It’s a dynamic time to be farming, says Purdue’s Chris Hurt at the Wells Ag Outlook breakfast.

These are some pretty heady times to be involved in production agriculture, noted Chris Hurt, Purdue agronomist at Wednesday’s Ag Outlook Breakfast at the Wells County Community Center.

But like longtime farmers know, what goes up often comes down.

Hurt sees continual price rises in the corn, soybean and wheat markets through 2010 with a gradual settling leading up to that time and then a leveling off period.

But predicting how the markets will react to various factors remains as difficult now as it has always been,.

Hurt explained to the audience of 40-plus farmers, bankers and agribusiness people Wednesday that today’s bull market stands on four legs—ethanol, biodiesel, worldwide demand and the cheap dollar.

What the federal government does in the upcoming energy bill will keep those first two legs standing, noted Hurt. What that bill requires as far as renewable fuels from corn starch will likely keep the ethanol market strong, in spite of the media indication that the ethanol market will go bust.

“Nobody knows how long the boom will last,” observed Hurt, adding that the bill calls for 15 billion gallons of ethanol from corn starch by 2015. “That’s a guaranteed market,” he said.

Hurt noted that about 65 percent of the projected ethanol plant construction is now complete and on line producing the renewable fuel. That leaves about 45 percent to get on line sometime next year. Indiana’s ethanol plant construction is mirroring the nation’s noted Hurt, citing Bluffton’s own IBE plant with construction to be completed next summer.

At the beginning of 2006, Indiana had one ethanol plant in South Bend using about 36 million bushels of corn a year. The state now has six plants using about 160 million bushels a year. Five more will go on-line in 2008, needing 150 million more bushels a year. Companies are working with the Indiana Department of Agriculture for the construction of five more plants and an additional 21 plants have been announced—most of which will likely never be built.

To put the crop usage into perspective, Hurt observed that the South Bend plant used about four percent of Indiana’s corn crop—a considerable number considering it was just one plant. When all of the plants that are currently under construction begin production next year, they will use about 30 percent of Indiana’s corn crop.

“Indiana is the nation’s fifth largest corn-producing state, so those numbers reflect momentous changes,” said Hurt.

So the demand for corn for ethanol is just getting a good start, he observed. The boom is expected to continue for the next two years and then flatten off as about all of the plants that will be built are put into production.

Nationwide the production numbers are at about 7.2 billion gallons of ethanol a year. Another 6.2 billion gallons is expected to be added in the coming year. If the energy bill calls for 15 billion gallons of production by 2015, noted Hurt, then there will still be some room for growth in the market.

He added that while ethanol’s potential 15 billion gallons-a-year production hardly threatens America’s 140-billion gallons-a-year appetite for oil, it does help lessen it. And biofuels are the only fuel production industry that has added capacity in the past two years. The oil industry can’t claim that, observed Hurt.

Biodiesel is driving the demand for soybeans. The massive Luis-Dreyfuss plant in Claypool will use about one in every four bushels of soybeans crushed in Indiana this year. While biodiesel is not as big of a factor in the soybean market as ethanol is in the corn market, it is having a significant impact on prices, noted Hurt.

He observed that Luis-Drefuss’ big demand for beans has pretty much caused Indiana to stop exporting beans for crushing. Beans marketed in Indiana in 2008 will likely all be crushed in-state, he said.

World demand is continuing to rise and that was reflected strongly in this year’s wheat market. Nearly all of the stocks for export were sold right after harvest in July and August of this year, observed Hurt and demand is forecast to stay strong.

China and India are the two drivers of the world market. China’s communist government is trying to co-exist with a growing market-driven economy. The Chinese people have gotten a taste of the good life and are starting to chafe at the demands of the communist government.

One of the ways that Hurt sees the Chinese government trying to pacify its citizens is to keep food prices low. Right now, he observed, food price inflation is about 17 percent annually in China, while average Chinese household incomes continue to rise at a rate of 10 percent a year. The Chinese government’s solution currently is to raise the country’s grain imports to meet the demand and try to keep food inflation in check. But as the household incomes in China grow, the people eat more food, creating a continuing need for more imports.

The weak U.S. dollar is helping those exports. As foreign countries look for grain to import, the United States looks more attractive because foreign currency buys more grain.

