Keith Good Farm Policy: Farm Belt a Bright Spot in U.S. Economy
Farm Bill Issues
As action from the full Senate and the House Agriculture Committee on the new farm bill is forestalled, a couple of interesting opinion-based items were published over the weekend.
Long time columnist Robert J. Samuelson indicated yesterday that, “Sitting in the cab of a $350,000 John Deere tractor pulling a $150,000 Deere corn planter, Greg Carson embodies modern American agriculture. It’s capital-intensive, high-tech, efficient — and now immensely profitable. Looking for a bright spot in the U.S. economy? The farm belt is it.
“Driven by high grain and soybean prices, farmers’ cash income hit a record $109 billion in 2011. Land values have followed high crop prices. Since 2006, an average acre of Iowa farmland has doubled. Last year, the increase was 33 percent, to $6,708, reports Michael Duffy of Iowa State University. And farms sustain factories. Iowa’s unemployment rate is now 5.2 percent compared with 8.1 percent nationally.”
While noting that, “With less debt, farmers are less vulnerable to repayment problems,” yesterday’s column added that, “Price increases in the 1970s reflected general inflation. Current prices rest on sturdier pillars: for starters, corn demand for ethanol mandated to be mixed with gasoline.
“A second source of demand comes from developing countries, led by China, that are improving diets by shifting to more beef, pork, poultry and dairy products. This requires more corn and soybeans for animal feed.”
Mr. Samuelson concluded by saying: “Congress is writing a new farm bill and is struggling with how much to trim subsidies. But why should prosperous grain farmers and absentee owners receive special treatment and windfalls? The proper level of subsidies is simple: zero.”
However, with respect to high grain prices driving record income, Dan Piller reported on Saturday at The Des Moines Register Online that, “Iowa’s farmers and state economy watchers face the reality that a ‘historically rare period’ of prosperity for Iowa agriculture may be ending.
“The U.S. Department of Agriculture last week forecast a return to more normal corn surpluses of almost 2 billion bushels. The more ample supplies could drive down corn prices to as low as $4.20 per bushel by year’s end, compared with an average price of $6.20 in 2011, the USDA predicted [see related graph].”
Mr. Piller explained that, “If the forecast holds, the impact will ripple across Iowa’s economy. During the ag boom, farmers with cash to spend have bid up land prices and bought new tractors and combines. Deere & Co., seed companies and other manufacturers have added thousands of workers to meet demand.
“‘A reduction in corn prices will take away cash from the economy,’ said state banking superintendent Jim Schipper, also a farm banker in Osceola.”
The Register article noted that, “‘When you are paying $300 per acre or more for rent, along with the cost of fertilizer, seeds and diesel that we’re paying this year, you have a cost of production that is well above $5 per bushel,’ said Kevin Ross, who farms near Minden in western Iowa and is president of the Iowa Corn Growers Association.
“Other parts of Iowa’s economy would benefit from a big price drop, including ethanol manufacturers as well as livestock producers, because of lower feed costs. Consumers, in turn, could see lower meat prices.”
Meanwhile, Paul Johnson, the President of the Minnesota Association of Wheat Growers noted in a letter-to-the-editor at the Minneapolis Start Tribune on Friday that, “The Star Tribune’s May 7 editorial on crop insurance (‘Small farms lose as crop program grows’) was insulting and unfair. Crop insurance has become the risk-management tool of choice for Minnesota farmers, because it works. The program was created to ensure that the private sector would help shoulder part of agriculture’s risk.
“As recently as the late 1990s, only about 30 percent of farmers participated. Today, crop insurance covers 80 percent of eligible lands, providing more than $114 billion in coverage in 2011. Crop insurance not only prevents taxpayers from shouldering the full burden of a farm disaster, but also gets payments to farmers quickly, typically within 30 days of finishing a claim.”
“Mother Nature does not just strike small farms. A crop-insurance indemnity does not make a farmer or rancher ‘whole’ any more than a check from an insurance company replaces a house lost in a tornado,” the letter said.
Also on crop insurance, John Mages, the President of the Minnesota Corn Growers Association, indicated on Friday that, “Crop insurance is a public-private partnership, designed to ensure that when disaster strikes, the private sector – crop insurance companies – are there to help shoulder the risk and the financial burden of rebuilding. Crop insurance policies are purchased by the farmer and suited to the farmer’s needs, comfort with risk and financial situation.
“In the past, before purchasing crop insurance was the widespread and widely available option, disasters like last year’s would have triggered large, stand-alone disaster bills in Congress, aimed at trying to save as many farms as possible. Those bills would have cost taxpayers dearly, and unfortunately, would have taken months, or even several years to finally get into the hands of the farmers who need the help. Not a good situation for either party involved.
