Jerry Hirsch reported in Sunday’s Los Angeles Times that, “Corn is a key element of the U.S. food supply. It is what dairy cows eat to make milk and hens consume to lay eggs. It fattens cattle, hogs and chickens before slaughter. It makes soda sweet. As the building block of ethanol, it is now also a major component of auto fuel.
“And that may signal trouble ahead.
“Economists are cautioning that the nation’s growing dependence on corn would make for a double jolt in the event of a drought across the Midwest: soaring prices not just for food but also for gasoline.
“Analysts now warn that a ‘corn shock’ might not be far off — and it could lead to $5 gas and $3.50 eggs as the effects reverberate across the economy.”
The L.A. Times article stated that, “Analysts are already simulating what would happen if a drought hit the corn belt. Bruce Babcock, an agricultural economist at Iowa State University, estimates that corn could reach $8 a bushel from $5.46 now.
“It could happen as soon as this summer.
“‘The risk of a drought right now is higher than normal because of the La Niña we are seeing,’ Babcock said, referring to the cooling of ocean temperatures that often has a drying effect.
“As any farmer can tell you, Mother Nature is fickle. The U.S. has suffered four major weather disasters since 1971 that wiped out 21% to 29% of the corn crop at a time.
“Periodic bad weather, including droughts, scorching heat waves and cold, cloudy spells at just the wrong time, has reduced harvests by billions of bushels. Previously, these disasters have raised food prices. The next drought will be the first to affect gas prices.”
(Note: For an interesting look at weather concerns and the potential risks of adverse growing conditions in a market similar to that outlined in the L.A. Times article, see this report from May of 2007 entitled, “2007 U.S. Corn Production Risks: What Does History Teach Us?”)
Mr. Hirsch indicated that, “Because of the interrelationships among crops, a major shortfall in the U.S. harvest could tip global grain and soy markets into chaos. It would affect the prices of food made directly from these commodities, such as bread, pasta and tortillas, and food made indirectly, such as pork, poultry, beef, milk and eggs.
“If it happened this summer, it would be especially bad because of the current pace of global food inflation.”
Near the conclusion of his article, Mr. Hirsch stated that, “Here in the U.S., a corn shortfall would also force federal regulators to make difficult choices. Among them: Should they stick to the ethanol production goals outlined in the 2007 Energy Independence and Security Act or work to free up corn stocks to replenish the domestic and international food supply?”
Farm Bill: Land Values and Conservation
As commodity prices gyrate at historically high levels, the value of U.S. farmland is also increasing. This trend could potentially have long-term environmental impacts.
Jerry Perkins reported in Saturday’s Des Moines Register that, “Farmland prices rose 18 percent in Iowa during 2007, according to the Chicago Federal Reserve Bank’s survey of agricultural lenders. [See related graph from the report].
“Iowa and the parts of four other states that make up the 7th Federal Reserve District based in Chicago chalked up an annual increase of 16 percent in farmland prices, the largest yearly increase in the district since the late ’70s, said David Oppedahl, business economist for the Chicago Fed.”
As farmland values increase and the projected return for agricultural production goes up, farmers face increased incentives to plant more acreage. In some cases, landowners could possibly forgo enrolling land in federal environmental programs because of the potentially higher return of production related returns over conservation payment rates.
Brad Dokken reported in Saturday’s Grand Forks Herald Online (North Dakota) that, “The success of conservation programs in the farm bill Congress now is debating depends in large part on land-rental rates that are high enough to convince farmers and other landowners to set aside acreage at a time of soaring commodity prices.
“‘We’re very concerned about money aspects of the bill,’ Dave Nomsen, vice president of governmental affairs for Pheasants Forever, said Thursday. ‘We’re anxious to point out the benefit of conservation programs not just to landowners and sportsmen, but to all Americans that benefit from conservation projects that do good things for water quality, soil erosion and habitat.’”
The article explained that, “According to [Bart James, director of agriculture and conservation programs for Ducks Unlimited], high commodity prices at a time when CRP [Conservation Reserve Program] contracts are expiring have led to significant habitat losses in the Prairie Pothole Region, which often is called North America’s ‘duck factory.’
“North Dakota, for example, has lost 420,000 acres of CRP in the past year, and South Dakota and Montana each have lost about 13 percent of their acreage.
“‘It’s going to be pretty devastating what’s going to happen if we aren’t able to get this farm bill back on track in terms of rental payments offered to landowners,’ James said.”
And Faith Bremner reported on Saturday at the Argus Leader Online (South Dakota) that, “About 300,000 acres of CRP land in South Dakota are being removed from the program and probably will be used to grow traditional row crops…[T]he program, now capped at 39.2 million acres nationwide, is credited with producing an additional 2.2 million ducks and 13.5 million pheasants annually, protecting 170,000 miles of stream banks and keeping 450 million tons of topsoil from washing away.”
