August 19, 2017

Economy (Deflation? Ag Prices), EPA CAFO Rule, Rural America and USTR- EU Beef Hormones Dispute

Economy (Deflation?-Ag Prices)

Peter A. McKay reported in Saturday’s Wall Street Journal that, “Stocks ended the worst month in more than a decade with a second straight day of gains, even as economic data signaled a persistent slowdown.

“The Dow Jones Industrial Average finished up 144.32 points, or 1.6%, at 9325.01. It was the first time since late September that the Dow rose two days in a row, leaving the blue chips up 11.3% for the week, their best weekly performance since October 1974.

“Still, the Dow was down 14.1% in October, its worst month in percentage terms since August 1998.”

The Journal article added that, “Although oil futures rose 2.8% Friday and 5.7% for the week, oil had its worst month in its exchange-traded history, down nearly 33% at $67.81 a barrel as investors bet that demand would sag.”

In addition to the reduction in crude oil prices, the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS) indicated in their monthly Agricultural Prices report on Friday that, “The preliminary All Farm Products Index of Prices Received by Farmers in October, at 145 percent, based on 1990-92=100, decreased 9 points (5.8 percent) from September. The Crop Index is down 17 points (9.8 percent) and the Livestock Index decreased 5 points (3.8 percent). Producers received lower prices for corn, soybeans, wheat, and cattle.”

The NASS report added that, “The October all wheat price, at $5.79 per bushel, is down $1.64 from September and $1.86 below October 2007 [related graph],” while, “The corn price, at $3.99 per bushel, is down $1.03 from last month but 70 cents above October 2007 [related graph].”

“The soybean price, at $8.66 per bushel, decreased $2.04 from September but is 30 cents above October 2007 [related graph],” Friday’s report said.

With respect to agricultural futures prices, the Associated Press reported on Friday that, “December wheat futures dipped 1.75 cents to $5.3625 a bushel on the Chicago Board of Trade, while corn for December delivery fell 8 cents to $4.0150 a bushel. January soybeans shed 10 cents to $9.33 a bushel, after falling as low as $9.18 a bushel earlier in the session.”

Declining prices for crude oil and some key agricultural commodities, in conjunction with other economic indicators, have caused attention to focus on the issue of deflation.

Peter S. Goodman writing in Saturday’s New York Times, reported that, “Only a few months ago, American policy makers were worried about the reverse problem — rising prices, or inflation — as then-soaring costs for oil and food filtered through the economy. In July, average prices were 5.6 percent higher than a year earlier — the fastest pace of inflation since 1991. But by the end of September, annual inflation had dipped to 4.9 percent and was widely expected to go lower.

The new worry is that in the worst case, the end of inflation may be the beginning of something malevolent: a long, slow retrenchment in which consumers and businesses worldwide lose the wherewithal to buy, sending prices down for many goods. Though still considered unlikely, that would prompt businesses to slow production and accelerate layoffs, taking more paychecks out of the economy and further weakening demand.”

Tom Petruno, writing on Friday at the Los Angeles Times Online, noted that, “Investors are constantly reminded to think about inflation when making decisions about their money.

Now there’s a new wrinkle: the possibility of deflation.”

The L.A. Times article stated that, “We’ve already had severe deflation — falling prices — in housing, stocks and commodities this year.

“The question is whether that could spill into prices of goods and services across the board, as well as into wages, as the economy worsens.”

And in Europe, Jonathan House and Emma Charlton reported in Saturday’s Wall Street Journal that, “Among economists, expectations are rising that the 15-nation euro zone as a whole could also show a third-quarter retrenchment. Since the euro zone’s economy already shrank by 0.2% in the second quarter, a further contraction would put the bloc officially in recession, according to one common definition.

“Other indicators released Friday lend support to gloomy forecasts and suggest that the European Central Bank need worry little about inflation pressures when it meets to decide on interest rates on Thursday.

Euro-zone consumer-price inflation declined for the third straight month in October — a drop that economists attributed to falling food and energy prices, which peaked over the summer.

