FarmPolicy

October 18, 2019

As Farm Bill Stalls, Focus on Commodity Supply and Demand

David Streitfeld reported in yesterday’s New York Times that, “Everywhere, the cost of food is rising sharply. Whether the world is in for a long period of continued increases has become one of the most urgent issues in economics.

“Many factors are contributing to the rise, but the biggest is runaway demand. In recent years, the world’s developing countries have been growing about 7 percent a year, an unusually rapid rate by historical standards.

“The high growth rate means hundreds of millions of people are, for the first time, getting access to the basics of life, including a better diet. That jump in demand is helping to drive up the prices of agricultural commodities.”

The article added that, “Farmers the world over are producing flat-out. American agricultural exports are expected to increase 23 percent this year to $101 billion, a record. The world’s grain stockpiles have fallen to the lowest levels in decades.

“‘Everyone wants to eat like an American on this globe,’ said Daniel W. Basse of the AgResource Company, a Chicago consultancy. ‘But if they do, we’re going to need another two or three globes to grow it all.’

“In contrast to a run-up in the 1990s, investors this time are betting — as they buy and sell contracts for future delivery of food commodities — that scarcity and high prices will last for years.”

Mr. Streitfeld indicated that, “In the long run, the food supply could grow. More land may be pulled into production, and outdated farming methods in some countries may be upgraded. Moreover, rising prices could force more people to cut back. The big question is whether such changes will be enough to bring supply and demand into better balance.

“‘People are trying to figure out, is this a new era?’ said Joseph Glauber, chief economist for the United States Department of Agriculture. ‘Are prices going to be high forever?’”

And, the Times article stated that, “If all this suggests a golden age for American growers, it could well be brief, said Bruce Babcock, an economist at Iowa State University. He predicted that farmers would do their best to ramp up production, possibly to the point of pulling land out of conservation programs so they could plant more. ‘Give farmers a price incentive, and they’ll produce,’ he said.

“The Agriculture Department forecasts that world wheat production will increase 8 percent this year. In the United States, spring and durum wheat plantings are expected to rise by two million acres, helping to drive prices down to $7 a bushel, the government said.

“Yet the competition among crops for acreage has become so intense that some farmers think the government and analysts like Mr. Babcock are being overly optimistic.

“Read Smith, a farmer in St. John, Wash., thinks a new era is at hand for all sorts of crops. ‘Price spikes have usually been short-lived,’ he said. ‘I think this one is different.’”

Jeff Swiatek, writing yesterday at The Indianapolis Star Tribune Online, reported that, “All-time high prices for soybeans and wheat and near-record high prices for corn and other farm goods have pumped up farm incomes by 50 percent since 2006 in Indiana and other Farm Belt states… The boom is expected to plow billions of dollars of extra income into Indiana’s economy in the next few years. Big beneficiaries range from co-ops and ag suppliers to rural restaurants and retailers.”

Nonetheless, the article pointed out that, “Farmers, with more cash to spend, are facing inflated costs for many of the materials they need to farm. In the past two years, prices of nitrogen, potash and phosphate fertilizers have roughly doubled. Values of farmland last year jumped about 17 percent, the largest annual increase since 1977, according to Purdue University. And land rents have shot up as well.

“The jump in production costs has occurred as farmers strive to plant as much cropland as possible and boost output by using lots of fertilizer and pesticides and double-cropping winter wheat and soybeans on the same field when possible.”

Mr. Swiatek also indicated that, “Demand for grain is running so strong that the nation’s wheat supply is almost gone, while soybean and corn inventories by August should hit their lowest levels since 1973-75, says Chris Hurt, a Purdue ag economist. ‘The cupboard is almost bare. It’s too tight for comfort. It’ll be until (the) 2010 crop before we can catch up and rebuild these inventories.’

“The upshot: grain markets in the next two years could see ‘enormous volatility in prices,’ Hurt said, as traders react to weather scares, droughts and scarcity. Adding to the uncertainty is the low value of the dollar relative to the euro, which makes U.S. grains cheaper for foreign buyers.

“Ronnie Mohr, a Hancock County crop farmer who is a director of the 50-state farm co-op Land O’Lakes Inc., says although he reaps the benefit of high grain prices, he worries they’ll cripple his main customers: hog farmers and other livestock operators who buy more than half of each year’s U.S. corn harvest to feed to their animals.

“‘I don’t like $5 corn. I’m taking advantage of it, don’t get me wrong. But it’s a little scary long-term. I have friends that it has really hurt.’”

