Keith Good: Tumbling Corn Prices Could Trigger Farm Subsidy Payments

    Crop Watch

    With respect to Farm Bill and policy implications of the current market environment, Bloomberg writer Alan Bjerga reported on Friday that, “The U.S. government increased its forecast on Friday for a surplus of corn, raising the prospect that prices will tumble to levels that would trigger subsidy payments to farmers.”

    Mr. Bjerga explained that, “Futures sold in Chicago briefly fell under $3.83 a bushel, nearing the $3.70 support price contained in the farm bill that Congress passed this year.

    “Payouts are based on a longer-term average, so a dip will not immediately add to taxpayer costs. Still, as U.S. grains such as corn and rice head toward bigger surpluses, an era of low crop subsidies may be ending.”

    The article pointed out that, “Rice and peanut farmers probably will get payments this year, said Pat Westhoff, an agricultural economist at the University of Missouri, but corn, wheat and other crops should remain higher than the price set for triggering payouts.

    “Westhoff said export demand and requirements to add ethanol to some fuels might be enough to keep corn above target prices, assuming crops don’t become too large.”

    Beyond the potential policy implications of lower market prices for some agricultural commodities, Reuters writer Christine Stebbins reported on Friday that, “U.S. farmland values have remained strong this summer despite falling crop prices, but that could change heading into the busy annual auction season at year’s end, auctioneers say… . Grain prices, led by corn, fell to four-year lows this week on the outlook for a record harvest. This can put pressure on the price of land and squeeze bank accounts secured by it, since land is the main collateral.”

    Ms. Stebbins explained that, “But experts say sub-$4 corn will pressure farmers’ bids in land auctions this fall and lead land owners to reduce rents. More than half the 250 million acres of corn, soybean and wheat land in the United States are rented.”

    Gregory Meyer reported on Friday at The Financial Times Online that, “Soyabean markets went into freefall after a government report lifted supply estimates for the world’s most widely grown oilseed.

    “The bean is typically crushed into soya meal that is fed to livestock, and into vegetable oil, making it a key input in products including steak, baked goods and biodiesel.

    “The US Department of Agriculture raised its estimate of the global oilseed crop by 5.8m tonnes on Friday to a record 521.9m tonnes” [full report here, summary of U.S. supply and demand variables for soybeans here].

    The FT article added that, “Thanks to a huge expected harvest in the US this year, the department also increased forecasts of next year’s domestic soyabean stocks by 90m bushels to 415m bushels. The US is the world’s top producer of soyabeans.”

    “US farmers are likely to harvest soyabeans on a record 84.1m acres this year after they planted widely in response to high prices. Favourable temperatures and ample rains have left 72 per cent of US plantings rated good or excellent,” Friday’s article said.

    Tony C. Dreibus and Andrea Gallo reported in Saturday’s Wall Street Journal that, “Prices for soybeans, corn and wheat fell sharply on Friday after the U.S. Agriculture Department projected bigger-than-expected harvests and stockpiles this year, extending months of market bearishness for three of the biggest U.S. crops by value.

    “Soybean futures dropped about 3%, wheat fell by more than 4%, and corn prices slid to the lowest level in nearly four years as the USDA, in its closely watched monthly World Agricultural Supply and Demand Estimates report, said favorable weather is expected to lead to big jumps in crop production this year, outpacing demand.”

    The Journal article added that, “The USDA did trim its estimate for corn production, saying growers will harvest 13.86 billion bushels of the grain this year, below its previous forecast of 13.935 billion bushels, which analysts expected to be unchanged, as farmers planted less corn than previously expected” [summary of U.S. supply and demand variables for corn here].

    The Journal writers noted that, “The USDA also said U.S. wheat production will top forecasts, leading it to project world wheat inventories of 189.54 million metric tons by the end of the 2014-15 season, up from a forecast of 188.61 million tons made last month. It expects strong spring wheat crops to more than offset a poor harvest of U.S. winter wheat, which suffered from bad weather.”

    More broadly, Saturday’s article explained that, “Corn and other crop prices already had fallen sharply in the past two years, weakening years of economic prosperity in farm country. Wet weather this growing season has improved soil moisture in the Midwest and Plains. At least four times the normal amount of rain has fallen in the past 30 days in parts of Iowa and Illinois, the biggest growers of corn and soybeans, according to the National Weather Service” [see also this graph of U.S. June precipitation levels from Friday’s USDA Crop Production report].

    Reuters writer Tom Polansek reported on Saturday that, “Prices are expected to weaken further due to favourable growing conditions. Updated weather models look ‘near perfect’ across the U.S. Corn Belt during the key pollination stage of development for corn, said Karl Setzer, grain solutions team leader for MaxYield Cooperative in Iowa.”