“I don’t see the dollar in the short run appreciating a lot. It’s not showing a lot of strength,” observed Hurt.

Hurt expects the demand for U.S. grain to level off, though, as the rest of the world starts to catch up with it. “By the year 2010, I see a more leveling off of the demand for U.S. grain,” he said.

Hurt recalled the history of past commodity price surges. In the years of World War I and immediately afterward, the demand for U.S. grain was high as Europe tore itself apart. Millions of acres that had never been in production before—many of those acres marginal in soil quality—were converted to agriculture to meet the world’s demand for U.S. grain. When Europe got back to the business of producing its own grain again, those acres didn’t go out of production and as a result, there was a slump in the ag economy for the next dozen or so years.

The same cycle was repeated during Word War II, but this time price controls kept the prices of commodities from surging. So when the bust period followed, it wasn’t quite as noticeable.

The early to mid-1970’s saw another surge in demand—followed by record highs in commodity prices. A lot of those high prices were also fed by overall inflation in the U.S. economy. The highs of the 70’s were followed by the lows of the 80’s.

Hurt believed the current demand-driven surge will be longer lasting—probably until about 2015. Around 2010, the surge we’re seeing now will really level off and continue only slightly for the following five years. The demand will start to be met mainly by technology—higher yielding hybrids, mainly—and by the rest of the world catching up.

Hurt observed that the president of Monsanto—a leading producer of farm chemicals and hybrid seed—recently expressed no concern about the alleged media-hyped “food versus fuel” controversy. “His line was it’s time to turn the U.S. farmer loose. We can produce enough corn for both food and fuel,” said Hurt.

Cellulose fiber ethanol will also help meet the demand for biofuel, observed Hurt. Although cellulose fiber production facilities are now well outnumbered by corn starch facilities, after 2010, most of the ethanol plants built will likely be cellulose fiber facilities.

Ethanol experienced some growing pains this year, observed Hurt, but that has leveled off. Ethanol supply has been exceeding demand, resulting in ethanol plants paying slightly below market price for corn—but that has changed and ethanol plants are paying more in line with the markets.

All of this demand has Hurt forecasting corn in the $4.25 range per bushel by June to July of next year. Soybeans should be in the $11.50 a bushel range at the same time. Best pricing opportunities, he believed, would be for June and July delivery.

The soybean market, though is heavily impacted by South America and what happens there. South America is expected to get on board for the worldwide demand and kick up production and that could mean $8 beans by June of next year. But if it’s a bad weather year in Brazil and Argentina, we could see “beans in the teens” said Hurt.

Worldwide demand for wheat is expected to stay strong through 2008 and that should keep wheat prices high as well.

While farm incomes are continuing to rise, suppliers and landlords are wanting a piece of the pie and starting to hike the input costs for farmers. The high commodity prices has also resulted in an increase in the value of farm ground—up to over $5,000 an acre in some places in Wells County this fall. The increase in land values also increases farmer’s overall net worth.

With the demand for beans and wheat strong in 2008, Hurt forecast a decline in corn acres in 2008 from 2007. Lower input costs—especially for wheat—will also be driving a switch from corn to beans and wheat, he observed.

Hurt noted some economists are forecasting a drop in the foreign market demand for grain because the supply is not there. People will learn to do without, those economists believe. Hurt doesn’t see that happening because there is no indication that foreign markets are planning to scale back.

Although farmers are seeing some heady prices for their commodities, Hurt’s advice was to be optimistic, but stay conservative. Especially in the bean market. Pursue those $11 markets but plan for $8 beans. Be prepared to face an enormous margin risk.

“You need to protect your downside risk,” said Hurt advising the farmers to check into crop insurance, option pricing and diversification. “I don’t need to tell you not put all of your eggs into one basket,” said Hurt. “Protect against the downside exposure, but keep the upside in mind,” he said.

Regarding animal production, Hurt observed that the beef, lamb and poultry markets have made good adjustments to the price rises in grain and are situated to continue a steady climb in prices. However, hogs have not yet made the adjustment and the market for pork will remain weak over the next two years. Hurt forecast a steady to declining market for both pork and milk.

He concluded by observing that it’s a dynamic time to be farming, but what a lot of people outside of farming don’t realize is those massive changes in revenues are being matched by equal changes in costs.

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