Farm Bill- General
Jonathan Rivoli reported in Saturday’s Bismarck Tribune that, “Negotiations on the farm bill have reached a critical juncture in Washington as Congress and the White House haggle over the bill’s funding, Rep. Earl Pomeroy said Friday.
“‘The next few days will be absolutely critical in whether the farm bill gets done or not,’ he said.”
The article added that, “At issue in the more than $280 billion package is whether to include $10 billion for programs including a permanent disaster aid title. Congress is looking to find a way to pay that pleases the White House, but has thus far been out of luck.”
Mr. Rivoli indicated that, “Over the last few years, lawmakers from upper Plains states like North Dakota have successfully fought for disaster aid packages separate from the farm bill, but this often occurred years after the actual disaster.
“The Senate is insisting on this provision, but the Democrats’ idea to pay for it with various tax law changes have met the ire of the White House.”
And Janell Cole reported on Saturday at The Dickinson Press Online (North Dakota) that, “If a new farm bill isn’t signed by President Bush by March 15 and the current one must be extended, Rep. Earl Pomeroy, D-N.D., said Friday, he’ll consider that a defeat.”
The article noted that, “Pomeroy, who met with about 20 farm leaders and other North Dakotans Friday, also said the Bush administration keeps ‘moving the goal posts,’ creating more new reasons why it the president won’t accept each successive bipartisan plan Senate and House leaders have agreed upon.
“Pomeroy heaped praises on the House’s Agriculture Committee chairman, Rep. Collin Peterson, D-Minn., during the meeting, calling Peterson’s work ‘extraordinary.’”
Meanwhile, U.S. Secretary of Agriculture Ed Schafer penned an item, which was posted on Sunday at The Forum Online (North Dakota).
Sec. Schafer stated that, “Recently, The Forum published an editorial regarding the ongoing negotiations over the farm bill. It was suggested that I take an active role in persuading the president to accept the Senate’s farm bill proposal, despite the fact that it could potentially spend up to $22 billion in new money to expand government programs while raising taxes on the American people. What The Forum should be doing instead is urging me to support a measure that reflects the wishes of the American people – not one that was devised by special interests and behind closed doors in Washington.”
Sec. Schafer added that, “There is much talk in Congress about the need to be fiscally disciplined, yet the Senate’s farm bill goes way over baseline. Considering the fact that the farm economy is booming, this massive spending package is incomprehensible. It amazes me that the very people who oppose tax cuts for high-income earners are the same people who fight to protect farm payments for Manhattan millionaires who own some farm land.
“Our president would like to sign a good farm bill this year, and it is imperative Congress recognize that he is speaking from a platform generated from what he heard in the listening sessions. The result of not coming up with positive new legislation is that we extend the current bill, which means that important topics such as energy, increased costs of nutrition, trade balance, specialty crops and ethanol will not be addressed.
“The Forum asks that I influence the president to support a Senate proposal that I believe does not meet the wishes of the American people. Instead, I would suggest that perhaps The Forum call on Congress to come up with a bill that provides reform and addresses the issues pertinent to our farmers, instead of spending more money and ignoring the obvious calls for reform.”
DTN writer Chris Clayton provided more perspective with respect to the Farm Bill and the executive branch in an update posted on Sunday at the DTN Ag Policy Blog.
Mr. Clayton pointed out that, “The Bush administration sent over to [House Ag Committee Chairman Collin Peterson (D-Minn.)] on Saturday a laundry list of ‘parameters for a successful farm bill’ that Peterson had been requesting. That laid out several detail in the farm bill the administration wants and potentially successful offsets. The letter states the administration ‘is willing to consider’ a farm bill with $10 billion in spending above the budget baseline over 10 years, if the farm bill contains significant program reforms.
“Such reforms for the administration would include no increase in marketing-loan rates, counter-cyclical target prices in commodity crops or the Milk Income Loss Contract program payment to dairy farmers. The administration also stands by its ‘beneficial interest position,’ meaning that farmers would have to give up beneficial ownership interest in their crops to lock in a loan-deficiency payment. USDA made that proposal in the department’s farm bill last year because farmers took advantage of a drop in commodity prices in fall 2005 due to Hurricane Katrina, locked in LDPs, but held on to the grain until prices increased.”
The DTN item added that, “The administration also wants the marketing loan program to become a recourse loan as part of creating a revenue-based counter-cyclical program, ‘which I have told them I will not support,’ Peterson said.
“Other demands by the administration would eliminate all planting restrictions on commodity-crop land, which the World Trade Organization has raised as a problem with the U.S. commodity programs. The administration also wants to remove from the farm bill a proposed sugar-to-ethanol program, which would allow ethanol plants built for sugar processing to buy cheap sugar from the federal government for feedstock.
“The administration also renewed its proposal to take up to 25 percent of foreign food-aid money to buy food from local sources closer to locations of international hunger needs, rather than rely solely on U.S. commodities. Food-aid groups right now are lamenting the cost of U.S. commodities hurting food-aid efforts internationally.”
