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“Agflation” – Farm Bill

Anthony Faiola reported in Sunday’s Washington Post that, “The globe’s worst food crisis in a generation emerged as a blip on the big boards and computer screens of America’s great grain exchanges. At first, it seemed like little more than a bout of bad weather.

“In Chicago, Minneapolis and Kansas City, traders watched from the pits early last summer as wheat prices spiked amid mediocre harvests in the United States and Europe and signs of prolonged drought in Australia. But within a few weeks, the traders discerned an ominous snowball effect — one that would eventually bring down a prime minister in Haiti, make more children in Mauritania go to bed hungry, even cause American executives at Sam’s Club to restrict sales of large bags of rice.

“As prices rose, major grain producers including Argentina and Ukraine, battling inflation caused in part by soaring oil bills, were moving to bar exports on a range of crops to control costs at home. It meant less supply on world markets even as global demand entered a fundamentally new phase. Already, corn prices had been climbing for months on the back of booming government-subsidized ethanol programs. Soybeans were facing pressure from surging demand in China. But as supplies in the pipelines of global trade shrank, prices for corn, soybeans, wheat, oats, rice and other grains began shooting through the roof.”

Mr. Faiola stated that, “At the same time, food was becoming the new gold. Investors fleeing Wall Street’s mortgage-related strife plowed hundreds of millions of dollars into grain futures, driving prices up even more. By Christmas, a global panic was building. With fewer places to turn, and tempted by the weaker dollar, nations staged a run on the American wheat harvest.”

The Post article went on to explain that, “The convergence of events has thrown world food supply and demand out of whack and snowballed into civil turmoil. After hungry mobs and violent riots beset Port-au-Prince, Haitian Prime Minister Jacques-Édouard Alexis was forced to step down this month. At least 14 countries have been racked by food-related violence. In Malaysia, Prime Minister Abdullah Ahmad Badawi is struggling for political survival after a March rebuke from voters furious over food prices. In Bangladesh, more than 20,000 factory workers protesting food prices rampaged through the streets two weeks ago, injuring at least 50 people.”

Today’s article also noted that, “Even wealthy nations are being forced to adjust to a new normal. In Japan, a country with a distinct cultural aversion to cheaper, genetically modified grains, manufacturers are risking public backlash by importing them for use in processed foods for the first time. Inflation in the 15-country zone that uses the euro — which includes France, Germany, Spain and Italy — hit 3.6 percent in March, the highest rate since the currency was adopted almost a decade ago and well above the European Central Bank’s target of 2.0 percent. Food and oil prices were mostly to blame.

“In the United States, experts say consumers are scaling down on quality and scaling up on quantity if it means a better unit price. In the meat aisles of major grocery stores, said Phil Lempert, a supermarket analyst, steaks are giving way to chopped beef and people used to buying fresh blueberries are moving to frozen. Some are even trying to grow their own vegetables.”

With respect to biofuels, the Post article noted that, “The root cause of price surges varies from crop to crop. But the crisis is being driven in part by an unprecedented linkage of the food chain.

“A big reason for higher wheat prices, for instance, is the multiyear drought in Australia, something that scientists say may become persistent because of global warming. But wheat prices are also rising because U.S. farmers have been planting less of it, or moving wheat to less fertile ground. That is partly because they are planting more corn to capitalize on the biofuel frenzy.”

And, in a broader look at market efficiencies, price signals and trade barriers, the Post article indicated that, “If market forces had played a larger role in food trade, some now argue, the world would have had more time to adjust to more gradually rising prices.

“‘The international food trade didn’t undergo the same kind of liberalization as other trade,’ said Richard Feltes, senior vice president of MF Global, a futures brokerage. ‘We can see now that the world has largely failed in its attempt to create an integrated food market.’

“In recent years, there has been a great push to liberalize food markets worldwide — part of what is known as the ‘Doha round’ of world trade talks — but resistance has come from both the developed and developing worlds. Perhaps more than any other sector, nations have a visceral desire to protect their farmers, and thusly, their food supply. The current food crisis is causing advocates on both sides to dig in.”