    And in a global context, Reuters writer Isla Binnie reported on Friday that, “World food output is on track to meet the needs of a growing population after a decade punctuated by supply concerns, the OECD and U.N. food agency (FAO) said on Friday.

    “Global agricultural production and consumption will rise in the next 10 years, as people in emerging countries become wealthier and eat more protein, but the increases will be slower than in the previous decade, the agencies said.

    “Surplus stocks and rising production should keep commodity prices stable after the ‘roller coaster’ of the last decade marked by a record high in 2008 and global recession in 2009.”

    In addition, Neil Hume reported on Friday at The Financial Times Online that, “Over the next decade the FAO and OECD expect global meat consumption to increase 1.6 per cent a year, resulting in more than 58m tonnes of additional meat being consumed by 2023 and poultry overtaking pork to become the most popular meat product.

    “The report says the change in dietary preferences leads to a shift towards greater production of coarse grains and oilseeds, which can be used to feed livestock, away from staple food crops such as wheat and rice.”

    The FT article added that, “‘Crop prices are expected to drop for one or two more years, before stabilising at levels that remain above the pre-2008 period but significantly below recent peaks,’ the report said. ‘Meat, dairy and fish prices are expected to rise. In real terms, however, prices for both crops and animal products are projected to decline over the medium term.'”

    With respect to transportation issues, Bloomberg writer Jeff Wilson reported on Friday that, “Grain shipper Keith Brandt in North Dakota is worried he’s about to run out of storage space just as rains in the U.S. improve the outlook for a soybean crop that’s already forecast to reach a record.

    “Rail delays of more than three months mean he’s still struggling to haul supplies from last season, while farmers across the nation have almost finished planting what the government estimates is an all-time high of 84.8 million acres.”

    Reuters writer Karl Plume reported on Friday that, “An upcoming river lock repair project in south Chicago has attracted the attention of exchange operator CME Group because the lock’s closure could disrupt deliveries against its Chicago Board of Trade grain and soybean futures contracts.”

    Also, Ben Leubsdorf and Jon Hilsenrath indicated yesterday at The Wall Street Journal Online that, “U.S. food prices are on the rise, raising a sensitive question: When the cost of a hamburger patty soars, does it count as inflation?

    “It does to everyone who eats, especially poorer Americans, for whom food costs are a large portion of income. But central bankers often look past food-price increases that appear temporary or isolated while trying to control broad and long-term inflation trends, not blips that might soon reverse.

    “The Federal Reserve faces an especially important challenge now as it mulls the long-standing dilemma of what to make of the price of a pork chop. As Fed officials debate when to start raising short-term interest rates to prevent the economy from overheating and causing inflation, Fed Chairwoman Janet Yellen has signaled she wants to take her time.”

    (Note that The New York Times indicated yesterday that, “Janet L. Yellen, the Federal Reserve chairwoman, will field questions from a Senate committee on Tuesday and a House committee on Wednesday. The formal purpose is the presentation of the Fed’s biannual report on monetary policy, but questions about fiscal policy and financial regulation are likely, too.”)

    Policy Issues

    Ohio State University agricultural economist Carl Zulauf, and Nick Paulson, Jonathan Coppess, Gary Schnitkey and Todd Kuethe from the University of Illinois, indicated on Friday at the farmdocDaily blog (“2014 Farm Bill Decisions: Payment Yield Update Option“) that, “The 2014 farm bill provides the owner of a Farm Service Agency (FSA) farm with a one-time option to update the farm’s payment yield for covered crops.  This article will discuss this decision.  It concludes by recommending that all producers consider updating yields if updated yields are higher than current yields; however, updated yields may be surprisingly low.   For a broader policy discussion of the payment yield update option, see the April 3, 2014 farmdoc article by Nick Paulson, Jonathan Coppess and Todd Kuethe titled ‘2014 Farm Bill: Updating Payment Yields,’ available here.”

    Also, USDA’s Economic Research Service (ERS) indicated on Friday that, “Producers of corn, soybeans, and wheat–the three largest crops produced in the United States–are the largest consumers of Federal crop insurance, although producers of other crops are a growing share of program enrollment [related graph]. In 1997, corn, soybeans, and wheat crops accounted for 80 percent of all acres enrolled in the program; including cotton and sorghum raised the share to nearly 90 percent of all acres enrolled. Over the last 15 years, with new types of policies being offered and more crops added to the program, the share of enrolled acres attributed to these major crops fell as participation in the Federal crop insurance program continued to rise. Pasture, forage and range land have accounted for the bulk of recent gains in enrolled acres, expanding from zero in 1997 to 48 million acres in 2012. By 2012, corn, soybeans, and wheat made up roughly 68 percent of all acres enrolled, with cotton and sorghum accounting for an additional 7 percent.”

