Keith Good: Ag Equipment, Supply Companies May Feel Pinch in 2015

    Economic Matters

    Jesse Newman and Bob Tita reported in today’s Wall Street Journal that, “Many U.S. farmers are expected to tighten their belts further in 2015 as they contend with another year of lower grain and soybean prices–economizing that could pinch the companies that sell them equipment and supplies.

    “Fall 2014 brought the U.S.’s second straight bumper harvest of major crops. While prices have rebounded in recent months from their lows, they are still projected to remain depressed through this year, with futures prices for corn staying below $4 a bushel, and soybean prices drifting lower to $9 a bushel, according to agricultural lender Rabobank.”

    The Journal writers noted that, “Austerity in the farm economy comes on the heels of a commodity-price boom that helped fuel prosperity across the U.S. Midwest through 2013, driving farm incomes and land values to record highs–and fueling the North America farm-machinery market’s biggest and longest rally in memory.

    “‘There are a lot of adjustments to come in the entire agricultural sector,’ said Chris Hurt, professor of agricultural economics at Purdue University in Indiana.

    “He said farmers likely will curb spending on farm equipment, making do with tractors and combines they already own and squeezing profits for manufacturers such as Deere & Co [related article]. Demand for farm supplies like fertilizer and seeds also could slow, which would hurt companies like Monsanto Co.”

    Marcia Zarley Taylor reported yesterday at the DTN Minding Ag’s Business blog that, “In agriculture, worry about breakevens prior to planting tends to be the norm. In the last 100 years, U.S. agriculture experienced only four periods of ‘flush’ profit margins-World War I, 1946, 1973-1978 and 2006-2012, economists at Purdue’s Center for Commercial Agriculture say. More recently, losses were forecast 15 out of the last 25 years from 1991 to 2015, prior to planting, economist Brent Gloy and Purdue University colleagues write in a recent essay.

    Ms. Taylor pointed out that, “What’s different about the current outlook is the magnitude of the potential 2015 wreck is the biggest in that quarter century, the Purdue economists add. By their early 2015 budget calculations average-quality Indiana farmland is projecting a loss ranging from $156 to $317 per acre. ‘The declines in commodity prices have not been met with subsequent reductions in costs, creating the potential for a very serious margin squeeze,’ they write.

    “That jibes with Farm Credit System lenders in the upper Midwest who are prepping for losses $150/acre on corn and $70 to $80/acre on soybeans with normal yields. What’s more, they want borrowers to consider what several back-to-back disasters might do to their creditworthiness and to take pre-emptive action now.

    “Studying cycles shows that ‘the better times have been a lot shorter than the downsides,’ said Purdue Economist Chris Hurt in a recent webinar. Typically that’s seven to 10 ‘fat’ years, sometimes followed by 20 lean years.”

    In livestock related news, Reuters writer Tom Polansek reported yesterday that, “U.S. researchers have identified a new strain of a hog disease that has wiped out millions of baby pigs, a sign the virus will keep mutating as producers work to contain it.

    “A third strain of Porcine Epidemic Diarrhea virus, or PEDv, was detected in a Minnesota hog herd and found to be at least as virulent as an original strain that emerged in the United States in early 2013, said Douglas Marthaler, assistant professor of veterinary population medicine at the University of Minnesota, on Monday.”

    Mr. Polansek noted that, “Marthaler, who reported on the strain last month in a journal from the U.S. Centers for Disease Control and Prevention, believes the strain is a mutation of the original. A second, less-virulent strain had previously been identified.

    “The original strain may have mutated in response to increased immunity in herds, Marthaler said. It is also the nature of viruses like PEDv to evolve as they replicate.

    “‘The virus is always changing,’ Marthaler said.”

    Purdue agricultural economist Chris Hurt indicated yesterday at the farmdocDaily blog (“More Pork Is on the Way“) that, “Pork producers are gearing up to provide their customers with what they want and that is ‘More Pork’ and ‘More Bacon.’ The nation’s hog producers have expanded the breeding herd by four percent and have already farrowed three percent more sows this past fall. The larger number of young pigs will begin to move pork production above year-previous levels in early 2015 and could reach seven percent higher by the end of 2015. Annual production may average five percent higher. This major increase comes after a series of years of smaller pork supplies dating back to 2007 when feed prices began to escalate and most recently due to large baby pig death losses in 2014 due to PED.”

    Dr. Hurt also noted that, “The theme for pork producers in 2015 will be to strive to gain control over PED death losses and to continue to expand the breeding herd. It is likely the breeding herd will continue to expand another two to four percent over the course of 2015.

