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The past 2 crop seasons have been horrific years for producers of most major US crops. Large LDP's and now two consecutive years of government aid have been the salvation for many if not most crop farmers. Farmers are quick to realize, however, that long-term survival and improved profitability must be built on price level and supply/demand - but there must be safety nets to protect farmers and the food supply from global economic and political shocks.

Cotton producers have proven to be a resilient bunch. If anyone ever questioned the Georgia farmer's commitment to cotton, the past two years have given the answer. In 1999, Georgia planted 1.5 million acres of cotton (equaling the modern record set in 1995) despite a dismal 1998 and the likelihood of low prices again in '99. Of course, cotton's resiliency can in part be attributed to (a) low prices for alternative crops such as corn and soybeans and (b) the prospect of a large LDP to supplement the low cash price.

Thus, we have a true dilemma- a "Catch 22" situation in cotton. US and world cotton prices have been declining and low since 1997. The market has clearly signaled that less cotton is needed. Yet because of low prices for alternative crops and, at least in case of the US, income support policies (LDP's) that cushion farmers from low world prices, plantings have not declined. Thus, if the supply side fails to adjust, we will continue to bleed profusely through this period of low prices until improvements on the demand side can pull us out. How long that will be is a difficult question to answer.
 

World Situation

While much attention recently has been focused on the southeast Asia economic situation, cotton's current problems actually put down roots in 1995. For much of the early 90's, world cotton consumption was fairly staple at about 85 million bales annually. Price direction was largely a function of production shortfall or surplus. For the 3-year period 1995-97, production out paced consumption each year and stocks began to build. In 1998 the southeast Asia crisis hit, consumption and US exports hit a tailspin, and the rest is history.

The 1999 world crop is currently forecast at 86.1 million bales- up 2% from last year. Despite a reduced crop in the US due to sharply lower yields, production is expected to increase in key countries such as China, Pakistan, and former Soviet states. On the demand side, world consumption is expected to rebound about 2.5 percent and export growth is expected. Evidence suggests that the supply/demand picture is improving but only slightly and improvement is slow.

Anyone who doubts the magnitude of the over-supply in cotton need only look at the numbers. The global scene continues dominated by large and burdensome stocks. Stocks on hand at the end of the 1999/2000 crop marketing year are expected to total 41 million bales with a stocks-to-use ratio of 47%. The past two seasons, cotton stocks relative to use have been at the highest levels since 1985. During that year, the A-Index (world price of cotton) averaged less than 50 cents per pound or essentially the same level as today.

Higher US prices will likely come only when the world price improves. Aside from major supply shocks, improvement will likely be slow.
 

US Situation

If the US crop gets any smaller we may end up giving it away! In August USDA estimated the '99 crop at 18.3 million bales and the crop has declined markedly since. Drought in the southeast, hurricanes in the Carolina's and Virginia, and other problems have trimmed the crop to a current estimate of 16.4 million bales. Despite an almost 2 million bale cut in the US crop, price has not improved. For most of July to the present, price (December futures) has remained in a narrow range of mostly 52 to 55 cents. Despite the reduced US crop, global supply/demand has dominated.

Another culprit has been weak demand. Cotton is facing increased competition from MMF's (man-made fibers). Believe it or not, cotton price would actually have to continue to work even lower to be price competitive. Looking at all fibers used by US mills, cotton has lost 2 to 3 percentage points or the equivalent of over 1 million bales annually to MMF's since 1998. Cotton also continues to face a flood of imports of foreign textiles.

US exports are expected to improve to 5.5 million bales compared to 4.34 million last season. This is in part in anticipation of renewed funding for the Step 2 program.

While the world price (A-Index) has continued to slide, US prices have managed to hold. This has helped the US producer by increasing the cotton LDP.
 

Outlook Brief For 2000

I anticipate that US cotton producers in 2000 will likely plant very near this year's level. There is just no reason to do otherwise. This is scary because with this year's plantings, this crop could very well have been 18 to 19 million bales had the weather cooperated. Aside from sharply improved demand or global supply shocks, prices will likely remain near current levels or lower. A cutback in foreign acreage would help and is likely with now 2 years of low world prices. As this year, however, producers should plan on a large LDP and be prepared to forward price at levels above the loan rate.

