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FAPRI baseline projects continued commodity market volatility

Further livestock and dairy production increases could weigh on prices in 2018 unless demand growth is exceptionally strong.

The latest analysis of national and global agricultural trends from the University of Missouri indicates little change in net farm income this year and a slight increase in 2019. However, even with modest increases projected in commodity prices in 2019, net farm income is expected to remain far below the record level set in 2013. Good news in the report includes strong demand for meat, which should offset downward pressure on prices from increased production last year.

Each March, economists with the university's Food & Agricultural Policy Research Institute (FAPRI) and the Agricultural Markets & Policy team release the annual "U.S. Baseline Briefing Book." Their projections for agricultural and biofuel markets are based on market data made available in January.

“We use computer models to develop a range of projected market outcomes that take into account some major sources of uncertainty about future supply and demand conditions,” FAPRI director Patrick Westhoff said. “We calculate hundreds of possible outcomes based on different combinations of factors and use those to produce an average that takes all the variables into account.”

Per capita availability in 2018 will be nearly 20 lb. (10%) above 2014, returning to levels last experienced in 2004-07. Production growth will begin to slow in 2019, and domestic supplies should peak by around 2020. "Any unexpected challenges to domestic or international meat demand could severely deflate livestock prices," FAPRI noted.

FAPRI’s analysis shows that a fifth straight year of global grain and oilseed production above the long‐term trend hampered recovery of crop prices last year. Projections in the 2018 briefing include slight price increases for 2018‐19 and 2019‐20 crops. These include projected average 2018‐19 prices of $3.57/bu. for corn, $9.38/bu. for soybeans and $4.89/bu. for wheat. In contrast to other crops, upland cotton and rice prices are projected to fall in 2018‐19 due to carryover of cotton stocks from 2017 and expected planting acreages for both rice and cotton.

Last year, strong demand buttressed cattle, hog, poultry and milk prices, despite increased production. Further production increases could weigh on livestock and dairy prices in 2018 unless the growth in demand is exceptionally strong.

"Consumer demand for meat was stronger than average in 2017," the report noted. "It is rare for meat supplies to grow as they did last year without output prices suffering more severe declines," the report explains. "While economic projections point to U.S. meat demand remaining solid, prices are projected to retreat for most products in 2018 due to continued supply pressure and a return to more historical levels of consumer demand."

Overall, net farm income is projected to grow slightly in 2018. However, real net farm income will remain flat and below 2015 levels from 2019 through 2027. This is not encouraging for producers, who have watched their income‐to‐debt ratio dwindle in recent years.

Net farm income is much lower relative to farm debt than the 1995-2014 average. Net farm income averaged nearly 32% of outstanding debt in 1995-2014 but fell to less than 17% in 2016 and 2017. This year’s projections suggest continued pressure on farm finances in the years ahead.

All commodity markets remain sensitive to the health of the global economy and trade relationships, FAPRI noted. The baseline does not assume any major trade disruptions nor any new agreements that would encourage U.S. exports.

Also included in the report is a list of government policy assumptions that FAPRI used in developing its projections. With the exception of dairy products, this year’s projections do not take into account provisions of the Bipartisan Budget Act Congress passed in February.

FAPRI projects Agriculture Risk Coverage payments to decline rapidly. More farmers are assumed to choose Price Loss Coverage (PLC) in 2019 if current program rules are extended by a new farm bill and producers are allowed to make a new election. Total PLC payments are expected to average about $5 billion per year between 2019-20 and 2023-24.

Crop insurance net outlays are projected to average more than $8 billion per year for fiscal 2019-27, while major commodity program outlays should average a little more than $6 billion per year for the same period.

Annual food price inflation was below 1% for the second straight year in 2017 and is projected to be about 2% in 2018, similar to the overall rate of inflation in the U.S. economy. "Food prices have begun to increase in recent months and will post more typical rates of growth moving forward," FAPRI noted.

The report’s macroeconomic assumptions are based primarily on forecasts by HIS Markit, which suggest moderate gross domestic product growth of 2.7% in the U.S. and global economies this year and slowing to about 2% after 2019. IHS Markit also projects an increase in inflation to 2.4%, steadily increasing oil prices after 2019 and a rise in the prime lending rate to 6.5% by 2021.

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