Bright outlook for the new year.

Crop yields in 2004 were phenomenal. Producers in almost all parts of the country harvested record crops of corn, soybeans and cotton, and net cash farm income soared to new highs.

The combination of large crops, modest gains in production costs and rising government payments all contributed to the positive economic returns. This good income for farmers puts a positive spin on the outlook for almost all other sectors of the agriculture industry.

OUTLOOK FOR CORN

The corn yield in 2004 soared far above the previous record level, settling at a national average of more than 160 bushels per acre. Even with prices declining through most of the year, total net returns per acre from corn production were high.

Even though corn prices have declined sharply compared to last spring, we are not expecting farmers to cut corn acreage in 2005. Net returns to corn remain very high; corn yields are rising at a much faster rate than those for other crops; new biotech varieties and improved seed treatments make growing continuous corn more practical; and concerns about Asian rust may discourage some farmers from planting soybeans.

There is a very good story to tell about corn demand. Total domestic and export use this year is expected to reach about 10.9 billion bushels. Exports and feed use are both projected to be up, and exports are also on the rise.

The solid gains in demand may well continue. Ethanol production is continuing to rise, and more ethanol plants are under construction. Congress may finally pass an energy bill that includes the Renewable Fuels Standard, which will require even more ethanol production and use. Solid gains in exports also seem likely, with China backing away from selling corn to other countries and probably becoming a net importer itself.

With corn stocks at the end of 2004-05 projected to be near 1.8 billion bushels, it will be a struggle for corn prices to stage a very sizable recovery. It will take weather problems next season for prices to get much above the loan rate, and if growing conditions in 2005 are anything like they were in 2004, corn prices will fall even further.

Even so, the safety net provided by the farm program will largely protect farm income. Already, farmers are collecting loan deficiency payments, direct payments and counter-cyclical payments, which may play an important role in farm income in 2005 and beyond.

OUTLOOK FOR SOYBEANS

Recent developments may have shifted the outlook for the soybean market. Yields came in strong in 2004, with records in many parts of the country. Great prices in the spring encouraged farmers to boost soybean acreage. While prices had declined to near the loan rate by harvest time, farmers had plenty of opportunities to take advantage of the price strength over the summer.

The small 2003 crop triggered good prices in 2004. Bad weather pushed 2003 yields down to near 1993 levels, and prices had to rise to ration the limited supplies. The price rise was given another boost when soybean crops in Brazil and Argentina were hurt by adverse weather and widespread disease problems. The combination sent U.S. soybean prices up to the $10 mark early in 2004. However, the huge 2004 soybean crop has put a different spin on the market, with stocks nearly tripling and prices moving below the loan rate of $5 per bushel.

With U.S. soybeans facing strong competition from South America, soybean acreage was expected to stagnate near 2004 levels.

But late in the season, the discovery of Asian rust in several states across the South threw a wrench into the outlook. Concerned about the possible impact that Asian rust can have on soybean yields and on per-acre pesticide costs, at least some producers will cut back on soybean acreage in 2005. The impact will be felt mostly in the Southern states stretching from Louisiana through the Carolinas, but some downward adjustment in acreage is also expected for the Corn Belt states.

OUTLOOK FOR COTTON

As was the case with corn and soybeans, U.S. cotton yields soared to new record levels in 2004, leading to a big buildup in stocks. The cotton market feels the pinch from both sides, with production up more than 4 million bales and demand down by almost 2 million.

As a result, cotton stocks went from a fairly snug 3.5 million bales at the end of 2003-04 to an excessive level of 7.5 million by the end of 2004-05. With this change in fundamentals, cotton prices plunged to near 40 cents per pound compared to 70 cents per pound at the beginning of 2004.

Domestic cotton use has been declining for years as imports of finished goods have taken a larger share of the market. With that backdrop, exports are critical. Exports have been hurt by a recovery in production in China, and longer term there is the chance that the United States will lose some of the policies that help keep U.S. cotton competitive in world markets. If the recent WTO ruling is upheld, Congress may have to end or at least modify the Step 2 program and possibly the GSM credit guarantees. That could hurt U.S. cotton exports in future years.

With prices down sharply from last year, some decline in cotton acreage had been expected for 2005. However, the discovery of Asian rust will probably push some farmers to plant more cotton in place of soybeans. The result could be a year over year increase in cotton acreage, even though supplies are already excessive. Another good yield in 2005 could hold the cotton market down for the foreseeable future.

