Dow Jones writer Bill Tomson reported yesterday that, “U.S. farm net income will reach a record level of $87.1 billion in 2007, a substantial $28.1 billion increase from 2006, the U.S. Department of Agriculture predicted Thursday.

“Quick growth of corn-based ethanol production in the U.S. is a major component of rising net income, according to the new forecast, which also factors in government subsidies. The report was released by the USDA’s Economic Research Service.

“‘The rise in prices of grains and oilseeds due to the demand from the rapid expansion of ethanol production could result in a record corn crop and record cash receipts for crops,’ the report said.”

And Bloomberg news reported this morning that, “U.S. net farm income in 2007 will be 48 percent greater than a year earlier, and more than forecast in February, as higher grain and livestock prices offset increased production costs, the government said.”

The article indicated that, “Cash expenses will rise 8.5 percent to a record$222.6 billion, and gross cash sales will jump 16 percent to a record $276.4 billion, the USDA said.

“The value of all U.S. crop production this year is forecast to rise 14 percent to $136.2 billion from 2006. The value of production from cattle, hogs, chickens and eggs will increase 18 percent to a record $140.2 billion, the USDA said.

“The average price of corn, the nation’s biggest crop, is 62 percent higher this year than a year earlier, and soybeans, the second-largest crop, are 36 percent higher. Wheat prices, which reached a record high Thursday, are 46 percent higher on average than a year earlier.”

The ERS report, which can be viewed by clicking here, also noted that, “In 2007, average farm household income is projected to be $86,693, up 8 percent from 2006. Both the average farm and off-farm incomes of farm households are expected to be higher than in 2006.”

With respect to government payments, ERS indicated that, “Direct government payments are expected to total $13.6 billion in 2007, down from the $15.8 billion paid out in 2006. This level would be nearly 17.4 percent below the 5-year average.”

“Countercyclical payments are forecast to decrease from $4.0 billion in 2006 to $1.1 billion in 2007. This follows a small decrease in 2006. Of the 2007 crops, only upland cotton and peanuts are expected to receive payments. This continues 2006 trends. This is quite a change from previous years, when more than half the payments for 2004 and 2005 were to corn and a quarter of the payments were to cotton.”

“Marketing loan benefits—including loan deficiency payments, marketing loan gains, and certificate exchange gains—are projected at $1.1 billion in 2007, down from $1.8 billion in 2006. In 2006, upland cotton producers and corn producers received 62 percent and 24 percent, respectively, of total marketing loan benefits. Since upland cotton marketing loan benefits are expected to decline only 8 percent, upland cotton producers may realize 97 percent of the total marketing loan benefits in 2007.”

A complete table containing federal farm payment information from 2003-2007 can be viewed here.

And, the report also added that, “Conservation programs include all conservation programs operated by the Farm Service Agency (FSA) and the Natural Resources Conservation Service (NRCS) that provide direct payments to producers. Estimated conservation payments of $3.1 billion in 2007 reflect programs being brought up toward funding levels authorized by current legislation.

“Ad hoc and emergency program payments are forecast at $2 billion. Although this would be an 629-percent increase over 2006, it is only 13 percent above the 5-year average. Ad hoc and emergency program payments include all programs providing disaster and emergency assistance to farmers. The carryover of payments from 2006 has been lower than expected. Further, much of the payments for major crop damage from drought in 2007 is expected to be paid in 2008.”

For an excellent graphical summary of the breakdown of government payments from 1997 to 2007, just click here.

Other helpful graphs, including information regarding net farm income (graph), corn production (graph), corn prices (graph) soybean production (graph), soybean prices (graph) and production expenses (graph), were also presented.

Meanwhile, Tom Polansek reported in today’s Wall Street Journal that, “Relentless demand for U.S. wheat in the face of high prices catapulted Chicago Board of Trade wheat futures to fresh highs, analysts said.

“Nearby CBOT September wheat climbed to a high of $7.74 a bushel — topping the record of $7.60 set Wednesday — before closing up 28 cents at $7.70 per bushel. Most-active CBOT December wheat set a new high of $7.885 and closed 26 cents higher at $7.845” (see related graph).

The Journal article added that, “Unfavorable weather caused crop losses earlier this year in areas that are traditionally big exporters, including Europe and the Black Sea region. The trade, meanwhile, is becoming more anxious that dryness in top producers Australia and Argentina will damage chances for the Southern Hemisphere to help build global supplies.”

In a related article, Dow Jones News writer Lisa Kallal reported on Wednesday that, “Record prices for European wheat are driving costs up for livestock producers, millers and biofuel refiners which will raise meat and flour prices while slowing E.U. ethanol output, analysts say.

“At a time of historically tight global grains stocks, the E.U.’s key wheat producing nations France, Germany and U.K. were hit by drought in April followed by constant rains at harvest time. In eastern Europe drought and extreme heat cut output in Hungary, Romania and Bulgaria.”

The article added that, “‘Pork and poultry are hit the hardest,’ says Emma Cardy-Brown, feed and animal protein specialist, also with Rabobank. Feed makes up a minimum 50% to 60% of the costs of those meat goods, she adds.

“According to Deloitte & Touche LLP, many U.K. livestock producers have seen feed prices rise almost 100%. ‘It’s not a question of if retail (meat) prices will go up, but will they go up enough,’ said Richard Crane,food and agriculture partner at Deloitte.