As an illustration, the Post article cited recent news developments from France, “The European Union doles out about $41 billion a year in agriculture subsidies, with France getting the biggest share, about $8.2 billion. The 27-nation bloc also has set a target for biofuels to supply 10 percent of transportation fuel needs by 2020 to combat global warming.

“The French, whose farmers over the years have become addicted to generous government handouts, argue that agriculture subsidies must be continued and even increased in order to encourage more food production, especially with looming shortages.

“Last week, French Agriculture Minister Michel Barnier warned E.U. officials against ‘too much trust in the free market.’

“‘We must not leave the vital issue of feeding people,’ he said, ‘to the mercy of market laws and international speculation.’”

Meanwhile, David Nason reported yesterday at The Australian Online that, “It’s 40 years since Stanford University entomologist Paul Ehrlich predicted that hundreds of millions of people would die of starvation in the 1970s and ’80s because the world could no longer produce enough food for its rapidly growing population.

“Ehrlich outlined his theories in The Population Bomb, a bestseller that offered policy prescriptions ranging from compulsory birth control, cutting government payments for dependent children, applying a luxury tax to cribs and nappies, and ceasing food aid to the Third World.

“Not surprisingly, Ehrlich was branded a crackpot and his basic premise that a terrible age of famine was at hand never eventuated. In fact, there was less famine in the last quarter of the 20th century than at any time in history, the result of world food production growing at 15 per cent annually and outstripping the growth in population.”

After outlining recent trouble spots with respect to food price inflation, the article stated that, “According to the US Commodity Futures Trading Commission, the price of rice over the past 12 months has soared a staggering 122 per cent. For wheat, the increase has been 95 per cent, for soybeans 83 per cent and corn 66 per cent. The World Bank estimates that prices for all foods have risen 83 per cent in the past three years.

“This week, UN food envoy Jean Ziegler blamed these price explosions on Wall Street, saying a herd of market traders, speculators and financial bandits had ‘turned wild and constructed a world of inequality and horror’. But greed and opportunism on financial markets is only part of the story.

“Food inflation is also about recent droughts in Australia and Russia; changing eating patterns in China and India, where the burgeoning middle classes want to eat more grain-fed meat and dairy products; the chronically weak US dollar; flawed alternative energy policies in the US and EU; and the blowout in the cost of fuel and fertiliser.

“Above all else, food inflation is about the hunger of the poor, and if there’s one anecdote that drives home the desperate suffering, it’s the story of mothers in Haitian slums who have been feeding their children mud pies mixed with oil and sugar to try to make their hunger pangs go away.”

This article also stated that, “But for many the urgency needed is lacking. In the US, provider of 50 per cent of the world’s food aid dollars, the Bush administration’s response has been limited to providing an extra $US200 million ($213million) in urgent aid and asking Congress to amend the Farm Bill so that one-quarter of US food aid can be spent on local and regional procurement.

“While this would allow faster, more flexible deployment of vital aid dollars, save millions of dollars in unnecessary transport costs and feed more hungry people, it threatens powerful farm interests in Washington, who want food-aid dollars spent in the US. The measure is far from a sure thing.

“But the biggest failure of US policy concerns the huge subsidies being paid to farmers to grow corn for the ethanol industry. This year one-third of the US corn crop will be diverted into making ethanol. And as more and more land is set aside for ethanol production, prices for other crops such as soybeans and cotton are rising.”

Asa Wahlquist, writing yesterday at The Australian Online, reported that, “In Australia, CPI figures released this week revealed food prices were rising above the level of inflation.

“According to the ABS, in the March quarter, food rose 2.1 per cent, while overall inflation rose by 1.3 per cent. On an annual basis, food prices rose by 5.7 per cent and overall inflation increased by 4.2 per cent.”

The article added that, “Bill Cordingly is the head of food and agribusiness research with the international food and agribusiness specialists, Rabobank.

“He says the 5.7 per cent rise in food costs is significant, ‘when you see historically food prices have trended lower, and below inflation, because of technology and a whole range of factors’.

“He points out the raw commodity is often a small part of the cost of a final product, and that virtually every stage of production — transport, labour, energy and packaging — is under pressure from rising costs.”