FARM POLICY AND INTEREST RATES

Farm programs are set in the 2002 Farm Bill, and no significant changes are expected for 2005 or 2006.

The Federal Open Market Committee has been pushing interest rates higher since the Fed funds rate hit a bottom of 1.0 percent at the end of 2003. With respect to some offsetting factors, this will probably continue through the new year as well.

Overall, interest rates are expected to continue to rise in 2005, but no huge jump is expected. Best guess right now is that rates will increase by 1.5 to 2.0 points and the Fed Funds rate will end the year at about 4.25 to 4.50 percent. This will push the prime rate from its current rate of 5.25 percent to 6.75 to 7.25 percent.

TOP EVENTS IN 2004 AGRICULTURE

Courtesy of the Doane economists, here's a look at the events and developments in 2004 that have important implications for the agriculture industry.

10. Beef Trade With Japan. All year U.S. and Japanese officials discussed ways to end the beef trade stalemate. USDA confidently predicted trade would resume by the end of summer, but as 2005 begins there is no end in sight. Even with the problems, average U.S. cattle prices were record high in 2004, and most producers had another profitable year.

9. High Energy Prices. Energy prices made the list in 2003, but prices roared even higher this year. The high prices boosted production expenses by about $2 billion in 2004, pushing up fertilizer, energy and irrigation costs.

8. Ethanol Production, High energy prices have contributed to the strong growth in ethanol production. U.S. ethanol production has doubled since 2001, and further growth seems assured. Congress still hasn't passed the Renewable Fuels Standard, but the combination of current incentives, states phasing out MTBE use and strong energy prices continue to encourage investors to build production facilities.

7. WTO Rulings, Rulings by the World Trade Organization that some U.S. cotton subsidies are illegal and should be changed immediately could have far-reaching policy implications. The U.S. has appealed the ruling, and a final determination is expected by spring. The U.S. may have to change the export credit guarantee programs and eliminate restrictions on planting fruit and vegetable crops on program acreage. That could trigger requests for income support for fruit and vegetable producers at a time when ag spending is already being cut.

6. World Grain Crop. World grain production soared to record levels in 2004, with most growing areas of the world enjoying big crops. World production reached 2 billion tonnes this year, besting the 1997 record by 121 million tonnes. Even with the huge crops, world grain production exceeded consumption by only 18 million tonnes.

5. Crop Price Volatility. Crop prices covered a broad range during 2004, especially for soybean prices. Prices hit a high of near $10.50 per bushel last spring and declined to less than $5 by harvest. U.S. farmers harvested a poor crop in 2003, with adverse weather pushing yields to the lowest level in a decade. This buoyed prices, but serious problems with the South American soybean crop caused prices to explode. The U.S. crop was about 9 million tonnes under expected levels, with a similar shortfall in Brazil and Argentina. As the potential for a huge U.S. crop emerged during this year, soybean prices have been under serious pressure. The market is counting on a rebound in South America, and yield or rust problems could provide some price action in spring as well.

4. Increased Hog Demand. Hog demand was amazing in 2004. Production was up about 3.5 percent for the year, while prices increased about 35 percent. Recently, the disconnect has been even greater, with a 50 percent increase in prices and production barely changing from the same period in 2003.

3. Record Net Farm Income. This year, net farm incomes continued to soar. Good prices and huge crops boosted crop cash receipts, falling prices triggered higher government payments, and livestock cash receipts soared with high prices in most sectors. Net cash farm income averaged $57 billion from 1997 through 2001, was near $68 billion in 2003, and is projected to be above $75 billion in 2004.

2. Asian Soybean Rust. This disease had very little impact on ag in 2004 but has the potential to be a big factor in the future. The migration of Asian rust to the United States. has long been expected, but its discovery in Louisiana this past fall of 2004 and the subsequent outbreaks in several other states set off alarm bells throughout agriculture. All information suggests that Asian rust will be an important factor for U.S. agriculture not just this year but for the extended future.

1. Record Crop Yields. Crop yields in almost all regions of the country were higher than expected. The national average corn yield exceeded trend by about 12 percent, and the national average cotton yield was more than 20 percent above trend. Huge yields for these crops make the new record for soybean yields look paltry by comparison. Most wheat producers didn't get to take part in the production bonanza, but this was a very good year for producers of the other crops. The huge crops played an important role in the big leap in net cash farm income for 2004.