    “Producers may express some disappointment that the extraordinary profits of 2014 will not continue, but they also realize that 2014 was the aberration year that may only happen once in a lifetime. Most will be happy to accept 2014 and 2015 as the best two consecutive profit years in modern hog production.”

    Also, Spencer Chase reported yesterday at Agri-Pulse Online that, “The Humane Society of the United States (HSUS) claims an undercover investigation at a Minnesota poultry processing facility shows inhumane treatment of chickens.”

    Trade Issues

    DTN Ag Policy Editor Chris Clayton reported yesterday that, “Agriculture Secretary Tom Vilsack sees trade negotiations taking up a bigger chunk of his time in 2015, particularly now that the farm bill is deep into implementation by USDA staff.

    “In a year-end interview with DTN, the agriculture secretary said he believes he and other Obama administration officials will be working to complete the 12-country Asian trade deal called the Trans Pacific Partnership. The secretary seemed confident a deal could soon be struck.

    “‘The hope is the Trans Pacific Partnership negotiations conclude soon in the new year so that we can go about the business of articulating the need for Trade Promotion Authority for the president,’ Vilsack said.”

    The DTN article indicated that, “U.S. Trade Ambassador Michael Froman and his team continue to negotiate, but there remain looming questions over whether the White House can get fast-track promotion authority from Congress. Republicans who are taking over both chambers of Congress this week have advocated for fast-track, also known as Trade Promotion Authority. Trade advocates see the opportunity in 2015 to strike the biggest trade deal since NAFTA two decades ago despite the lack of trust between President Barack Obama and GOP leaders.

    “‘I’m confident with a high-standards agreement with expanded market access that people will see the need for Trade Promotion Authority,’ Vilsack said. ‘That’s basically the key and hopefully we’re going to see that shortly after the beginning of the year.’

    “Vilsack noted that a ‘high standards’ agreement would open up significant opportunities for agriculture. So trade will be a focus in 2015 ‘and very much a focus in terms of my time,’ he said.”

    Mr. Clayton added that, “A major sticking point in the trade talks for agriculture has been reluctance by Japan to further open up its agricultural markets. Last summer several U.S. groups signed a letter calling on the Obama administration to drop Japan from the trade talks unless Japan puts a better deal on the table that lifts barriers for pork, rice, wheat and dairy products. Little has changed since then.”

    Also yesterday, Vicki Needham reported at The Hill Online that, “President Obama and Mexican President Enrique Pena Nieto will meet Tuesday to discuss concluding trade negotiations early this year on a massive agreement that spans from Latin America to Asia.

    “Obama and Nieto, who will meet at the White House, are expected to discuss the dynamics of finishing the long-awaited Trans-Pacific Partnership (TPP) deal, which is in the final phase of talks.

    “‘We think that there’s a chance to get this done in the relatively near future,’ a senior administration official said Monday on a conference call with reporters.”

    And Justin Sink reported yesterday at The Hill Online that, “President Obama hopes to recruit Mexican President Enrique Peña Nieto to help pressure the Cuban Castro regime to undertake reform efforts during talks this week at the White House, a senior administration official said Monday.”

    The article noted that, “‘The leaders will discuss our new approach to Cuba, which will create opportunities or us to work together with key partners like Mexico to encourage positive change in Cuba and reinforce democratic principles,’ a senior administration official said.”

    Meanwhile, Vincent Boland reported yesterday at The Financial Times Online that, “The European Commission is pressing the US to allow all EU countries to resume exporting beef to the American market after Ireland regained access following the lifting of a ban imposed during the BSE or ‘mad cow disease‘ crisis more than 15 years ago.

    “The Irish agriculture ministry said on Monday it had secured access for Irish beef to the US market after two years of intensive contacts and inspections of Irish production facilities by the US authorities.

    “Ireland is the first EU country to re-enter the market following the formal lifting of the US ban on European beef imports in March last year. It joins countries such as Canada, Australia and Mexico, which already export beef into the US market, the world’s biggest.”

    The FT article pointed out that, “The US ban on European beef has been a key issue in ongoing EU-US trade negotiations, as the industry on both sides of the Atlantic seeks to defend the protections against BSE that are now in place. It is expected to remain an area of disagreement until the US widens access to its market to include all EU countries.”

    Also with respect to the EU, Tommy Stubbington reported in today’s Wall Street Journal that, “The euro tumbled to a nine-year low against the highflying dollar Monday, struck by nerves over Greek politics and steadily building expectations that the European Central Bank will soon beef up its stimulus program.”

