UW-Madison releases 2006 Status of Wisconsin Agriculture report

The 2006 edition of the Status of Wisconsin Agriculture, which is available online this week, is produced by agricultural economists and other faculty at the University of Wisconsin–Madison College of Agricultural Life Sciences.

The report includes the following:

An overview of the financial environment in Wisconsin’s farming sector;
A review of current conditions in major Wisconsin commodity sub-sectors and forecasts for 2006;
An article on the role and status of women farmers in value-added agriculture in Wisconsin;
An article on the role of organic farming in Wisconsin’s agricultural sector and Wisconsin’s role in the nation’s organic food industry;
An article on a proposed new law that would allow new organizational structures for Wisconsin cooperatives.

Following is a copy of the report’s executive summary. The full report is available online as a PDF document.

Printed copies may be purchased for $5, including postage, by contacting Linda Davis, Department of Agricultural and Applied Economics, UW–Madison, 427 Lorch Street, Madison, WI 53706.

The Status of Wisconsin Agriculture, 2006: Executive summary

Net farm income in 2005 won’t break the record set last year (strong prices for nearly all farm products allowed Wisconsin farmers to chalk up record net farm income of $1.9 billion in 2004), but at an estimated $1.6 billion, it will come a close second.

While 2005 milk prices didn’t reach the lofty levels of 2004 in most months, they were much higher than expected, and the state’s dairy cows pumped out 3.5 percent more milk than recorded in 2004. As a result, milk revenue was down only about $100 million from 2004. Overall meat animal cash receipts increased, with cattle and turkey prices exceeding their 2004 averages and other livestock and poultry prices staying close to last year’s. While crop revenue was down from 2004, due primarily to sharply lower prices for corn and soybeans late in 2005, higher government payments made up much of the difference.

Total cash receipts from Wisconsin farm markets in 2005 are expected to tally only slightly under 2004’s $8 billion. But farm expenses were 7 percent higher, due mainly to the impact of high oil prices on the cost of fuel and fertilizer.

Looking Back

Here’s how our commodity analysts summarized 2005:

More milk was produced, but prices remained solid. The year began with depleted stocks of dairy products, thanks to two consecutive years of flat milk production combined with small gains in commercial use. This set the stage for strong milk prices in 2005 as long as consumer demand held firm. In fact, domestic consumption grew by about 2 percent in 2005 while very large exports of nonfat dry milk – usually a drag on the market – emptied government warehouses. The increased milk usage offset 4 to 5 percent year-over-year gains in monthly milk production in the second half of the year (when producers ramped up production in response to profitable prices).

The battle of supply and demand ended up close to a draw. Class III milk prices averaged $14.05 per hundredweight for the year; about $1 per hundredweight under 2004, but $2 over the preceding five-year (2000-04) average.

Wisconsin had more cows at the end of 2005 than at the beginning. This is the first year since 1994 that Wisconsin did not record a January-December loss in cows (between 1985 and 2001, the average within-year loss was 33,000 cows per year). This is a positive sign of a turnaround beginning in Wisconsin’s dairy sector. The state’s dairy herd upped milk yield per cow in 2005 by 3.9 percent, well above the trend gain of about 2 percent. Total milk production in 2005 was just shy of 23 billion pounds.

Wisconsin’s meat sector gained revenue in 2005. Choice cattle prices were up about 1 percent in 2005 due to a smaller cow slaughter and good demand despite continued BSE-related bans on beef exports to Japan and other countries. Pork exports were up sharply, keeping prices very near 2004 levels. Broiler prices fell off only slightly from 2004’s record level despite higher output. Smaller turkey production strengthened 2005 prices slightly.

Corn and soybean growers saw prices skid rapidly in 2005. Summer drought conditions were expected to trim 2005 harvests of corn and soybeans. That didn’t happen. Price began to fall in response to the August USDA crop report, which projected more production than the trade anticipated. Subsequent crop reports raised yield and production estimates even more, putting further downward pressure on prices.

U.S. corn production in 2005 ended up above 11 billion bushels and soybean production at over 3 billion bushel. Both crops were the second largest ever. Wisconsin harvested about 430 million bushels of corn and 66 million bushels of soybeans in 2005. Transportation problems related to hurricane Katrina and lack of storage caused very weak local basis levels for Wisconsin corn and soybeans.