“In 2011, with 80 percent of eligible lands protected by crop insurance, private sector companies paid out in excess of$10.7 billion in payments to farmers who had purchased plans and suffered losses. Those checks were often in the hands of the farmers in 30 days or less after they completed the necessary paper work. It’s because of the effectiveness and efficiency of crop insurance that many of us are in our fields planting today instead of being forced to auction off our farms.”
With respect to dairy issues, Bill Bruins, the president of the Wisconsin Farm Bureau Federation, noted in a column late last week at the Wisconsin State Journal Online that, “Congress continues to craft the next U.S. farm bill, but the debate is basically over on an issue important to Wisconsin — the federal dairy program.
“The bipartisan Dairy Security Act, developed over three years with extensive input from farmers, ends the existing, antiquated dairy program, and replaces it with one that is both better for farmers and less costly for taxpayers. Congress should grab this win-win proposition, insert it into the dairy section of the farm bill and move on.
Pat Westhoff, the director of the Food and Agricultural Policy Research Institute at the University of Missouri, noted in a column on Saturday that, “The farm bill cleared its first hurdle last month, gaining approval from a key Senate committee. There are no guarantees that all the remaining hurdles will be cleared this year.”
Dr. Westhoff noted that, “Compared to simply extending current law, the bill would cut net federal spending by $23 billion over the next 10 years, according to estimates by the Congressional Budget Office. Spending is cut by reducing farm subsidies and making smaller changes in conservation programs and the supplemental nutrition assistance program, or SNAP, formerly known as the food stamp program.”
“The draft farm bill uses some of the savings from eliminating direct payments to create a new Agriculture Risk Coverage program. The program would pay farmers for smaller losses that are not covered by crop insurance. The proposed formulas are complex, but farmers would get a payment when per-acre revenues fall by at least 11 percent from a recent average. Farmers are expected to use the existing crop insurance program to protect themselves against losses of more than 21 percent.”
Dr. Westhoff added that, “Getting a bill out of committee is only the first step. The House still needs to put together its proposal. Under normal circumstances, there would be debates and votes on the floors of both chambers and a conference committee to work out differences. Reports suggest it is unlikely that all of those normal steps can be completed before the November elections.
“Some believe a bill could be completed during a post-election lame-duck session of Congress. The bill’s budget savings could help offset the cost of extending current tax cuts or heading off other planned spending cuts. However, enough hurdles remain that it still seems very possible that the 2012 farm bill will become the 2013 farm bill.”
In other policy news, Dina ElBoghdady reported on Saturday at The Washington Post Online that, “Next month, the Agriculture Department will begin testing raw ground beef for the ‘Big Six’ at meat plants in order to keep these pathogens off people’s plates. The decision comes four years after scientists and government experts warned of the dangers these germs pose to the nation’s food supply. Since then, the Big Six have been repeatedly tied to multi-state outbreaks and illnesses.
“Most of those illnesses were not linked to beef. They were linked to sprouts or lettuce or no source at all. The meat industry argues that it is being unfairly targeted. Only once before — with the notorious E. coli O157:H7 — have regulators banned a pathogen from fresh meat.”
The article added that, “If the Food and Drug Administration detects any pathogens in the food it oversees — vegetables, fruits, seafood and just about everything other than meat — it yanks the products. But the resource-strapped agency inspects only a fraction of its plants every year.
“By contrast, the law requires the USDA to inspect all meat plants daily.
“And the government says it is time to add the Big Six to the daily routine.”
Meanwhile, a news release on Friday from Rep. Edward Markey (D., Mass.) stated that, “Concerned that corn-based livestock feed could be linked to a sharp rise in antibiotic resistance, today [Rep. Markey and Louise Slaughter (D-N.Y.) asked the Food and Drug Administration (FDA) what the agency is doing to ensure appropriate use of antibiotics in food-animal production. The same antibiotics that are used in animal agriculture, such as penicillin and erythromycin, are also used by ethanol producers to prevent bacterial growth during the corn-based ethanol fermentation process. Producers then sell the byproduct of ethanol production as livestock and poultry feed, a use that appears to be sliding under the regulatory radar.
“In the letter sent today to FDA Commissioner Margaret Hamburg, the lawmakers ask the agency about its recent effort to reduce the use of antibiotics for animal growth promotion in food-animals, as well as what the FDA is doing to ensure that ethanol producers comply with regulations for food additives.”
A news release Friday from the National Farmers Union (NFU) indicated that, “[NFU] President Roger Johnson issued the following statement today in anticipation of the Trans-Pacific Partnership (TPP) negotiations that will take place in Dallas on Saturday:
“‘NFU supports fair trade that mutually benefits all nations involved and allows agriculture to compete on a level playing field. NFU strongly supports the Trade Reform, Accountability, Development, and Employment (TRADE) Act, which requires that all trade agreements include provisions that ensure other countries have environmental, food safety, health, and labor standards equal to or greater than those in the United States.