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A case can be made that of all Georgia's major crops, peanuts have been the bright and shining star in 1998 and 1999. The star perhaps has not shined as brightly as one would have hoped for, but compared to other crops, peanuts have faired better. When was the last time you heard someone mention peanuts as a bright spot when it comes to economics and politics? Not often, but that's been the case in '98 and '99. The 2000 crop, however, may tell a different story.
 

Supply and Yield Situation

USDA currently estimates the 1999 crop at 1.91 million tons-- down 3.6% from last year. Harvested acreage is forecast to be down about 2% and yield is also forecast to decline slightly. US and Georgia yields have been relatively good in 1998 and 1999 particularly when compared to cotton. The Georgia yield has averaged 2,661 pounds per acre for 1997-99. The US peanut quota for 1999 was 1.18 million tons for edible use plus approximately 100,000 tons of temporary seed quota.
 

Demand Situation

Peanut consumption continues to improve. After trending downward strongly since 1991, consumption has improved each year after bottoming out in 1996. For the 1998/99 marketing year just completed on July 31, use of shelled peanuts increased 2.7% from the previous year. Peanut butter continues to be a concern, however. For the year, use in peanut butter fell 2%. For the latter half of the 98/99 year, government purchases of peanuts and peanut butter for food and nutritional programs was practically nonexistent. Government purchases typically account for about 3% of the US peanut quota.

Imports of peanuts continue to be a concern. When adjusted for imports, US peanut consumption (the US demand for US grown peanuts) still lags behind levels of the late 1989 and 1991.
 

Buybacks and Burdensome Stocks

Since 1996, the use of buybacks has increased. A "buyback" is an additional (non-quota) peanuts allowed into the quota market through mutual agreement of the producer and buyer. From 1996-98, 459,000 tons of buybacks have entered the quota supply. This has largely been a win-win situation for both the farmer and the buyer. The farmer received an above average price for his additionals and the buyer received a quota peanut for much less than the support price. Surprisingly, for 3 years these peanuts were added to the quota side without large quantities of "normal" quota peanuts being diverted to CCC loan and without CCC losses.

That will likely change in 1999/2000. Increased buybacks have resulted in a build-up of peanut stocks or previous crop inventory. Entering the 1999 crop marketing year on August 1, peanut stocks were at the largest level since 1995 and 100,000 to 200,000 tons above the average for the last 3-5 years. The high stocks situation resulted in low and stagnant prices on quota contracts during the season and because buyers are not likely to risk building inventory further, it is possible that 100,000 to 150,000 tons of quota peanuts could be placed in CCC loan this season and result in CCC losses. Under the '96 peanut program revisions, growers will be accessed to cover any such losses. Such an assessment has been estimated in the neighborhood of $50 per ton.
 

Trade Issues

The major issue continuing to face the peanut industry is trade-- specifically the NAFTA and GATT treaties. Under GATT, Argentina has become a major competitor. Under NAFTA, tariffs on Mexican peanut imports will decline to zero. Should Mexico become a major producer, it too would pose a threat.

Of larger concern is FTAA, the Free Trade Agreement of the Americas. Under this proposal, Argentina would be given NAFTA tariffication which, like that for Mexico, would decline to zero.

The future of the peanut industry lies in how these trade issues are dealt with. Many trade issues are yet to be decided and the future is uncertain. Assuming, however, that the trade agreements are hard eventual realities, it will be necessary for the industry to find an acceptable balance between the need for producer profitability and the realities of trade policy. The current peanut program and level of price support appears at odds with trade policy and vice versa.

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In 1999, Georgia poultry producer profit margins remained positive, cattle producers regained a hold on profitability, while pork producers struggled just to breakeven. At this point, it looks like we may have a good chance of the perfect game (no hits, no runs, no errors) in 2000 with all three meat producers pitching profits. The key will be whether or not hog producers cut production enough to offset some of the large poultry production increases expected. Cuts in beef production are already in the cards as cattle producers have continually whittled their beef herds since the low prices of 1996. As a result of reduced beef and pork supplies in 2000, along with some increased meat exports, per capita supplies of meats should decline from their record 1999 levels. If feed grain prices remain on the low side, reduced meat supplies should lay the foundation for profits stretching across all three meat sectors - provided feed costs remain low. Export prospects are also important for meat producers as exports represent 9% of beef production, 7% of pork production, and almost 16% of broiler production. A return to an expanding meat export market in 2000 could cinch the profit outlook for Georgia beef, pork and poultry producers.

