FarmPolicy

Commodity Developments; EU Farm Policy; Brazil Cotton Case

Commodity Developments

Ian Berry reported in today’s Wall Street Journal that, “Corn prices continue to climb on concerns about Midwestern flooding and crop damage but avoided taking out records.

“Nearby July corn at the Chicago Board of Trade rose 9.75 cents to $7.4225 a bushel Tuesday. It had previously hit highs for eight straight days, most recently at $7.60 intraday on Monday.”

Mr. Berry indicated that, “The market shook off early assessments by some observers that a government report Monday showing 57% of the crop was rated good to excellent was bearish. That was down three percentage points from last week, but some traders expected a steeper drop, given the extent of the flooding, particularly in Iowa, the top corn-producing state.

“But analysts said regardless of expectations, the report, from the Agriculture Department, paints a dire picture.

“‘This is the lowest-rated corn crop since 1996, the lowest-rated soybean crop since 1993,’ said Brian Hoops, president of Midwest Market Solutions. ‘That doesn’t sound bearish.’

“In 1993, there was significant flooding in the U.S. heartland which lowered corn and soybean crop production.”

The Journal article also noted that, “Gains in corn were limited by forecasts calling for dry weather throughout this week, analysts said. T-storm Weather said below-normal temperatures will limit soil drying in many areas, however, and rain chances will increase ‘substantially’ next week.”

In a related article regarding the USDA’s June 30 Acreage report, Dow Jones writer Bill Tomson reported yesterday that, “The U.S. Department of Agriculture will release a much-anticipated crop acreage report on June 30, but because some of the most recent damage from flooding and wet weather might not be reflected, a follow-up survey may be conducted in July, a USDA official said Tuesday.

“Ty Kalaus, a statistician for USDA’s National Agricultural Statistics Service, said surveys for the June 30 acreage report began on May 30 and ran through the first two weeks of June. From now until the report’s release date the data already collected is being prepared.

“If NASS does decide to do a follow-up survey in July, Kalaus said, that data would be released in an August report.”

With respect to the future’s price of other agricultural commodities, the Associated Press noted yesterday that, “Wheat for July delivery rose 21.75 cents to $8.9825 a bushel [and] July soybeans rose 24 cents to $15.58 a bushel.”

Also yesterday, Javier Blas reported at the Financial Times Online that, “Traders said rising prices for corn and soyabean would reverberate through the food supply chain, pushing up the cost of meat, poultry and dairy products. The surge in corn prices would further affect a range of foodstuffs, including breakfast cereals and sweeteners.

“The United Nations Food and Agriculture Organisation yesterday warned higher feeding costs, strong demand and tight supplies were pushing up the retail prices of meat. ‘In the face of strong demand, meat supplies are tight and this situation is contributing to the increase in prices,’ the FAO said. ‘Higher feed costs are . . . pushing up retail prices,’ it added in its monthly food price index report.

“In Chicago, live cattle futures for delivery in April 2009 – a key contract – yesterday surged to 115.5 cents a pound, the highest for any cattle contract traded in the US.”

An AFP article from yesterday reported that, “Battered by torrential rains, the U.S. breadbasket state of Iowa is battling flooding that could be devastating for this year’s grain harvest, producers say.

“‘The damages are very extreme,’ said Don Roose, president of US Commodities, a research and brokerage firm based near the Iowa capital of Des Moines.

“With 83 of the state’s 99 counties declared a disaster area, Iowa, the leading US corn and soybean producing state, is the most hard-hit of nine central states pounded by days of heavy rains.”

The article added that, “Iowa Governor Chet Culver estimated crop damage at $1 billion.”

P.J. Huffstutter reported in today’s Los Angeles Times that, “For more than a week, floodwaters have spread across the nation’s Corn Belt, preventing farmers from planting soybeans and damaging a corn crop had just started to sprout. Analysts estimated that Iowa, Illinois and other corn-growing states might produce 15% less than last year. Some believe the shortfall will be larger.”

The L.A. Times article noted that, “State officials gauge the damage to Iowa’s corn crop alone at more than $2.7 billion, with the cost of repairing and rebuilding Cedar Rapids — the state’s second-largest city — expected to be at least $1 billion.”

Kari Lydersen and William Branigin reported in today’s Washington Post that, “The Mississippi has been closed to commercial traffic for an almost 300-mile stretch for more than five days since record river levels overwhelmed locks. River- and lake-related tourism has been halted, a severe blow for towns that rely primarily on farming and tourism to survive.