Cranberry growers produced less than expected, but sweet corn output climbed sharply. USDA estimated the 2006 Wisconsin cranberry crop at 3.6 million barrels in August. But a hot summer reduced berry size and dropped production to about 3.3 million barrels. Growers are expecting prices for the 2005 crop of around $35 per barrel. Wisconsin apple production was 3 percent higher than 2004 and prices were about the same. Tart cherry production in the state was down about 4 percent due to spring frosts and cool weather during blossom set, but larger crops elsewhere reduced prices from 2004.

Potato growers bumped acreage in 2005 but experienced lower yields because of the hot, dry summer. A smaller national crop kept prices well above 2004. Sweet corn acreage was up 10 percent and yields were up 8 percent. Snap bean production was down 6 percent on smaller acreage.

High oil prices upped the cost of purchased inputs. Fertilizer and fuel cost Wisconsin farmers much more in 2005. Anhydrous ammonia – a nitrogen fertilizer used heavily in corn production – is manufactured from natural gas and was especially impacted by high energy prices in 2005. Interest rates rose more than 2 percentage point during the year. Land rents remained constant but land prices rose sharply.

The overall economy was jolted by high oil prices and hurricanes, but absorbed the shocks nicely. GDP growth continued strong in 2005, about matching 2004’s 4 percent increase. This surprised many analysts, who expected the oil price shock and hurricane-related disruptions to stifle economic growth. There was no apparent effect of high gasoline and heating fuel prices on consumer spending for food.

Here’s what we expect for 2006:

Milk prices will drop as the nation’s dairy herd expands. Cow numbers will increase slightly as herd expansions more than offset cow losses from dairy farm exits. Milk yield per cow will be up around 2.5 percent. Total milk production will be about 181.5 billion pounds. Demand should grow by at least 1.5 percent, to 182.4 billion pounds, even after accounting for the effect of higher energy costs. Expect 2006 milk prices generally to average about $1 per hundredweight lower than 2005.
Meat animal prices will be off slightly. The beef industry has entered the expansion phase of the cattle cycle, meaning larger calf crops and more cattle available for slaughter. Broiler production will be up as well, causing some softening of broiler prices as well as prices for competing meats. Further lifting of imports bans would boost exports and diminish the negative price effect of larger domestic meat supplies.
Corn and soybean prices will remain under pressure. The large 2005 corn and soybean crops were accompanied by large carryover stocks from 2004 crops. This means a burdensome supply and lower new season prices unless plantings are sharply reduced or bad weather cuts 2006 yields. Corn and soybean producers are protected in part by counter-cyclical and loan deficiency payments, but these will be reduced as part of attempts to cut the federal deficit.
Expanded Wisconsin cranberry acreage will yield a larger crop in 2006 if nature cooperates. Little change in output or price for other fruits is anticipated. Vegetable plantings on irrigated acreage in 2006 will depend in part on contract prices rising to offset the higher cost of pumping water.
High energy prices will hurt. Current and expected natural gas prices suggest anhydrous ammonia prices above $500 per ton in 2006, and prices for mined P and K fertilizers will be higher because of more costly transportation. Fuel prices are expected to stay at late-2005 levels throughout 2006. Interest rates will likely remain close to current levels unless inflation rates pick up rapidly in 2006.
Economic growth will help. Real GDP growth of about 3.5 percent in 2006 will help promote strong markets for farm products. Longer-term effects of high energy prices and the ballooning U.S. trade deficit are big question marks in the macroeconomic outlook. A new WTO agreement in 2006 may or may not occur. But even if a new trade pact is signed in 2006, the impact on agricultural trade will be felt in later years.
The Wisconsin farm economy is sound based on conventional measures. Farm assets total about $50 billion and farm debt is only about $7.2 billion. A possible red flag is the composition of assets – close to 80 percent of asset value is in farm real estate. There is no clear evidence that the farm real estate market is about to collapse. But a doubling in the average value of an acre of Wisconsin farmland since 1999 has some observers nervous.
An increasingly large percentage of Wisconsin farm household income is earned off the farm. Recent USDA data show that in 2004, farm income represented an average 11.6 percent of total household income for Wisconsin’s 75,500 farmers. However, more than half of these farms were classified by USDA as “Residential/Lifestyle” farms having negative farm income but total household income over $100,000 annually. For Wisconsin farms with gross farm income exceeding $100,000, farm earnings represented more than two-thirds of household income.