“‘If a farmer is losing money producing chickens, he is going to stop producing,’ says James Dunsterville, managing director of Agrinews in Geneva. This in turn will mean fewer supplies making their way to the retail market.”

The article also explained that, “And little respite is expected from the global grain market due to generally tight supplies and the E.U.’s strict zero tolerance policy on non-approved genetically modified products. The E.U.’s GMO policy means corn imports from the U.S. and Argentina will not be possible, leaving Brazil the only source for corn.

“Pedro Correa de Barros, president of the E.U.’s Compound Feed Manufacturers’ Federation, says a current GMO de facto import ban for corn gluten feed will increase E.U. feed costs by EUR60 million to EUR90 million on top of the already high grain prices.

“A similar ban on soybean meal imports will have devastating consequences for European livestock producers, wiping out entire (E.U.) pig and poultry production chains, Correa de Barros adds.”

Some sectors of the U.S. livestock sector, particularly pork, appear to be adjusting more favorably to higher commodity prices.

Purdue University Agricultural Economist Chris Hurt noted earlier this week that, “Somewhat surprisingly, the pork industry has not made supply adjustments with higher feed prices. In fact, pork producers have been modestly increasing the breeding herd and seem content to continue to do so. There seems to be two explanations. The first is that producers of both beef and poultry were quicker to drop production with rising feed prices such that total meat and poultry supplies have been lower this year. Secondly, hog producers were operating at a profitable margin when higher corn prices hit. Rather than trim the size of the herd, hog producers have largely absorbed higher feed prices in the form of reduced margins.

“So far this year, pork prices have been able to stay ahead of the higher feed prices without forcing adjustments to supplies. Production has been up 2 percent, yet farm level prices have also been up as a result of better domestic pork demand. The improved domestic demand probably is related to less competition from other meats and poultry as those industries adjusted to higher feed prices. As corn prices rose dramatically last fall and winter, the beef industry made some sharp adjustments. These included sending many fewer animals to feedlots and reducing market weights. As a result, the availability of beef per person was down nearly 2 percent this spring and summer. Adjustments to high corn prices also came quickly for the broiler sector where production per person was down about 3 percent from last fall through this summer. Egg producers also adjusted quickly dropping available supplies by about 2 percent from late 2006 until the present time.”

Dr. Hurt added that, “The pork industry has not been forced to drop production with higher feed prices as has been the case for beef, broiler, and egg producers. However, the positive margins for pork producers have largely been eliminated with higher feed prices.”

Although higher commodity prices appear to be impacting portions of the food and livestock sectors in both the EU and the U.S., robust prices and projected increases in farm income appear to be an insufficient impetus for dramatically altering U.S. farm policy. At least thus far in the debate, the 2007 Farm Bill more closely resembles the 2002 law and does not provide for substantial changes in policy instruments that reflect changes in some significant portions of the agricultural economy.

Price variability, rather than price level may end up being more of a concern for farmers over the next few years. The parameters of the 2002 Farm Bill, which had its origins in the low price environment of the late 1990s, does not contain policy tools that could provide more assistance for income stabilization, such as farmer savings accounts or revenue insurance.

However, the 2007 Farm Bill has not been signed into law yet and awaits Senate action where proposals that could more adequatelyaddress income stabilization could be included.

In related Farm Bill coverage, the Associated Press reported yesterday that, “The farm bill passed last month by the House doesn’t go far enough in limiting which farmers should be eligible to receive government subsidies, U.S. Agriculture Secretary Mike Johanns said.

“Johanns said the Senate should consider lowering the maximum amount a farmer can earn and still receive federal subsidies from the $1 million per year stipulated in the farm bill.

“Johanns and President Bush believe no farmer who makes more than $250,000 a year should receive subsidies intended to protect them against low prices for major crops such as corn, soybeans and cotton. Bush has threatened to veto the bill over the income limit and a tax on some foreign companies with American subsidiaries.”

The AP article also noted that, “Bob Stallman, who runs one of the largest farm lobby groups and is an opponent of limits on government payments, watched Johanns from the back of the crowd.

“‘We believe farm policy should support agricultural production and not some subjective and social goals,’ Stallman, a Texas rice farmer and president of the American Farm Bureau Federation, said after the appearance.

“Limiting subsidies is a nice idea, he said, as long as farmers in Europe andelsewhere also are willing to live without government support.”

With respect to the reality of the abundance of available tax tools available exclusively to farm operators and the ease with which many farmers could manage their income level, the article stated that, “Some, like Purdue University agricultural economist Allen Gray, question how effective income limits on subsidies would actually be, seeing as how the government would have to rely on farmers’ tax returns to determine their eligibility.

“‘There are all kinds of loopholes in the way in which a farmer can report their farm income,’ Gray said.”

Ethanol

Dow Jones writer Bernd Radowitz reported yesterday that, “Brazil’s state-run oil company Petroleo Brasileiro SA (PBR), or Petrobras, Thursday signed a memorandum of understanding with Indian oil company Bharat Petroleum Corp. (500547.BY) concerning the logistics and sale of ethanol and biodiesel.

“The MOU aims at exporting ethanol to India and other overseas markets, Petrobras said in a release.

“Bharat Petroleum plans to blend ethanol into the gasoline it sells, and also intends to develop business opportunities in international ethanol sales, Petrobras said.

“Petrobras doesn’t produce ethanol itself yet, but has become increasingly active in ethanol exports. In 2008 it plans to export 500 million liters of ethanol.”

Keith Good