“Many farmers in this area have no flood insurance, having thought they were outside areas that would flood. The low-lying region around Gulfport flooded in 1965 and 1993, but the current inundation is much greater, according to local residents.”

And Dow Jones writer Rebecca Townsend reported yesterday that, “The widespread flooding across Indiana will likely be recorded as ‘the worst disaster Indiana’s seen in 100 years, and agriculture’s seen the majority of it,’ according to Indiana Director of Agriculture Andy Miller.

“The state is still ‘trying to get our arms around the extent of the damage’ and doesn’t want to rush out estimates of monetary damage, Miller said.”

Ms. Townsend noted that, “Efforts to quantify the monetary damages are still ‘back-of-the-envelope,’ said Chris Hurt, an agricultural economist with Purdue University Extension.

“Indiana has about 1.4 million acres planted each in corn and soybeans. The ‘X’ factor is the percentage lost. A 10% loss in corn, beans and wheat yield results in about $210 million lost crop value, Hurt said. But, he added, that estimate isn’t based on post-flood field examinations and doesn’t include lost pasture and forage crops, specialty crops, soil erosion or debris clean-up. Fields remain flooded in many regions of Indiana, hampering surveyors who are trying to get an idea of the cost of the disaster.”

And from a political standpoint, Dow Jones writer Bill Tomson reported yesterday that, “U.S. Department of Agriculture Secretary Ed Schafer will leave Thursday with U.S. President George W. Bush to go to Iowa to tour areas hit by flood waters.

“‘We’re still assessing how widespread the damage is on the farm lands,’ Bush said in a recorded statement distributed by the USDA.”

In additional analysis regarding weather related issues in the Midwest, Ben Casselman and Lauren Etter reported in today’s Wall Street Journal that, “Flooding in the Midwest could mean drivers will be getting a bigger soaking at gasoline pumps nationwide.

“In recent days, corn-based ethanol prices have risen along with floodwaters as commodities traders worry about damage to corn crops. Ethanol futures are up 17% over the past week, to $2.89 a gallon, mirroring the price of corn, which has risen 13% during the same period, according to Thomson Reuters.”

The Journal authors stated that, “Since refiners blend ethanol into gasoline, higher ethanol prices mean higher costs for refiners, which could be passed on at the pump as Americans enter the summer driving season.

“‘It’s coming at the worst possible time,’ said Stephen Schork, editor of the Schork Report, a newsletter on energy.”

Today’s Journal article explained that, “The relatively low price of ethanol has played a part in keeping gas prices in check compared with crude, said Mr. Schork. Now that brake is in jeopardy of disappearing.

“In the short term, logistical problems — including roads underwater and railways at a standstill — could lead to a temporary shortage of ethanol, adding perhaps five to 10 cents to the price of a gallon of gasoline in some markets, Mr. Schork estimates. However, that impact will last only a week or two, he says.

“The bigger question is the long-term impact. The Iowa Farm Bureau estimates Iowa, usually the largest corn-producing state, has already lost up to 10% of its corn crop, and a study from Ball State University in Muncie, Ind., estimates total crop damage in the state could amount to $2.7 billion.

“The resulting rise in corn prices — which have flirted with a record $8 per bushel in recent days — has made it hard for ethanol companies to remain profitable. VeraSun Energy Corp., based in Brookings, S.D., and one of the nation’s largest ethanol producers, recently delayed the opening of two ethanol plants because of market conditions, says spokesman Mike Lockrem. Last week a Citigroup Inc. report predicted many small-to-midsize ethanol producers would be forced to shut down temporarily to ride out the high costs.”

Also, Associated Press writer Mike Obel reported yesterday that, “Record-high corn prices, among other market conditions, have ethanol producers slowing expansion and analysts crunching numbers to find the industry’s break-even point.”

The AP article noted that, “Analysts, meanwhile, have begun calculating price scenarios under which ethanol production might become unprofitable.

“‘We believe these (corn) prices, if sustained, could pressure weaker producers to reduce or eliminate production,’ Oppenheimer & Co. analyst Joseph Gomes Jr. said Monday in a client note.

“In a telephone conversation Tuesday, Gomes cautioned that there is no set price for corn that will automatically mean ethanol production is unprofitable.

“‘There’s a ton of moving parts here that make it difficult to say that at this price ethanol producers start losing money,’ he said. ‘If the price of ethanol doesn’t rise, the price of corn is going to negatively impact a lot of these guys.’”