“Meantime, the flash estimate of annual euro-zone inflation fell to a nine-month low of 3.2% in October, down from 3.6% in September and just above expectations for 3.1%, Eurostat data showed.”

However, Adam S. Posen, in an update posted on Friday (“Doubtful about Deflation”) at the Peterson Institute Blog, noted that, “Suddenly people are worrying about deflation risks to the US economy. While the Fed was quite right to set aside inflation concerns when it lowered its benchmark interest rate this week, recent data on the outlook and the global slowdown does not indicate that we are at risk of deflation. It is unrealistic to think that we are.

First, asset price declines—even large and widespread ones as in US housing markets—almost never result in broader price declines. As I demonstrated in a paper [pdf], the bursting of only 2 out of 44 stock or real estate bubbles led to instances of consumer price index (CPI) deflation (and 16 out of 18 prior episodes of deflation in advanced economies were not preceded or accompanied by asset price busts).

“This lack of association between burst bubbles and deflation makes sense. For one thing, the challenge for monetary policy is supposed to be that bubbles arise without showing up in broader inflation measures, and that holds equally true on the way down. For another, even though housing and energy prices are falling, health care and education prices (among others) continue to rise, and they make up 20+ percent of GDP. Real wages (i.e., adjusted for inflation) are flat or declining slightly, but nominal wages are not being cut (the ‘adjustment’ in labor markets takes the form of unemployment, not wage declines).”

After additional analysis, Mr. Posen stated that, “Yes, deflation is a bad state to be in, and difficult to end when it gets going in an economy. But there is no good reason to be distracted by that right now.”

And some news sources indicate that some agricultural commodity prices may increase in the near term.

Bloomberg news reported today (“Soybeans, corn to gain, analyst says”) that, “Corn futures may rise 28 percent in the next six months and soybeans may climb 21 percent after prices dropped sharply in the last month, boosting demand, according to JPMorgan Chase.

“Corn may rise to an average of $5.30 a bushel in next year’s second quarter after averaging about $4.13 this month, JPMorgan commodity strategist Lewis Hagedorn said in a report to clients. He said soybeans may rise to an average of $11.25 a bushel from $9.27 in October.”

The Bloomberg article added that, “‘Given the lack of meaningful evidence of demand rationing to date and significantly lower nominal price levels, further risks of demand destruction beyond those already anticipated appear limited,’ Hagedorn said in the report. ‘We continue to believe in the underlying fundamental backdrop of insufficient supply growth in the face of historically large demand.’

“Hagedorn on Sept. 26 projected corn prices to rise to $6.60 a bushel in the first quarter of 2009 and soybeans to surge to $16 before the deepening global liquidity crisis forced hedge funds and index funds to start liquidating commodity holdings.

“‘The spreading contagion from financial markets amid tightening credit conditions which led to deleveraging across the commodity complex — and an almost complete lack of commercial buying interest — has contributed to a far deeper correction than anticipated,’ Hagedorn said. ‘Domestic and international food demand for agricultural products has exhibited remarkable robustness’ in past downturns, he said.”

In a broader look at the impact agricultural commodity prices are having on parts of the global economy, a recent Associated Press article focused attention on soybeans and Indonesia, “As prices for U.S. soybeans rise, so does hunger in Indonesia.”

The AP article, which was posted yesterday, reported that, “Over the last decade, Indonesia went from growing more than half its soy to relying on the U.S. for 70% of it. Now the poor among this country’s 220 million people are going hungry because of changes thousands of miles beyond their shores. It is the same story for dozens of countries that came to depend on richer nations for cheap food, only to find themselves squeezed when prices started rising.

“‘There has been a drastic change in prices, and these smaller countries have little to say. They basically have to take it,’ said Abdolreza Abbassian, a grain economist with the United Nations’ Food and Agriculture Organization. ‘They were exposed to the negative sides of globalization, rather than the positive.’