    Mr. Stubbington indicated that, “The euro’s drop won’t be entirely unwelcome: ECB chief Mario Draghi has previously highlighted the strength of the euro as a drag on inflation, which is far below the central bank’s target. A weaker currency could also provide a much-needed boost to the region’s economy by making its exports cheaper to overseas buyers.”

    “The dollar rose to its strongest level in 11 years against major currencies last week, as investors globally bet on a recovery in the U.S. economy,” the Journal article said.

    Policy Issues

    Yesterday, USDA’s Economic Research Service released a paper titled, “Options for Improving Conservation Programs: Insights from Auction Theory and Economic Experiments;” the abstract of the paper indicated that:

    “The U.S. Department of Agriculture spendsover $5 billion per year on conservation programs, mostly on voluntary programs that give financial assistance to farmers and landowners to provide environmental services (such as implementing nutrient management programs or planting native grasses). Since most programs cannot fund all interested parties, program managers must use some mechanism to select applicants. One option is to elicit offers through an auction. This report addresses the use of auctions in conservation programs. It considers how information in the hands of Government officials and rural landowners affects the auction’s performance, and how auction design can reduce Government expenditures or encourage landowners to provide greater environmental services. Results of laboratory experiments are discussed, highlighting shortcomings of common features of conservation program auctions (such as limits on the rent landowners may request), as well as how alternative auction designs can improve performance.”

    More generally, Jake Sherman and Burgess Everett reported this week at Politico that, “A number of complicated — and hidden — legislative fights are spread throughout the year, which could give House and Senate leadership nearly monthly headaches as they seek to preserve the improving economic climate in the U.S. The legislative land mines range from tricky transportation issues to funding controversial slices of the government, to updating a pricey Medicare program and, of course, the ever-explosive debt ceiling.

    “The lineup of these so-called cliffs could complicate the GOP’s desire for scoring a big accomplishment before the onset of presidential primary season. Furthermore, it could stoke intraparty confrontation and force Republicans into cooperation with the White House. These problems can’t be ignored, and GOP leadership will have to decide if it wants to set up short-term solutions or negotiate permanent fixes to these long-lingering problems. These deals don’t come together quickly and could require leaders to spend their hard-earned political capital on brokering compromises.”

    Political Notes

    Kyle Cheney reported yesterday at Politico that, “New York GOP Rep. Chris Gibson will not seek a fourth term in 2016, two GOP sources confirmed to POLITICO.

    “Gibson’s retirement, first reported by Roll Call, opens up a Republican-held, Upstate seat won twice by President Barack Obama.”

    Rep. Gibson is a member of the House Agriculture Committee.

    David Shepardson reported yesterday at The Detroit News Online that, “[Sen. Debbie Stabenow (D., Mich.)] becomes the senior senator through the retirement of Sen. Carl Levin, D-Detroit. But even as she moves up, Stabenow moves down the pecking order because of forces beyond her control. When Republicans officially assume control of the Senate on Tuesday, Stabenow, in office for 14 years, automatically loses her chairmanship of the Senate Agriculture Committee to a Republican. She will however, remain the top-ranking Democrat on the committee, which oversees farm policy, and retain her position on the Finance, Budget and Energy committees.

    “Stabenow, who ousted Republican Sen. Spencer Abraham in 2000, plans to seek re-election in four years and says she has no interest in running for governor in 2018.”

    The article added that, “The Agriculture Committee will continue to be pivotal in the coming session, because Congress will take up a reauthorization of child nutrition programs that expire Sept. 30. That includes the federal school lunch and breakfast programs as well as summer food offerings and nutrition for women, infants and children.

    “Stabenow casts child nutrition programs as critical to national security.

    “‘When 70 percent of the 18- to 24-year-olds cannot sign up for military service because they are too obese today, it is shocking,’ Stabenow said. A group of 450 generals is working with her and others to maintain health standards in the nutrition bill.”

    Mr. Shepardson also noted that, “Stabenow said that when Sen. Thad Cochran, R-Mississippi, became the ranking member of the Agriculture Committee, she bonded with him over their mutual love of the piano. Cochran has a baby grand piano in his office. ‘I sat down and played, and then we played together,’ she said.

    “Later, during marathon sessions to reach agreement on the five-year farm bill, Stabenow said: ‘Whenever things were getting tough on the farm bill, I said ‘Let’s go play the piano.'”

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