frost. For soybeans, the impacts—particularly on acreage planted and harvested—exceeded expectations, given that the window for planting is certainly longer than corn's. But with wet conditions persisting, finding a window to combine the wheat and get the soybeans planted is definitely a challenge. With some impact on soybean yields from the weather, Global Insight expects a 2.9 billion bushel crop. The wet weather also has implications for winter wheat seedings. Despite high wheat prices, Midwest farmers will likely be challenged to get their corn and soybean crops off in time this fall to get as much soft red winter wheat planted as they would like.

Global Insight's Energy Forecast

With the release of the July 3, 2008 forecast, Global Insight made a significant upward shift in its oil price projections over the next few years. The implication for agriculture is higher input prices for fuels and fertilizer in particular, but also stronger demand for corn from ethanol. For energy-intensive crops such as cotton and rice with no demand increase offset, this is bad news for returning to even 2007 levels of acreage in 2009. Both corn prices and corn acreage are expected remain stronger in 2009 and 2010 as a result of the higher petroleum costs.