“Soy has long been a staple in Indonesia. But in the 1990s, farmers complained that it was too expensive to grow because the government did not provide cheap seed or low-interest loans. At the same time, they could not compete with cheaper, better soy from countries like the United States, where farmers had advanced technology and government subsidies.”

The AP article also stated that, “[Tim Henning] calculated last spring that corn brought $75 to $85 more profit per acre than soy. So in 2007, he planted 50 more acres of corn on his 800-acre Minnesota farm and that much less soy. At a time when costs have risen for fuel, fertilizer, machinery and land, Henning is trying to squeeze what money he can from the earth.

“‘A number of years ago, the farmer got blamed because corn and bean prices were too cheap and farmers overseas were going broke,’ said Henning, 50. ‘Now, they are saying the prices are too high and people can’t afford to buy the food. So, we kind of feel we are in a ‘damned if you do, damned if you don’t’ situation.’”


In an article regarding the economy and consumer behavior, Andrew Martin reported in Saturday’s New York Times that, “Once upon a time, sales of organic and natural products were growing in double digits most years. Enthusiastic grocers and venture capitalists prowled the halls of trade shows looking for the next big thing. Grass-fed beef? Organic baby food? Gluten-free energy bars?

But now, shaky consumer spending is dampening the mood. It turns out that when times are tough, consumers may be less interested in what type of feed a cow ate before it got chopped up for dinner, or whether carrots were grown without chemical fertilizers — particularly if those products cost twice as much as the conventional stuff.

“Whole Foods Market, a showcase for the natural and organic industries, is struggling through the toughest stretch in its history. And the organic industry is starting to show signs that a decade-long sales boom may be coming to an end.”


AP writer H. Josef Hebert reported on Saturday that, “The Environmental Protection Agency issued new pollution control requirements for large livestock feedlots Friday that would allow farm operators to avoid having to get a permit if they claim the facility will not put harmful discharges into nearby waterways.”

The article explained that, “Under the rules, a feedlot would not automatically have to obtain a pollution discharge permit and could be certified as voluntarily complying with the ‘zero discharge’ standard. Operators would determine whether their facility is releasing or will release pollution into waterways based on the design of the facility and its operation. If they conclude no discharges will take place, they can operate without applying for a federal permit.

“Environmentalists complained this provision will let many of the feedlot operators off the hook.”

Rural America

On Friday, USDA’s Economic Research Service released an information bulletin entitled, “Rural America At A Glance, 2008 Edition.”

In part, the report stated that, “The home mortgage crisis has spilled over into other sectors as many banks and other financial intermediaries have tightened lending standards for automobile and small business loans to protect the quality of bank balance sheets. In addition, the risk premium on higher risk debt has risen so that many long-term rates have risen even as short-term interest rates have fallen. These financial factors have slowed growth in business spending. Further, when many existing homes remain unsold as loan default rates rise and banks and mortgage bankers take title to homes, the incentive for building new houses declines. Housing starts in April 2008 had fallen to half of what they had been in April 2007. These factors have combined to induce a national slowdown in employment and household income growth.

However, as of mid-2008, nonmetro banks have tightened credit far less than metro banks, particularly for loan applicants whose credit standing is good, mitigating the economic effects in nonmetro areas. The direct effects of the subprime crisis on housing markets have also been less in nonmetro areas than in metro areas, partly because effective credit standards were apparently higher in nonmetro areas, as suggested by lower foreclosure rates.”

USTR- EU Beef Hormones Dispute

On Friday the U.S. Trade Representatives Office (USTR) issued a news release, which stated in part that, “U.S. Trade Representative Susan C. Schwab announced today that USTR is seeking public comment on the possible modification of the list of European products subject to increased tariffs in connection with World Trade Organization (WTO) dispute settlement rulings in the EU – Beef Hormones dispute. Any such modification could involve the products subject to increased duties, the level of increased duties, or the EU member States whose products are subject to the duties. USTR is particularly interested in comments addressed to the effects on U.S. small- or medium-size businesses or on consumers of imposing higher duties on particular products.”

Keith Good

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