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Beef Cattle Outlook

Georgia cow-calf operations posted their best returns since 1994 this year as calf prices averaged more than $10/cwt. higher in price at the end of 1999 than in 1998 ($85/cwt for 450 lb. calves vs. $75/cwt.) . With feeder cattle supplies growing even tighter in 2000, due to the reductions already in place in beef herds (or the beef factory), calf prices are expected to be up $10/cwt. or more again in 2000. This should put most Georgia cattlemen back in the black next year.

Low feed grain prices also help feeder cattle prices. If feed grains remain low in 2000, more cattle feeders will look for ways to "add value" to grains through beef production. Thus, bids for feeder calves go up.

U.S. beef is a favorite in many parts of the world and increased exports to Asia and Mexico should boost beef exports in 1999 by 10% over 1998. Exports in 2000 may increase again, although not by as much as in 1999.

Due to favorable buy/sell margins at the end of 2000, Georgia cattle producers have an opportunity to profit by $25 to $50 per head by stockering or feeding their cattle. Stockering cattle on winter annuals may represent more profit than any other winter crop this year for many Georgia farmers.

All in all, the beef cattle outlook represents one of the most favorable in Agriculture as we head into the new millennium, due to the reduction beef cattle producers have already undertaken the past 4 years.

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Is There Hope For Hogs?

The last count of hogs and pigs across the country indicates that the worst hog prices since the great depression has led to liquidation in the industry. Unfortunately, while prices may be considerably improved from the $10/cwt. prices producers received at the end of 1998, prices high enough to cover total cost will not likely return until late winter of 2000.

As of September 1, total U.S. hog numbers were down 4% compared to last year. The pork factory or breeding herd was 8 % lower than last year, while market numbers were reduced by 4% from the numbers that resulted in the worst industry losses since the Great Depression. Slaughter during the last of 1999 should run 4% to 6 % below that of late 1998. Georgia hog numbers now stand at about one fifth their levels of 1980 and one third of the 1990 count.

U.S. pork exports will likely show some small decline in 2000 after a 3% gain in 1999. Net pork exports have registered tremendous gains in the 1990's. The U.S. is generally believed to have a competitive advantage in world pork production, but increasingly stringent environmental requirements may be eroding this advantage.

If the latest hog inventory is to be believed, market hog prices will remain in the mid to upper $30/cwt. level through most of winter. Prices may reach the low $40/cwt. range by late winter and the mid $40's by summer. $40/cwt. prices will be marginally profitable for efficient producers with low feed cost. However, the hog price disaster of 1998 will require many years of profitable prices for producers to recover their 1998 losses.

The hog production losses of 1998/99 have allowed some large packer/integrators to speed their plans to consolidate the pork production industry. Independent producers will be able to survive the near term only by becoming part of some type of coordinated production and processing chain through long term market agreements. For those that are able to survive with some type of independence, profits looks probable over the long term, although the next 10 year pork production profit margins will not equal those enjoyed through most of the 1990's.

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Large Broiler Production Increases Again in 2000 - But Profits Remain

Broiler producers enjoyed some of the best profit margins ever in 1998. In response, producers grew production by 6.5% in 1999 despite breeding flock problems and mid year heat. By late summer 1999, wholesale broiler prices were more than 10 cents/lb. lower than in 1998, but profit margins were still well in the black as feed cost remain low due to large corn and soybean crops.

In light of the continued profitability experienced in 1999 and the prospects for feed costs to remain at very low levels, it would be hard to imagine the industry holding production growth to less than 6% again in 2000.

Strong domestic fast food demand pushed boneless breast meat and wing prices up some 20% from 1997's levels in late 1998. The breast meat demand held well into 1999 as first half breast prices were off only 6 % from their 1998 prices. At the same time, a sluggish export market filled with large supplies of competing meats has pressured dark meat prices with first half 1999 leg quarter prices less than half of 1998's. Exports in 1999 are expected to decline by 1% from 1998 as the Russian market - the largest broiler export market in 1998 - has all but disappeared. Strong 1999 export gains to Hong Kong and the Baltic counties of Latvia and Estonia could not offset the Russian market collapse.