    And Mississippi State University agricultural economists Alba J. Collart and Keith Coble indicated in a recent article at Choices Online (“Highlights of the Agricultural Act of 2014 for Specialty Crops“) that, “The share of federal spending in the U.S. specialty crop industry has been small compared with support available for commodity crops. However, specialty crops gained considerable support in the Agricultural Act of 2014, also referred to as the 2014 farm bill. The bill increased funding levels for specialty crops by 55% to about $4 billion over ten years (United Fresh Produce Association, 2014). Most programs to solve critical needs of the specialty crop industry have been reauthorized and their funding levels have either increased or remained unchanged. Some of the existing programs were expanded and new programs were created.”

    Recall that the House Agriculture Committee’s Subcommittee on General Farm Commodities and Risk Management held a hearing last week on Farm Bill implementation (details here, at FarmPolicy Online); a Politico article on Friday noted that, “[C]riticism was directed at USDA’s decision to push back implementation of the actual production history, or APH, a change that would reduce crop insurance premiums for many struggling farmers

    “Reps. Frank Lucas (R-Okla.), Mike Conaway (R-Texas), Randy Neugebauer (R-Texas) and others called on USDA to implement it in time to help farmers afford to plant their crops for the 2015 harvest, but USDA Farm and Foreign Agriculture Under Secretary Michael Scuse said that won’t be possible. It’s an overly complex provision and USDA will not be able to put in place until the fall of 2015 for 2016 crops, he said.”

    In other developments, Ellyn Ferguson reported on Friday at Roll Call Online that, “Nutrition standards for school lunches have turned into one of the most contentious issues in this year’s appropriations debate.

    “The lunch standards helped prompt House leaders to abruptly pull the Agriculture spending bill from the House floor last month, and they are shaping up as a potentially big vote in the Senate too.

    “Republicans in the House and Senate want to use the fiscal 2015 Agriculture spending bill to delay — or allow waivers from — rules aimed at putting more fruits, vegetables and whole grains on school menus and reducing sodium, sugar and fat.”

    Cristina Marcos reported late last week at The Hill Online that, “The House late Thursday evening passed its sixth fiscal 2015 appropriations bill, to fund the Department of Energy and the Army Corps of Engineers.

    “Passage of the $34 billion measure, 253-170, marks the halfway point in the House’s consideration of fiscal 2015 appropriations.

    “Meanwhile, the Senate has not passed any appropriations bills for the fiscal year starting Oct. 1 due to a disagreement over amendments. A stopgap funding measure, also known as a continuing resolution, appears likely to keep the government running and avoid a shutdown through the midterm elections.”

    The House schedule for today stated that: “Begin Consideration of H.R. 5016-­‐ Financial Services and General Government Appropriations Act, 2015 (Modified Open Rule) (Sponsored by Rep. Ander Crenshaw / Appropriations Committee)”

    And the schedule for the week did not mention the Ag Appropriations measure.

    In other news, Kimberly Kindy reported on Friday at The Washington Post Online that, “A member of Congress and several food and worker safety groups are calling for the USDA to publicly release a copy of a proposed rule that would dramatically change how chickens and turkeys are inspected in U.S. slaughterhouses.

    “The draft version of the final rule — which has been in the making for more than two years — was sent to the White House’s Office of Management and Budget (OMB) on Thursday for review, but the U.S. Department of Agriculture will not release a copy to the public.

    “USDA officials said in a prepared statement that it has taken into account concerns raised by a variety of groups, but that it will not discuss publicly how the rule may have been altered.”

    In tax related issues, a news release Friday from the National Cattlemen’s Beef Association (NCBA) noted in part that, “Today, the U.S. House of Representatives voted 258 to 160 to pass H.R. 4718, legislation that will make permanent the fifty percent bonus depreciation of new capital purchases that was created in the American Taxpayer Relief Act of 2012. This bill addresses a section of the tax code that expired at the end of 2013 and is one of the provisions that has traditionally been addressed in tax extenders packages. It was also considered as part of the tax reform proposals in the House and Senate.

    “‘NCBA strongly supports the permanent extension of fifty percent bonus depreciation because it will help provide farmers and ranchers with predictable pro-growth tax code that allows us to make long-term investments in our businesses,’ said Bob McCan, NCBA president and Victoria, Texas, cattleman.”

    However, in statement of administration policy, the executive branch noted late last week that, “The Administration strongly opposes House passage of H.R. 4718, which would permanently extend ‘bonus depreciation’ rules that allow corporations to speed up deductions for certain investments and thereby delay tax payments.”


    In regulatory developments, the AP reported last week that, “Kansas will develop a program for breeding lesser prairie chickens in hopes of getting the federal government to back off its listing of the bird as a threatened species, Gov. Sam Brownback announced Thursday.”

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