Opportunity costs and crystal balls: Where are we headed in 2008 and beyond?

Progressive Hay Grower Editor Darren Olsen

When you stop and look at agricultural opportunities over the past 30 years, it is hard to find a time that producers have had so many positive opportunities. Forces outside animal and human consumption have come into play and are fueling a need for commodities that hasn’t been seen for generations. That leaves most producers with one very big question: “How do I make the most of this situation?” That, in many ways, depends on the individual and their abilities, but there are some trends and ideas that might make 2008 better.

Opportunity costs
Forage. Over the past year, forage crops have ridden the ethanol wave just as many of the main production crops have. Today, hay prices hover near recent historic highs and with producers looking to shift to wheat and corn. Older acres are quickly being shifted to these crops. One problem this year with alfalfa is its close relationship to the dairy industry. Last year’s record milk prices are softening and look to be about 15 to 20 percent lower for 2008. A recent quote from the latest USDA milk report stated, “High feed costs remain a big concern for producers, especially as lower milk prices are being projected as a result of declining dairy product commodity prices.”

In addition, the milk-to-feed ratio is looking to be at its lowest point in the past five years. Producers will be looking for the least expensive way to keep cows producing, so that will be a downward pressure point on hay. However, with fewer hay acres predicted for 2008 along with a larger dairy and beef herd nationally, hay looks to not drop as much as milk prices.

Corn. Corn, in the last two years, has become the golden child of agriculture. The ethanol craze has risen corn to a higher pedestal that, at least for the next two years, looks to remain intact. The biggest downer for the near future for corn is the economy in general. As Wall Street and other worldwide financial institutions continue to reel under the lending markets, oil prices are also coming down somewhat. If a recession really comes into play, the ethanol market could loose a lot of steam.

Soybeans. Soybeans are this year’s dark horse in the race. Their appeal to the ethanol market is already starting to wane as cellulose-based ethanol comes closer to a reality. If this is the case, then why does the price stay so high? That question can be answered on a broader international look. Soybean production throughout the world is slipping below predictions for 2008, as Brazil pulls back its projected harvest totals. No one is certain how long this will last, but this year seems it will provide high prices for soybeans.

Wheat. I would also group barley and other small grains into this commodity. With the world under a wheat shortage, look for this 2007 surprise crop to stay relatively high in both demand and price this year. As long as Australia and Argentina continue to struggle to hit production estimates, small grains will hold above recent averages.

Crystal balls
When looking at all the information currently available, 2008 looks to be a good year for most producers. Barring natural disaster, prolonged drought or rippling economic upheaval, most producers will have what they need to make it. Where decisions will lie with each producer remains to be seen, but keeping a few things in mind will help smooth out the bumps that might come:

1. Go with what you know. Most professionals interviewed agree that with most crops looking up, it is probably better to work with crops you are familiar with and have a good history of raising. With the inputs of production reaching record highs, growers can’t afford to be making management mistakes. Higher profits can easily be eclipsed with poor judgement.

2. Secure contracts and loans early. If you are needing financing or are looking at securing future pricing, you need to be making those contacts now. With the financial world oversensitive to loaning practices, money will be harder to come by than in the past few years. You need a good business plan in place along with ways to deal with the unexpected if you are wanting lenders to take you seriously. This will be especially true if you are making radical changes to cropping systems that will mean additional outlay for equipment or land.

3. Don’t put all your eggs in one basket. With the economy on eggshells and the world taking a close look at our political and production climate for 2008, prices could swing at a moment’s notice. In the past, producers have buffered downturns and gotten unexpected increases by remaining diversified in their production plans. It is hard to fight against the wisdom of time, although a fast buck and a high return are tempting. Just be sure you are secure in your decisions and can live with a variety of outcomes.

Above all, seek the advice of financial and production advisors if you have questions regarding local opportunities and contingencies you might not have thought about. With the year already shaping up as it is, opportunities are out there, if you look for them. PD