Indiana's agricultural outlook for 2017
Professor, Department of Agricultural Economics, Purdue University, West Lafayette
Indiana farm incomes were strong from 2011 to 2014 before dropping sharply in 2015 (see Figure 1) and again in 2016. By 2016, estimated Indiana farm income had fallen by more than 50 percent from the strong income years. For 2017, farm incomes are expected to increase by about $0.5 billion. This will be a welcome improvement, but will still be well below the peak years.
Figure 1: Indiana net farm income
Source: U.S. Department of Agriculture
Much of the improvement will come for crop producers, as yields for 2016 crops were at or near record levels. However, record national yields for corn, soybeans and wheat kept overall production high. This will cause inventories to grow and prices to remain depressed.
Lower costs have also been important to reducing crop losses. The two largest categories of cost reduction have been fertilizer and cash rents. Fuel costs were lower for the 2016 crop but are expected to be modestly higher for 2017. Machinery costs have dropped as the value of farmers’ machinery has declined with the weak farm economy. Farm families have also tightened expenditures for family living expenses where possible.
Animal agriculture had peak incomes in 2014, with prices and incomes for animal products dropping since. Lower retail prices of animal products were the primary reason grocery store prices fell throughout 2016. The low farm incomes for animal agriculture in 2016 are expected to be similar in 2017.
Indiana farm families generally experienced financial erosion in 2015 and 2016. This was led by weak margins for crop production, declining values for land and machinery, and lower inventory values for grain and animals. The financial erosion is expected to continue in 2017, but the rate of erosion will be less severe as the sector makes more progress toward reducing costs.
U.S. yields of corn, soybeans and wheat all set new records in 2016. Indiana had record soybean and wheat yields, and corn yields were the second highest on record.
Prices will remain under pressure, but low prices are also stimulating strong consumption in both the export and domestic markets. However, consumption will be less than production and inventories of all three will grow. Indiana corn prices are expected to average about $3.40 a bushel in 2017, compared to $3.70 in 2016. Soybean prices will be slightly higher in 2017 at an estimated $9.30 per bushel, compared to $9.10 in 2016.
Negative crop margins are expected again in 2017, but losses will be reduced from 2016. The reduced losses will be due to somewhat higher soybean prices and to reduced costs.
Milk prices in 2016 were at their lowest level in seven years and are expected to increase slightly in 2017. Milk prices have been below the costs of production. Milk production will be about 2 percent higher in 2017, and prices are expected to improve marginally. Feed prices should remain close to those of 2016. Milk producers will still operate at a small loss, but those negative margins will be somewhat less than in 2016.
There is some good news for consumers. Retail beef prices have been dropping. After peaking in May 2015 at $6.41 per pound for an average beef cut, prices have been falling. In 2016, they were down about 5 percent.
Lower beef prices are great for consumers, but beef producers have seen their returns drop, and that decrease will continue into 2017. Finished cattle prices averaged a record $1.55 per pound in 2015, but dropped to $1.21 in 2016 and are expected to average only $1.12 a pound in 2017. Calf prices were $2.29 per pound in 2015 and will drop to about $1.40 per pound in 2017. Brood cow producers will not recover full costs of production in 2017, and this will likely end a short expansion phase of the cattle cycle.
After record-high prices and profits in 2014, hog producers have expanded production so much that prices are below the costs of production. Losses in 2016 were estimated at $8 per head and will grow to $15 per head in 2017. Pork producers will need to cut output in the second half of 2017 and into 2018.
Consumers have benefited by retail pork prices dropping about 6 percent since record highs in 2014. For 2017, retail prices are expected to move modestly lower.
Narrow crop margins and the weak agricultural economy have resulted in lower Indiana land values. Average-quality farmland reached a peak of $8,000 per acre in 2014, according to Purdue University survey results. In 2016, those values had dropped to around $7,000. With crop prices below the full costs of production, more downward pressure is expected for land values. Anticipated higher interest rates will also contribute to lower land values.
Farmland values may drop an additional 4 to 6 percent in 2017. In the longer run, average-quality land may drop to about $6,000 per acre, which would be a 25 percent decline from previous highs. There can be wide ranges in land values across the state.
In 2017, crop producers will likely fare better than those in animal agriculture. Corn prices will average slightly lower, while soybean prices will be slightly higher. Dairy, beef and pork producers will likely experience losses relative to their costs of production.