High corn prices are expected to bring major shifts in crop production during the next two years, bringing an additional 8.4 million acres to corn in 2007. According to the 2007 agricultural economic baseline prepared for the U.S. Congress by the Food and Agricultural Policy Research Institute, ethanol from corn has become a driving force.

The current ethanol boom required major additions to the FAPRI models. “We made lots of changes in our models to keep up with the rapidly evolving industry,” says Pat Westhoff, FAPRI analyst. “U.S. energy policies may have a bigger impact on U.S. farm income than the farm bill.”

Corn use for ethanol is expected to nearly double in this crop year from that of the 2005 crop, and could exceed 4 billion bushels, or 32 percent of the nation’s corn crop, by 2009. FAPRI notes that increasing ethanol production drives the corn price from a $2-per-bushel average in the two previous crop years to slightly above $3 per bushel in every year of the 10-year baseline. Current prices are above those levels, exceeding $4 per bushel.

“Those prices are higher than our projections, as the market encourages producers to plant more corn in 2007 to feed the growing ethanol industry,” says Westhoff. U.S. farmers have not planted 85 million acres of corn since 1949. The FAPRI projection of 86.7 million acres in 2007 fell midrange in current trade projections. FAPRI projects almost 90 million corn acres in 2008.

While corn gains acres, soybeans give up the most, falling to 70.5 million acres in 2007 from 75.5 million acres in 2006. Wheat acres, most of which were planted this past fall, increased to 60.1 million acres in 2007, but are expected to drop in following years to 57 million acres by 2016.

The FAPRI baseline was prepared by think tanks at the University of Missouri and IowaStateUniversity, along with participation from economists at other universities.

“So much depends on the price of petroleum,” Westhoff says. University of Missouri FAPRI uses a baseline assumption that the oil price falls to $50 per barrel in 2016. Forecasts on oil, interest rates and other macroeconomics come from the private forecasting firm Global Insight. FAPRI assumes normal weather and continuation of present farm policies, including current biofuel incentives through the 10-year baseline. Computer runs of 500 alternative scenarios show prices can be much higher, or much lower, than averages in the baseline, depending on weather, oil prices and other factors.

“Current tax polices that support biofuel are slated to expire in 2008 and 2010,” Westhoff says. “If the credits expire, the results could be sharply lower biofuel production, corn and soy oil demand and crop prices.”

The current outlook depends on the price of corn not becoming too high, removing profits from the ethanol plants. Baseline projections show ethanol production remains profitable; but increasing production and falling petroleum prices result in lower ethanol prices. Lower ethanol prices and higher corn prices would squeeze projected margins for ethanol plants, eventually slowing growth in plant capacity.

High crop prices increase net income for grain farmers; higher feed costs cut profits of livestock feeders. Net farm income dropped $26 billion dollars in 2006 from a record high of $85 billion in 2004, with higher input costs largely responsible for the decline. Net farm income could rise to $7 billion in 2007, to $66 billion and could remain above $60 billion in later years.

Food cost increases remain moderate in spite of higher grain prices. Annual growth in the food Consumer Price Index will average near 2 percent long term — near the general inflation rate. While grain prices play a part in food cost increases, 80 percent of consumer food costs come from other factors, including labor, fuel and packaging.

Federal spending for farm programs is lowered by higher grain prices. Direct payments, counter-cyclical payments and marketing loans peaked at $16 billion in the 2005 crop year. Those same payments total $7.7 billion for the current marketing year. Payments are expected to drop to $6.7 billion by the end of the baseline in 2016, with direct payments accounting for $5.3 billion.

The baseline, which will be used to analyze the 2007 Farm Bill, has been given to the Senate and House agricultural committees and USDA.

The briefing book created for Congress will be available on the University of Missouri FAPRI Web site at www.fapri.missouri.edu. Pages have been added to the book on biodiesel, corn processing and other areas of the biofuel economy.

Food and Agricultural Policy Research Institute, Porkmag.com