For some of us, it is hard to look much beyond hitting the hay tonight; but for the Agricultural Economics staff at Purdue, their crystal ball has been plugged in, booted up, and predictions for 2007 are flying out at lightspeed. The farm gate is happy to share that information with you, and we’ll begin by laying a foundation of where we are right now. Let’s take a combined look at the prices you received this year and the prices consumers had to pay. You really have to wonder if there is any correlation!

The Purdue 2007 Outlook addresses numerous farm economic issues. If you are a kid in a candy store, go there now, but if time is short, we’ll hit the high points in due time. First up is an analysis of how consumer prices factored into your bank account.

Economist Corinne Alexander said there was some relief at the food store for consumers, since food prices did not climb as high and fast as did energy prices and the overall inflation rate. Meat, for example, was a function of the size of the cattle herd and prices were higher in 2005 because of fewer cattle slaughtered than in 2006, which saw meat more bargain-priced. Another reason for less inflation in food is the competition with the warehouse stores and other non-traditional food stores which are enjoying a growing share of the retail food market. Fortunately, food production in 2006 did not see a repeat of the 2005 hurricane season, but a California drought will push up fruit and vegetable prices.

While food store prices rose less than annual averages, restaurant prices kept a steady pace with prior years. Because dining out was more expensive, restaurant traffic fell off a bit while more meals were prepared at home. And the price of gasoline was certainly a factor in that decision as well.

Alexander researched specific food price changes from 2005 to 2006 and found, “The largest retail price decreases are occurring in the dairy and beef sectors with a 10% decrease in the price of butter and 7-8% decrease in the prices of ground beef, round roast, round steak and chuck roast. The largest food price increases have been for grapes, oranges, potatoes, sugar and apples. For the fresh fruits and vegetables, these price increases are due in part to increased demand, smaller US potato acreage, and citrus crops in Florida that have suffered from canker and hurricanes in 2004 and 2005. The increase in the price of sugar can be attributed to increased world sugar demand due to ethanol production from sugar cane.”

Ignoring the price changes in produce, Alexander indicates the bottom line for a Cornbelt farmer is lower prices for dairy products and beef, along with higher prices for sweeteners due to ethanol demand for corn. Was there any benefit for you? Purdue ag economist Chris Hurt says 2006 farm income will be down, but more near a trendline than any cataclysmic plunge. Based on Indiana commodities, Hurt says farm income will be down 10-15% from 2005, but there are several months yet to go in the year. An average net farm income of $23,500 in 2005 will be $21,000 for 2006.

Hurt rhetorically asks, “So why is Indiana farm income dropping when the 2006 yields for corn and soybeans are so high? The (answer is) crop inputs, and sharply reduced government payments. Crop input costs were up about eight percent in 2006 led by higher fuel, fertilizer, interest, and land costs.” 2005 corn prices that averaged less than the loan rate earned loan deficiency payments and counter-cyclical payments. 2006 corn prices that will average $2.35, will not earn any of those payments.

For livestock producers, overall income will be down, but will vary per specie. As indicated earlier, with soft consumer prices for butter and milk, dairy income will be down an estimated 16%. The stronger competition from beef kept pork prices soft, and Hurt says income for pork producers will be down about 5%. For the beef producer, income will be steady with 2005.

Summary:
Comparing farmgate prices and net farm income with the price trends in a grocery store requires a lot of computer muscle and many asterisks. Eliminating fresh produce from the Cornbelt equation leaves the meat case as the lone point of comparison. Softer 2006 prices were recorded for dairy and pork, both for consumers and producers. Steady beef prices are the result of the growing supply of cattle. For corn and soybean producers, who have closer relationships with processors than with food stores and consumers, higher market prices have resulted in declining government payments. Without that income and with higher production costs, net farm income in 2006 will be off slightly from 2005.