Mr. Clayton also reported that, “The extension of the 2002 farm bill ends March 15. Regardless of whether a deal is agreed to, it’s now likely there will be at least another one-month extension to iron out details and debate some final policy issues in conference after the money situation is resolved, Peterson said Sunday.”
A press release issued on Friday by the National Cotton Council stated that, “National Cotton Council Chairman Larry McClendon said the NCC will continue to work closely with Congress to ensure final passage and implementation of the farm bill and a successful conclusion to the World Trade Organization (WTO) Doha negotiations.
“In an address here today at the Southern Cotton Ginners Association’s Ag Update, McClendon recapped the NCC’s two-year efforts to develop sound farm policy that would: 1) provide a solid safety net for producers, ensure competitive prices in the international market, 2) align provisions of the upland cotton marketing loan with market signals and 3) streamline the flow of cotton to the marketplace. He said the Council also sought to avoid any tightening of payment limits or increased standards for eligibility for program benefits; to get a safety net of unlimited access to a marketing loan with redemption at the adjusted world price; and have the counter-cyclical payment decoupled from production with the direct payment left as the cornerstone of cotton policy.
“‘The farm bills in the House and Senate largely reflect the provisions sought by the Council,’ he stated. ‘The Council has urged Conferees to include reforms that are part of the House or Senate bills in the new farm bill.’”
The release added that, “However, McClendon warned that WTO negotiations may overshadow the U.S. cotton industry’s two-year effort on delivering sound policy in new farm legislation.
“He said the U.S. agricultural community has been largely supportive of its trade negotiators’ aggressiveness in the WTO Doha Round – even the proposed significant cuts in domestic agricultural support programs.
“‘But we stated from the very outset that such large cuts in support would only be acceptable if there were real, significant gains in market access,’ he said. ‘We warned our negotiators in 2006 that other countries were pocketing U.S. proposals and demanding more cuts in agricultural support while retreating on market access.’”
In more specific Doha news, an AFP article from Saturday indicated that, “The Doha round of world trade talks could still be concluded by year’s end, the head of the World Trade Organization said Saturday, despite a European warning of a ‘high risk of failure.’
“‘We are nearing the end game. Whether it’s a success of failure I can’t say, but it’s doable,’ WTO Director General Pascal Lamy said after meeting South African President Thabo Mbeki.”
Noting that, “The EU Trade Commissioner, Peter Mandelson, said Friday that he feared Doha was now ‘facing a high risk of failure, the first failure ever for a multilateral trade round;’ the AFP article added that, “[L]amy said doubts were normal at this point in the process…’We are at a crunch-time …It’s not surprising that positions stiffen,’ he said.”
Paul Maidment, writing on Saturday at Forbes.com noted that, “Those of you scoring at home the painstaking progress toward striking the Doha trade deal can make a faint pencil mark in the progress box.
“Pascal Lamy, director-general of the World Trade Organization, indicated on Saturday that more progress is being made in negotiations over agricultural trade than industrial tariffs. The slither of good news is that the agricultural negotiators are working on technical matters to get the final numbers within already agreed ranges. The flip side is that the ranges for industrial tariffs have still not been nailed down.”
Mr. Maidment also stated that, “Doha is widely taken to be dead unless the Bush administration secures that ratification for whatever deal is struck. Its fast-track trade negotiation authority only lets Congress vote a trade deal up or down, not amend it. A new U.S. administration, of whichever political stripe, will likely wipe the slate clean.”
Food Prices and Biofuels
The New York Times editorial board stated today that, “The world’s food situation is bleak, and shortsighted policies in the United States and other wealthy countries — which are diverting crops to environmentally dubious biofuels — bear much of the blame.”
The Times stated that, “Population growth and economic progress are part of the problem. Consumption of meat and other high-quality foods —mainly in China and India— has boosted demand for grain for animal feed. Poor harvests due to bad weather in this country and elsewhere have contributed. High energy prices are adding to the pressures.
“Yet the most important reason for the price shock is the rich world’s subsidized appetite for biofuels. In the United States, 14 percent of the corn crop was used to produce ethanol in 2006 — a share expected to reach 30 percent by 2010. This is also cutting into production of staples like soybeans, as farmers take advantage of generous subsidies and switch crops to corn for fuel.”
Concluding, the opinion item indicated that, “As a first step, the United States and other wealthy countries that are driving this problem must ensure that the United Nations and other relief agencies get the support they need to feed the most vulnerable people. But aid is not a solution.
“Congress must take a hard look at the effect of corn ethanol on food supplies in the same way the new energy bill requires it to review the environmental effects. It must move toward ending subsidies that will become even more difficult to justify as oil prices rise and the costs of producing corn ethanol decline. And it must press other wealthy countries to do the same before hunger turns to mass starvation.”