A key “moving part” in the equation on ethanol profitability is the price of crude oil; the Associated Press reported yesterday that, “Oil prices eased Tuesday — following a wild, record-setting session the previous day — as investors weighed expectations of higher output against the market’s ability to quench soaring global demand.

“Light, sweet crude for July delivery fell $1.26 cents to $133.35 a barrel in afternoon trading on the New York Mercantile Exchange.”

In a related article regarding U.S. energy policy and bifouels, Philip Brasher reported in today’s Des Moines Register that, “Sen. Charles Grassley says it’s too early in the year to consider rolling back biofuels incentives to soften the economic impact of high crop prices.

“‘You’re going to have this nervousness all through the summer, and you shouldn’t make any decisions like this until you know what the crop is at the end of the harvest season,’ said the Iowa Republican.”

Mr. Brasher also noted that, “Grassley has asked the USDA to release former cropland from the 35 million-acre Conservation Reserve Program so that it can be planted quickly to soybeans and other crops and soften the flooding’s impact on commodity prices.

“A USDA spokesman says the idea is under consideration. But CRP land provides prime habitat for game birds and other wildlife, so conservation groups strongly oppose the proposal.”

Meanwhile, Reuters writer Carey Gillam reported on Monday that, “The U.S. government needs to ante up more in loan guarantees to convince lenders to back commercial development of cellulosic ethanol, Verenium Corp Chairman Carlos Riva said on Monday.

“Riva said the 5-year U.S. farm law enacted last month was a good start in boosting cellulosic technology, which aims to produce large quantities of ethanol for fuel from switchgrass, crop residues and other plant cellulose wastes. Ethanol in the United States is now mostly made from corn.

“The new farm law provides $320 million in loan guarantees for the next two years for construction of cellulosic refineries. But an additional $150 million may be allocated if lawmakers are able to find the funding.”

EU Farm Policy

John W. Miller reported in today’s Wall Street Journal that, “With global food prices soaring and arable land in short supply, the European Union finds itself at loggerheads over how to overhaul a subsidy system that frequently pays landowners not to grow crops.”

Mr. Miller explained that, “Last month, the EU suspended a requirement for farmers to keep 10% of land fallow and raised quotas that limit the amount of milk each EU nation is allowed to produce. It’s proving much tougher for nations to agree on removing individual subsidies or figure out how to use EU farm money to lower food prices.”

The Journal article noted that, “French politicians want the EU to go back to paying farmers a set amount for every ton of specified crop grown, to stimulate production. The EU has been abandoning that practice in recent years because the World Trade Organization says production-linked subsidies create unfair competition.

“Other EU countries think France is wrong. U.K. officials believe high EU subsidies have depressed global food production because the EU dumped its surpluses on developing markets at low prices, discouraging local production. The U.K. wants to phase out production-linked subsidies altogether. It believes the EU can increase efficiency of land use by giving rural landowners an amount of money per hectare, leaving the market to decide what is most profitable for them to do with the land.”

In addition, Mr. Miller stated that, “The U.S. isn’t so different from the EU when it comes to farm aid. Nearly a quarter of the U.S.’s recent five-year, $307 billion farm bill goes to farmers. The rest goes to things such as food stamps, nutritional education and crop and biofuels research. Cutting the size of the overall farm bill has also proved impossible.

“French farm country, like the U.S. Midwest, is doing well on the back of record wheat prices and high subsidies. Despite the high prices, ‘farmers remain wedded to their subsidies, because it’s such a volatile business,’ says Alain Lepicard, an agriculture trader based in Yerville, in the north of France.”

Brazil Cotton Case

Bloomberg writer Carlos Caminada reported yesterday that, “Brazil will pursue $4 billion in sanctions against U.S. patents and business services to retaliate against subsidies paid to U.S. cotton farmers should the World Trade Organization back the plan, a government official said.

“Brazilian officials from several ministries will decide which patent payments to suspend and which services may face restrictions, the official said, speaking on condition of anonymity. Brazil, the world’s fifth-largest cotton producer, first proposed the retaliations in 2005.

“The WTO confirmed earlier this month a ruling that the U.S. hasn’t done enough to scrap aid to cotton producers, paving the way for the sanctions. In September 2004, the trade organization ruled that as much as $4 billion in annual U.S. cotton subsidies violated global trade rules, driving down world prices.

“A WTO panel may take three to four months to judge Brazil’s proposal to retaliate through sanctions on intellectual property and services, instead of goods, the Brazilian official said. The plan was first reported by O Estado de S. Paulo newspaper.”

Keith Good

Posted by Keith Good • June, 18, 2008 • 4:59 am