Broiler exports in the year 2000 will likely prove to be the 3^rd straight year without growth. Since exports represent about 16% of domestic broiler production, export conditions will be key to broiler prices over the next year.

Wholesale broiler prices will likely average 58.5 cents per lb. in 1999, or about 5 cents less than 1998's average. Prices during the last part of 1999 will fall 8 to 10 cents below 1998 levels as average broiler weights recover from the reduced levels produced by the hot late summer. Prices are expected to remain 4 to 5 cents below 1999 prices through most of 2000. For the 2000 year as a whole, broiler prices are expected to average around 56 cents per lb. as compared to 1999's likely average of about 59 cents per lb. While broiler production returns in 2000 will not be as favorable as those experienced in 1999, margins will remain comfortably in the black provided feed costs continue at low levels.

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Georgia corn growers plan on harvesting 260,000 acres of corn for grain this year, down 5,000 from last year. State wide yields are pegged at a nice 97 bushels per acre despite the hot dry weather that plagued much of the dry land crop. Total production will be close to 25 million bushels.

The USDA September crop report can be summarized as follows: planted acres down 2.6 million acres at 77.6 million acres; harvested acres down 1.6 million at 71 million; projected yields of 132.2 bushels per acre down from 134.4 in 1998; crop size of 9.381 billion bushels down from 9.761 last year and total supplies nearly unchanged at 11.7 billion bushels.

The demand side of the price equation is also expected to see little overall change. Feed use is projected to be steady at record levels of 5.575 billion bushels. Food industrial uses are expected to continue their steady growth rising 50 million bushels to 1.88 billion bushels once again outstripping exports. Foreign sales are projected to fall 135 million bushels to 1.85 billion bushels although the weakening dollar in the fall of 1999 may stimulate more interest in US corn. Total corn off take will likely be just over 9.3 billion bushels, down about 80 million bushels from last year. Ending stocks will rise by a similar amount to about 1.765 billion bushels or 19 percent of use.

Season average prices for 1999 crop corn are projected to average between $1.75 and $2.15 per bushel. During calendar 1999 to date December 1999 delivery futures prices posted a high of $2.51 at the end of March and a low of $1.94 on July 12^th. Since posting that low, prices have traded in a wide band of about 45 cents. A seasonal downtrend into the harvest period is underway at present.
 

The Future

I expect corn acreage in 2000 to decline slightly. The current price support levels under Freedom to Farm via the loan rates favors oilseeds over feed grains. This will play a role in farmer's planting decisions to some extent. An acreage number near 75.5 million acres would appear reasonable from this perspective. Trend yields would be near 132 bushels per acre providing a crop near 9.13 billion bushels. Given projected stocks, 2000 crop year supply would be about 10.85 billion bushels. If off take remains steady at 9.3 billion bushels, ending stocks would decline about a million and one half bushels to about 1.6 billion bushels providing a stocks-to-use ratio of 17 percent. Season average prices could move up to the $2.15 - $2.25 range.

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Georgia wheat growers harvested 225,000 acres of wheat for grain during 1999, down from 240,000 last year. State wide yields were an impressive 44 bushels per acre, one of the highest yields on record and up one bushel per acre from last year. The lower acreage this year continues a long downtrend that began way back in the early 1980's when we harvested nearly 1.5 million acres.
 

Current Global Situation

World wheat production during calendar 1999 declined for the second straight year totaling about 21.1 billion bushels. That is a 500 million bushel decline from last year and a 1.4 billion bushel decline from the record of 1997. While production has declined, consumption has remained nearly steady at 21.6 billion bushels. This has allowed world ending stocks to be drawn down 10 percent from 5 billion bushels to 4.5 billion bushels during 1999. This is the lowest level of ending stocks since 1996 and represents a ratio to use of 20.8 percent. There appears to be a disconnect between the usually reliable relationship between changes in stocks-to-use ratios and changes in prices. The current ratio is the third lowest in the decade of the 1990's and lower than last year, yet U.S. average prices actually fell. This disconnect may auger a price rise for the 2000 crop.
 

2000 Year Outlook

U.S. planted acres are likely to decline to 61.5 million acres. If yields are at trend line levels, production would be 2.2 billion bushels (BB). 1999 crop year ending stocks will be near 900 million bushels and thus the 2000 year total supply would be about 3.2 BB including about 100 million bushels of imports.