And Jim Downing reported in yesterday’s Sacramento Bee that, “While the real estate meltdown is draining billions of dollars from the capital region’s urban economy, area fields and orchards are yielding some of the richest harvests in decades.

“It’s the flip side of the rising cost of food: As global trends ranging from the weak dollar to the modernization of Asia drive up prices in supermarkets, they also boost the value of each pound of walnuts and sack of rice harvested in the Sacramento Valley.”

Mr. Downing noted that, “The strong prices haven’t fixed all of the rural Valley’s economic troubles. Unemployment remains high, and local government budgets are thin.

“Still, the strong farm sector is injecting new money into small-town economies: Tractor dealers are smiling. Walnut-tree nurseries are sold out. Farmland prices are up.”

“Walnuts are the third-largest crop in the Sacramento Valley. Together with rice and almonds, they accounted for more than $1.2 billion in revenue to the region’s farmers in 2006. Final returns for 2007 likely will be higher: To go with the jump in walnuts, rice prices are up roughly 20 percent, while almonds held steady,” the Bee article said.

And with respect to how the current environment is impacting agriculture outside of the U.S., Dow Jones writer Kenneth Rapoza reported on Thursday that, “Hot demand for farm commodities like sugar and ethanol are driving up the price of land in Brazil, according to a study by AgraFNP, an agribusiness consultancy.

“On average, a 1,000 hectare parcel of land that cost 1,700 Brazilian reals ($1,017) in 2001 cost BRL 4,000 by the end of 2007, an increase of 133% over seven years.

“When calculated in dollar terms, land prices have risen by an average of 219%. The dollar has been in a free-fall against the Brazilian real for the last two years.

“‘The main influence has been soybean prices and demand for soy,’ Mauricio Mendes, AgraFNP`s chief executive officer, said Thursday.”

Farm Bill

In recent Farm Bill developments, Reuters writer Charles Abbott reported on Friday that, “The Senate Finance Committee clearly has control over $10 billion of outlays in the farm bill but it should not be a barrier to strong U.S. farm policy, committee staff workers said on Friday.

“Congress is months behind schedule for enacting an omnibus farm law covering crop subsidy, public nutrition, export, land stewardship and biofuel programs. A dispute over committee jurisdiction was the latest hurdle for action.

“Leaders of the House and Senate Agriculture committees said on Thursday they would not surrender authority over farm policy in the new farm law.”

Mr. Abbott pointed out that, “‘We’re all for shared responsibility to complete this farm bill, and with the clock ticking, it is critical that the Senate Finance Committee come together with the Senate Agriculture Committee to work out the funding for the bill rather than use memos to the media to debate jurisdiction,’ said Kate Cyrul, spokeswoman for the Senate Agriculture Committee.

“Staff workers for Senate Finance Committee leaders wrote in a memo to reporters, ‘For the sake of America’s farm families, we in the Senate should acknowledge our shared responsibility to complete this bill and all pull together to get it done.’ The memo said negotiations were under way on the spending offsets to pay for the farm bill.”

Mr. Abbott indicated that, “The memo said the Finance Committee ‘wrote and holds jurisdiction over a number of elements in the Senate-passed farm bill,’ including disaster aid and some stewardship work. Jurisdiction held by the Finance Committee ‘should raise no opposition to completion of strong farm legislation,’ it said.”

A copy of the Memo can be viewed here.

Meanwhile, DTN Political Correspondent Jerry Hagstrom reported on Friday that, “Congressional leaders are reluctantly willing to let the 2002 farm bill get another one-month extension if a deal is reached on funding for the new farm bill.”

Mr. Hagstrom added that, “Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, said Thursday a one-month extension may be necessary but he is not enthusiastic about it because Congress only gets its work done when it has a deadline.

“A Peterson [House Agriculture Committee Chairman Collin Peterson, D-Minn.] spokesman said late Thursday that Peterson ‘supports extending the bill until April 15 only if a funding deal is in place to move the farm bill to conclusion. Otherwise, he doesn’t support it.’

“Reid [Senate Majority Leader Harry Reid, D-Nev.] and Pelosi [House Speaker Nancy Pelosi, D-Calif.] have pressured the congressional farm leaders to reach agreement on the increase in the budget and how it will be paid. The chairmen and ranking members have agreed the budget should be increased by $10 billion over 10 years, but they have not agreed on what spending cuts or tax measures might be used to pay for it in order to comply with congressional budget rules.”

