Indiana's agricultural outlook for 2012.

Corinne Alexander: Assistant Professor, Department of Agricultural Economics, Purdue University, West Lafayette

The outlook for Indiana agriculture in 2012 is bright because corn and soybean prices are projected to set a new record, following record prices in 2011. The one concern is that Indiana was negatively impacted by the wet spring and dry summer, so many farmers have a smaller crop to sell and cannot fully benefit from these high prices.

The upward trend in grain prices started in August 2010 due to the Russian drought and is further supported by the smaller than expected U.S. corn crop, record world sugar prices and the low world grain inventorMicahies. These high prices mean that crop producers can expect above average incomes in 2012 even as they raise concerns about higher input costs for the 2012-2013 crop.

Meanwhile, these higher crop prices will cut into profit margins for the livestock sector that had just returned to profitability in 2010 after suffering major losses since feed costs started escalating in 2007. The silver lining for the livestock sector is that these higher feed costs will likely limit expansion of livestock herds, maintaining higher livestock prices and passing these higher feed costs onto consumers.

The pork industry has responded to the uncertainty over feed prices by modestly increasing the size of the breeding herd by 0.6 percent. The USDA expects pork exports to increase 2.8 percent in 2012. As a result, pork producers should return to profitability in 2012 as long as feed costs remain at current levels, i.e., the price of corn remains below $7 per bushel. If there is a return to normal corn yields in 2012, feed costs could moderate further and pork producers would be in a position to expand production.

The dairy industry is facing higher feed costs for grains and forages, as well as lower milk prices, in 2012. At the same time, milk production is forecasted to increase largely due to increased output per cow. As a result, the dairy industry has tipped back into a period of losses and the USDA currently forecasts the dairy herd will contract slightly in terms of the number of dairy cows in 2012, though overall milk production may continue to increase with additional output per cow. Dairy farms that produce their own feed and forage may be in the best position to survive this period of volatile feed costs.

Of all the livestock sectors, the beef industry is the best positioned to weather the higher feed...