No major changes in wheat use are expected with domestic food use at about 930 million bushels, feed use at 295 million bushels and exports at about 1.125 BB. Total off take should be about 2.42 BB. Marketing year ending stocks will decline to under 800 million bushels, still too large a number to allow prices to mount a significant rally. Season average price should average near $2.90 per bushel. Georgia wheat growers will need to do smart marketing and harvest above average yields to make money on wheat during 2000.
 

The Future

Wheat production continues to decline in importance to many areas of the U.S. Since wheat is a crop produced by many nations around the world production can quickly respond to changes in price. Unless there is a major weather disruption, wheat prices will remain on the defensive and work to limit acreage while stimulating demand. Until prices move significantly higher, look for U.S. acres to slowly decline.

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Georgia soybean growers harvested 215,000 acres of soybean in 1999, down 5,000 acres from last year. State wide yields are expected to be a disappointing 20 bushels per acre due to the hot dry weather that affected Southeastern agriculture this year.
 

Soybean Market Situation

The USDA September crop report indicates U.S. farmers planted 74.1 million acres to soybeans during 1999 and expect to harvest 73.3 million acres, both record high. National yields are projected to be about 37.9 bushels per acre producing a record crop of 2.78 BB. We will have our first total supply exceeding 3 billion bushels this year with 3.15 BB needing to find a home. Soybean use will also be record large at 2.69 BB with the domestic crush at 1.635, also a record and exports good at 895 million bushels. Ending stocks are projected to be very large at 460 million bushels or about 17 percent of use.

1999 marketing year average prices will be about $4.80 but this is a bit misleading at to actual farmer soybean income. The CCC loan rate under the current Freedom to Farm legislation is $5.26 per bushel and "loan deficiency payments" will supplement cash market sales. This loan rate has been pointed to as one reason soybean acreage was up in 1999 compared to 1998 as it is relatively larger than the loan rate for corn. The same loan rate ratio is expected in 2000 indicating still large soybean acreage ahead.
 

The Future

Many market forecasters looking into the cloudy crystal ball of 2000 feel soybean acreage will increase next year. Estimates of planted acreage center around a one million acre increase to about 75.1 million acres. If that acreage comes to pass and yields are at trend levels of 38.4 bushels per acre, a crop of a whopping 2.84 BB would result. Combining this production with beginning stocks of about 460 million bushels would give a total supply of 3.3 BB.

If we assume that off take would be near current levels, and there is no indication of any likely significant increase, disappearance would be about 2.7 BB. That would leave ending stocks at a record level of over 600 million bushels or 23 percent of use. That would put heavy pressure on the cash market with price likely testing the $4.00 level during the growing season. Season average prices would likely be closer to $4.50. But, remember the loan program will provide an income safety net so budgeting at the loan rate does make soybeans much more attractive than by just looking at the cash market price.

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The trend in the Georgia dairy industry is similar to other parts of Georgia agriculture - fewer producers are producing more milk and increasing the economic impact of the industry. Today, 412 dairy farmers will produce about one percent more milk than in 1998. Estimated production for the year will exceed 166.9 million gallons with a farm gate value of almost $23 million. The total economic contribution of the dairy industry to the state's economy is over $75 million.

The future of the industry is bright. A growing population and declining milk production in surrounding states foretell a continued increasing market for Georgia milk. At the same time low feed costs and generally favorable milk prices should mean a further increase in milk production in 2000.

Milk production in the state is growing in south Georgia. The availability of low-priced land, a plentiful water supply, little population pressure, and a close proximity to the high valued Florida market should indicate continued growth.
 

Policy Issues

There are a number of policy issues which are causing uncertainty in dairy industry. Federal milk marketing order reform has been delayed and is now in the hands of Congress and the courts. While the probability of a favorable outcome for Georgia farmers is good, the future form of the order system is far from certain. Legislation authorizing Georgia to join a Southern Dairy Compact was passed during the last session of the General Assembly and is now before Congress. There is strong opposition to Compacts from processors and others and the chance of success in this area is much less. The impact on milk prices from order reform or Compacts will not be seen until late 2000 at the very earliest.

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* = Five year average price
** = Price Estimater for 1999
*** Subject to Federal Order Reform

AEC - 11/99