“‘The United States must be able to write a farm bill that provides family farmers and ranchers with an ample safety net under any trade agreement. Time and again the World Trade Organization has denied us the right to protect farmers and ranchers because of the structure of our trade agreements. It is critical for the survival of family farms and rural America that we are able to write a farm bill that helps farmers in times of need, when prices collapse and disaster strikes.’”
The “Washington Insider” section of DTN stated on Friday (link requires subscription) that, “U.S. Trade Representative Ron Kirk says more countries are inquiring about the possibility of joining ongoing talks aimed at creating a Trans-Pacific Partnership free trade agreement. They include not only Canada, Japan and Mexico, all of which have been mentioned before, but also Costa Rica, Colombia and the European Union, the latter two of which are interesting because they do not front on the Pacific Ocean.
“If the interest expressed in joining the TPP continues to grow, the trade agreement could become something like the World Trade Organization Lite in a few years. However, some trade observers say TPP likely will operate under a distinctly different set of rules governing issues not addressed by the WTO and its predecessor, the General Agreement on Tariffs and Trade. Those issues could include government trading enterprises and currency valuations.
“The nine nations currently negotiating the TPP include Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, Vietnam, and the United States. The 12th round of TPP negotiations are being held this week in Dallas.”
Aaron Back, Toko Sekiguchi and Yuka Hayashi reported yesterday at The Wall Street Journal Online that, “The leaders of China, Japan and South Korea agreed to begin free-trade negotiations this year, opening the possibility of an agreement that could rival the world’s largest free-trade zones in size, although it is likely to be far less comprehensive or rigorous.
“‘The free-trade agreement will unleash economic vitality of the region and boost economic integration,’ Chinese Premier Wen Jiabao said at a news conference with Japan’s Prime Minister Yoshihiko Noda and South Korean President Lee Myung-bak, during a summit among the nations in Beijing.
“The three countries accounted for 19.7% of global gross domestic product in 2010, compared with 27.2% for the North American Free Trade Agreement, which includes the U.S., Canada and Mexico, and 25.8% for the European Union, according to World Bank data.”
And Bloomberg writers Rebecca Christie and Brian Wingfield reported on Friday that, “The European Union and the U.S., which have the world’s largest bilateral economic relationship, are making progress on a trade accord that may be spelled out by mid-2014, EU Trade Commissioner Karel De Gucht said.
“Tariffs, services, procurement and regulatory issues top the agenda for the proposed agreement, which is taking shape this year. An interim report on the deal’s potential scope is due in June with a final document by the end of 2012, and negotiations could start soon after.”
For more information on EU agricultural trade, see this recent European Commission publication, “Agricultural trade in 2011: the EU and the world.”
In other trade developments, a news release Friday from the U.S. Trade Representative’s Office stated that, “Ambassador Ron Kirk announced today that the United States requested the World Trade Organization (‘WTO’) to establish a dispute settlement panel to decide U.S. claims regarding the Government of India’s restrictions on imports of various U.S. agricultural products, including poultry meat and chicken eggs. While India asserts that its measures are aimed at preventing entry of avian influenza, India’s measures are inconsistent with the relevant science, international guidelines, and the standards India has set for its own domestic industry.
“‘It is essential that U.S. farmers obtain the reliable market access that India agreed to,’ said Ambassador Kirk. ‘The United States holds its agriculture industry to the highest standards of safety and is confident the WTO will agree that there is no justification for India’s restrictions on U.S. exports.’”
Leslie Josephs reported yesterday at The Wall Street Journal Online that, “Sugar prices near 20-month lows have raised questions over Brazil’s future as a leader in both the sugar and ethanol industries.
“The South American nation is the largest grower of sugar cane, which can be used to make sugar or ethanol from fermented sugar-cane juice. Its cane fields are growing old, and Brazil is grappling with how to reinvigorate them amid low prices and years of neglect in the wake of the 2008 financial crisis.
“The industry is also trying to plot a course for ethanol production at a time when Brazil’s government—which determines how much ethanol is used in ethanol-gasoline blends and whose state-controlled oil company Petróleo Brasileiro SA, controls gasoline prices—is focusing attention on large offshore oil reserves.”
The Journal article noted that, “This Wednesday, sugar and ethanol producers, economists, commodity traders and analysts will mull over these issues at the sixth New York Sugar Conference, an annual event that is kicking off on a sour note with sugar prices down more than 12% this year.”
Yesterday’s article added that, “‘The government’s view on ethanol changed because they have oil resources to develop,’ said Michael McDougall, a senior vice president at brokerage Newedge, and a panelist at the sugar conference. ‘The whole ethanol [push] was started because they were importing large amounts of fuel. That expansion has now ground to a halt.’”
The ICE Dec and Mar contracts gave back 160 and 87 points on the week, respectively, as last week’s inversion between the two contracts gave way to partial carry. Well,