Deanese Williams-Harris reported on Friday at The Chicago Tribune Online that, “The supply problems with flour and rice are connected in different ways to dramatic price increases tied to global shifts in the commodity markets, where prices of corn, wheat, rice and soybeans have hit record levels in recent months. As corn prices have risen, for example, partly because of the demand for ethanol, farmers have shifted to that crop and out of specialty products like rye, food industry officials said.

“There is no rice shortage in the U.S., but rice prices are at record highs globally, leading to riots in some poor countries and threats by some producers to curb exports. A rise in rice prices here has led to sudden changes in buying patterns, experts said, with restaurants and other big users stocking up to avoid future hikes, thus upsetting the supply chain.”

More specifically with respect to U.S. retail reaction regarding rice prices, (and as was noted in the Post article cited above), the Chicago Tribune article stated that, “Sam’s Club said the limits on jasmine, basmati and long-grain rice purchases are because of ‘recent supply-and-demand trends.’ Costco did not return telephone calls for comment.

“Paul McNamara, a professor in the University of Illinois’ Department of Agriculture and Consumer Economics, said the situation at Costco and Sam’s was unusual because when supplies tighten, the most common response is to keep raising prices, not limit sales. He thinks it’s a short-term situation most likely connected to a fear of a disruption in the companies’ supply chain.

“‘It does suggest we are in a pretty strange food market,’ McNamara said. ‘Americans are not used to this.’”

And, regarding wheat purchases, the Tribune article noted that, “The concerns about flour supplies also appear to have hit Costco, which like Wal-Mart Inc.’s Sam’s Club is a major wholesale supplier. Costco Wholesale Corp. Chief Executive James Sinegal told Reuters this week that some store managers have put purchase limits in place because of the unusual demand for rice and flour.

“‘If a customer came in and said, ‘I want 10 pallets of flour,’ we’d probably say, ‘No, we can’t give you that. We can give you one pallet.’’”

Ag Economy, Farm Bill and Direct Payments

Donnelle Eller and Jerry Perkins reported in today’s Des Moines Register that, “Record U.S. farm income last year is fueling businesses across Iowa and helping to insulate the state from the worst of a national recession. But not all of Iowa’s farm economy is thriving.

“Corn prices that rose above $6 a bushel are forcing some livestock producers to cull hog and dairy herds. National pork leaders, seeking federal assistance, say producers have lost $2.1 billion in seven months.

“Threats lurk for farmers and farm equipment manufacturers, too. Skyrocketing fuel and steel prices could chop profits. And growing concern about worldwide recession could cut demand for all farm products.”

The Register article stated that, “Farmers, eager to get corn and soybean seed in the ground, also face the added challenges of rising input costs, such as higher rents for farmland and fertilizer prices. ‘It’s a very mixed picture,’ said Patrick Westhoff, an economist at the University of Missouri.

“‘There are some producers who are doing quite well right now. But even the ones who are doing well are experiencing higher costs of production,’ he said. ‘And for the folks on the livestock side, particularly hog producers, this is a pretty bad time.’”

Later, the Register article stated that, “Still, U.S. farm income reached a record $88.7 billion in 2007, 51 percent higher than the 10-year average of $61.1 billion. Income is forecast to grow 4.1 percent, to $92.3 billion, this year.

“Iowa’s dependence on farming is strong, despite the growth of industries like insurance, financial services and technology.”

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As overall U.S. farm income has increased, political focus has turned to direct payments.

And with respect to the Senate-House conference compromise agreement that was reached on Friday, David Rogers reported on Friday at Politico.com that, “Nutrition spending will grow by an estimated $10.2 billion, and [Senate Ag Committee Chairman Tom Harkin (D-Iowa)] preserved increases for conservation programs that have been his priority. But final cuts in the bargaining Friday included an estimated $400 million in savings from direct payments to producers, and a new disaster aid program would be scaled back to $3.8 billion — about $1.2 billion less than the Senate first wanted.”

Ken Cook noted yesterday at The Mulch blog that this $400 million savings may actually turn out to be $200 million- for more details, see, “Farm Bill: Direct Payment ‘Cut’ Is Change You Can Believe In.”

Keith Good