And DTN writer Chris Clayton reported on Friday (link requires subscription) that, “Unable to get a tighter farm payment cap through the Senate Agriculture Committee or as an amendment on the Senate floor, Iowa Republican Sen. Charles Grassley is attempting to do the same through the congressional budget process.

“Grassley got an amendment approved in the Senate Budget Committee Thursday that would establish a tighter payment cap of $250,000 compared to the current cap of $360,000.”

Mr. Clayton explained that, “Rather than lowering the amount of money people are allowed to collect, farm bill negotiators currently are looking at lowering the adjusted-gross income cap eligibility for people allowed to receive farm payments from $2.5 million to potentially $500,000. Grassley thinks there are too many loopholes in the proposals, though the Bush administration backs a tighter AGI.”

The Washington Post editorial board opined yesterday on the Farm Bill, noting that, “As Congress and the administration wrangle over a new farm bill before the current version expires next Saturday, here are two numbers that may help clarify the issues: $5.74 and $92.3 billion. The former is the price of a bushel of corn on Wednesday, a historic high. The latter is the Agriculture Department’s estimate for farm income; it is 4.1 percent above the $88.7 billion farmers made in 2007 and 51 percent above the average for the past 10 years.

“Yet in this flush time for farmers, House and Senate conferees are contemplating a farm bill that might cost $10 billion more over the next decade than the current law would have. The tentative $280 billion-plus price tag includes needed spending on nutrition and soil conservation programs — but also about $5 billion a year in cash transfers to corn, soybean, wheat, cotton and rice farmers over the next five years. So far, there are no meaningful limits on the amount each farm enterprise can receive. Thus, plenty of this federal largess will be showered on people much richer than the average American, who is struggling with higher food costs.”

The Post opinion item indicated that, “The real point is that there is no justification whatsoever for spending billions more on agriculture, no matter how it’s paid for. Instead, the bill should have been redrafted to reflect new economic realities. Congress should cut crop subsidies and cap payments to well-to-do farmers, devoting the savings to deficit reduction and increases in food stamps, so that the poor can afford higher grocery prices. Rep. Ron Kind (D-Wis.) recently circulated a letter among his colleagues showing how this could be done, through 10 modest changes to the law, among them a means test for subsidies that would still let farm households making up to $200,000 a year get federal help. But cotton interests, represented powerfully in the Senate by Blanche Lincoln (D-Ark.), have historically resisted any serious limitation on federal payments to growers of those crops. Meanwhile, the Bush administration is insisting on at least some form of means-testing. Hence the current standoff.

“What goes up must come down; crop prices will moderate sooner or later. But growing food demand in developing countries such as India and China strongly suggests that grain commodities will stay relatively expensive for the near future, buoying farm income in the United States. This is the time to slash these wasteful and expensive subsidies, not lock them into law. Both reformers in Congress and the Bush administration must stand their ground.”

Doha

Reuters writer Jonathan Lynn reported yesterday that, “Trade negotiators are entering a critical period in their efforts to wrap up a new world trade agreement by the end of the year.”

The article indicated that, “But optimism at the start of the year that a deal could be done soon has faded, as the talks have bogged down in technical details and recriminations among rich and poor countries about who should show the greatest ambition in lowering barriers.

“Meetings this week on central agriculture and industrial goods will determine whether World Trade Organisation (WTO) mediators can issue revised texts distilling the progress.”

Mr. Lynn stated that, “Negotiators for the Doha round talks, launched in 2001, have entrenched their positions, making little progress in narrowing the gaps over the past month as they review the latest revisions of the agriculture and industry drafts issued on February 8.

“As a result, the hoped for meeting of ministers, flagged in January for around Easter, which falls this year on March 23, now looks likely to be in mid-April, if at all.”

Graeme Dobell, writing today at ABC News Online (Australia) reported that, “Australia and the United States say the terms of a multilateral trade deal amongst 151 countries could be agreed upon in the next two months.

“Canberra and Washington are again talking of the chance to revive the Doha round, the stalled negotiations in the World Trade Organisation.

“The metaphors of death and crisis have become central to discussion of the world trade round. Trade Minister Simon Crean admits the talks are on life support.”

The article noted that, “Mr Crean now says a deal must be achieved in the next few months, before the Bush administration in Washington goes from lame duck to dead duck, and before France takes the rotating leadership of Europe, with Paris one of the loudest voices opposed to any EU concessions on agriculture.”

Keith Good

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