It is crystal ball time. You have had a relatively good year with yields and prices, and while not everyone was able to come to the party, the overall ag economy benefited from 2007. 2008 will bring a new Farm Bill, higher cash rents, and lower profit margins. But from there, what will the farm economy resemble?

Managing risk, developing a marketing plan, and estimating a budget are all challenges for even a strong farm operator. However, some keys to success come from the agricultural economists who study those factors more thoroughly than farm operators have the time to read and research. The Purdue Agricultural Economics Department just released its forecast for 2008, and you will be among the first to see it.

US economy. Larry DeBoer says the economy will continue to expand but has slowed. The weak dollar has spurred exports but economists are debating whether the housing and mortgage problems will spread to the rest of the economy. GDP will be above inflation, unemployment will rise slightly, interest will remain steady along with inflation. He predicts a 20% chance of a recession.

Agricultural trade. Philip Abbott expects another record year with farm exports reaching $79 billion, but with imports climbing above $70 billion. Poor weather abroad has helped US wheat export values, but overall exports have been helped by a strong global economy and a weak US dollar. The latter is expected to continue, due to the high trade deficit. More than two-thirds of the trade expansion has resulted from higher commodity prices.

Farm Bill. Allan Gray reminds us the House passed its version in July, which changes very little from the current US ag policy of direct and counter cyclical payments and a loan program. Both the House plan and the Senate offer an alternative that provide a safety net based on average crop revenue. Payment limits are reduced significantly in both versions, and conservation programs are increased more in the Senate than in the House. Both versions provide funding that will benefit specialty crop production.

Food prices. Corinne Alexander believes consumers will pay an additional 3.5 to 4.5% for food, for both 2007 and 2008, and reports that food prices rose over the past year more than the annual average for the past 10 years. Higher prices are due to livestock operations paying more for feed, strong domestic and foreign demand for food products, higher energy costs, and adverse weather.

Milk prices. Mike Schultz reports the all time record for the all milk price was set at $21.70 this summer, resulting in increased dairy profits. But he says the strong demand will keep the price higher in 2008. Higher feed costs have pinched profits, but the global demand for dairy resulted in more revenue. The higher price of milk should result in 2.6% more milk in 2008.

Beef cattle. Chris Hurt says reduced supplies mean higher prices for the balance of 2007 and through 2008. The breeding herd dropped slightly and fewer heifers were retained. With stable supplies and a growing population, per capita consumption will be down. With high prices for finished cattle and a large corn crop, feeder cattle markets will also be strong. Profits look bright for cow-calf producers with little interest in expansion and growth of exports.

Hogs. Chris Hurt said the 3% increase in pork production in 2007 will be followed by 2% in 2008 along with a slight pullback in prices. The stability in pork prices extends back to 2005. Production costs are becoming more volatile with higher feed prices which have eliminated profit margins. Breakeven prices are anticipated next summer.

Corn. Chris Hurt says total usage will grow to 12.6 billion bushels, out of the 13.3 billion produced. Ethanol will use 25% of the crop and exports will reach 2.35 billion bushels due to tight world stocks. US stocks will be nearly 2 billion with an average price of $3.20 per bushel. High costs will narrow margins for ethanol producers and refineries will slow down.

Soybeans. Chris Hurt expects the 2007 carryover to diminish with the smaller crop. The crush will remain high as large numbers of livestock demand soybean meal and bio-diesel producers demand soybean oil. The result is fewer beans being exported. Soybean acreage will grow 8 to 10% in 2008, but tight supplies will keep prices around $10.

Wheat. Chris Hurt says below normal yields in most wheat production areas will keep inventories at 30 year lows and prices at record highs, reflecting its transition from a feed to food grain. The weak dollar keeps the demand high for US wheat. The US average price for new crop wheat will be $6 to $6.50 per bushel. Producers with the capacity to double-crop their soybeans behind wheat are urged to consider that practice.

Crop input costs. Alan Miller forecasts higher production costs, but also expects supplies to be strained in some areas with unusual cropping patterns. Fertilizer will be up 4 to 20% in 2008 resulting from higher natural gas prices. Chemical costs will be up 2% to 6%. Seed with biotech traits will be up 15% to 25% in price. Diesel fuel will be up 5% in cost. Crop insurance premiums will be comparable to 2007 for corn, but higher for soybeans. Machinery prices will be up 5 to 6% and wages up 4 to 5%.

Land leases. Luc Valentin believes the ability to pay rent must be taken into account when signing a lease because higher crop prices and higher production costs will create thin margins. Leases will be renegotiated to provide higher payments to land owners even with financial uncertainty. Land owners have the least risk with a cash rent lease should not expect more than a crop share land owner with higher risk.

Land prices. Craig Dobbins says land values have moved sharply higher with a 16.6% jump in the average price of land over the past year. For a tenant to have the same chance of return, his risk premium needs to be twice as large as it was in the period of 2001 to 2005. Land prices will continue to rise another 5% to 15% in 2008, unless higher interest rates cause more owners to sell than there are currently.

Finance and agribusiness. Mike Boehlje and Chris Hurt say the financial performance of agribusiness firms has been strong in the past year and should not fade in 2008. Farm equity improved in 2007 with the help of higher land prices, but the greatest risk for farmers in 2008 is the reduction of margin due to higher rents and crop production costs. Survival will be dependent on managing downside risks and leaving an opportunity for favorable outcomes.