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Crop sector margins tightening -- FAPRI

A new report confirms what market analysts, traders and farmers have suspected all along heading into the 2013 growing season: If crop output returns to normal, profit margins could collapse like a house of cards.

A report released this week by the University of Missouri Food and Agricultural Policy Research Institute (FAPRI) provides baseline predictions for the 2013 crop year and its likely outcomes -- one way or another -- on prices and resulting profit potential for Midwestern grain farmers.

"The drought of 2012 has resulted in higher prices for many crops, higher feed costs for livestock producers and larger indemnities under the federal crop insurance program If crop yields return to long larger indemnities under the federal crop insurance program," the FAPRI report shows. "If crop yields return to long-term trends in 2013 the term trends in 2013, the result could be sharply lower grain and oilseed prices."

The FAPRI report is far from suggesting major change; in fact, it contains corn acreage expectations similar to those planted last year, along with slightly higher expected wheat and soybean plantings. But, in the absence of a drought, the improved production potential in the absence -- or even lessening -- of drought conditions could mean a major price swing for corn, soybeans and wheat.

"Average weather conditions in 2013 would result in a 2013 corn crop that far exceeds the previous record. This would allow corn use and stocks to rebound and the corn price to fall by about $2 per bushel relative to the record average price for the crop harvested in 2012," according to the FAPRI report. "A rebound in global grain and oilseed supplies also contributes to sharply lower prices for soybeans and wheat for crops harvested in 2013."

While the crops sector would see major trimming in profit potential if the drought ends and production ramps back up, the opposite's likely for the livestock side. Driven by feed supplies -- mainly forage -- that will remain in tight supply even after the drought ends, beef prices will continue to climb, and the trend won't reverse anytime soon.

"Multiple years of drought have limited forage supplies, raised feed prices and reduced cattle numbers. Live cattle prices rise to $129 per hundredweight in 2013 and remain near that level for several years," according to the FAPRI report. "Hog, chicken and milk prices also increase in 2013. If feed prices decline as projected, this would imply increased profitability for livestock and poultry producers."

Despite the bearish outlook for the crops side, don't look for net farm income to slide in immediate succession, however; this year's farm incomes still will likely stay in the stratosphere for the coming year.

"Farm income remains high for the third straight year in 2013. Net farm income, a measure that includes changes in the values of inventories reaches a record $131 billion in 2013 while net cash income reached its record level in 2012," the FAPRI report shows. "Both net income measures retreat slightly in 2014 in response to lower crop prices and receipts."

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