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Production Costs and Profitability, Vilsack Hearing, and Doha

Production Costs and Profitability

Bloomberg writer Madelene Pearson reported today that, “Global prices for fertilizer and agricultural chemicals are expected to be ‘significantly’ lower in 2009 than the previous year driven by a fall in demand and the global financial crisis, Rabobank Groep NV said.

“Prices for major farm inputs such as crop nutrients have fallen between 60 percent and 75 percent from records reached in mid-2008, the bank, the world’s largest lender to farmers, said today in an e-mailed statement. Demand for farm chemicals is expected to be lower in 2009 than the previous two years, it said.”

The article noted that, “‘The outlook for world fertilizer prices is significantly influenced by the current global economic downturn and the fall in the broader commodity prices for agriculture, energy and international freight,’ Rabobank said. ‘These factors have resulted in reduced fertilizer demand in the short term and consequently lowering prices.’

“To be sure, fertilizer prices will remain above long-term average levels, the bank said.”

Jeff Caldwell, writing yesterday at AgricultureOnline, reported that, “The U.S. economy’s in trouble, and those woes are trickling into the ag sector. Fuel prices are lower and fertilizer costs are expected to slide this year, and a looming battle for 2009 acres between corn, soybeans and wheat — along with grain prices — will hinge largely on factors like these.

But, these are volatile times for markets like fuel and fertilizer, and that’s translating to a cloudy crystal ball with 2009 corn and soybean production costs, says Iowa State University (ISU) Extension economist Mike Duffy. It’s important to get a handle on production costs now, but that’s going to be a tall order.”

The article also indicated that, “The dramatic rise in farmland prices and values is expected to slow in 2009. That’s not to say it’s totally leveling off, however; Duffy expects an eight-percent increase in land rents over ’08 levels in the coming year. But, a lot depends on other variables weighing on grain prices.

“‘Cash rent for 2009 is projected to be up but the amount of increase will vary considerably based on conditions and the quality of the land,’ he says. ‘Cash rents will follow land values. Land values, in turn, are dependant upon the income that can be earned. Decreased commodity prices and higher input costs will lower returns and should eventually lead to lower rents.’”

Meanwhile in a look at revenue variables, Bloomberg writer Jeff Wilson reported yesterday that, “Soybeans jumped to a three-month high and corn gained the most in three weeks on concern that hot, dry weather will stress plants in Argentina and Brazil, the biggest exporters of both crops after the U.S.”

The article stated that, “Soybean futures for March delivery jumped 29 cents, or 2.9 percent, to $10.16 a bushel on the Chicago Board of Trade. Earlier, the price touched $10.2075, the highest for a most- active contract since Oct. 3. Soybeans are up 31 percent from an 18-month low of $7.7625 on Dec. 5. Still, the price is down 38 percent from a record $16.3675 on July 3.

Corn futures for March delivery rose 16.25 cents, or 4 percent, to $4.275 a bushel in Chicago, the biggest gain since Dec. 16. The price has risen 40 percent from a two-year low of $3.055 on Dec. 5. Most-active futures touched a record $7.9925 on June 27.”

And with respect to potential profitability, Reuters writer Karl Plume reported on Monday that, “Iowa farmer Gordon Wassenaar says he is optimistic about 2009, displaying a sometimes puzzling ‘glass half full’ mentality needed in a profession in which mother nature can wipe out months of work overnight.

“He and other U.S. farmers notched record profits in 2008 as crop prices soared to all-time peaks, but economists say they may be lucky to break even this year because grain prices have plunged 50 percent while farm costs remain high.”

The article noted that, “”We’re cautiously optimistic, but nobody thinks that prices are going to go anywhere near as high as they were in 2008,’ he said from his 1,500 acre farm in Prairie City, Iowa, where he grows corn and soybeans.

“‘Realistically, unless you have an exceptionally good crop, you’re going to have to have (corn) prices over $4 a bushel to make any money at all. For soybeans, we probably need somewhere between $8 and $9 a bushel, but we’re in an area where we normally get pretty good soybean yields,’ Wassenaar said.”

Mr. Plume pointed out that, “Farmers across the Midwest United States are watching grain prices closely as they buy seed, fertilizer, and other farm chemicals in preparation for the upcoming 2009 crop year.

Economists at Iowa State University estimated production costs for the average farmer in Iowa at between $4 and $4.50 a bushel for corn and up to $10 a bushel for soybeans.”

And the article also noted that, “The export market is a concern as the global recession drags on. Domestic demand for feed grains is also off.

“Producers of beef and dairy cattle producers and hogs reduced herds in response to the summer’s soaring feed grain costs, while poultry producers scaled back flocks.”

For more detail on agricultural exports, listen to this USDA Radio Newsline item from yesterday entitled, “Export Outlook Uncertain for 2009,” which features comments from USDA Chief Economist Joe Glauber (MP3 audio available here).

And, as U.S. producers prepare for the 2009-crop year DTN Executive Editor Marcia Zarley Taylor reported yesterday that, “Expect lenders to rewrite their standard operating procedures when you call for a loan in 2009. It’s not business as usual anywhere in the banking system.”

The DTN article stated that, “Financial markets remain in upheaval after panic spread worldwide last fall, and that means credit-intensive farm operations face potentially major changes ahead, cautioned Allen Lash, president of AgriSolutions, an Illinois-based financial consultant.”

Vilsack Hearing

Philip Brasher reported yesterday at The Des Moines Register Online that, “Tom Vilsack could take office as agriculture secretary as soon as Jan. 20, the same day that President-elect Barack Obama is sworn in.

“The Senate Agriculture Committee has scheduled a confirmation hearing for Vilsack for Jan. 14. That would make it possible for the full Senate to vote to confirm the former Iowa governor as soon as Obama takes office and signs the nomination papers, said Mark Halverson, the committee’s chief of staff.”

And Tom Steever reported yesterday at Brownfield that, “Iowa Senator Charles Grassley says time will tell about farm bill implementation rules defining who is actively engaged in farming and eligible to receive federal farm payments. Grassley told reporters Tuesday that he doesn’t expect former Iowa Governor Tom Vilsack, the U.S. Agriculture Secretary designate, to express his thoughts on the interpretation of those rules until after the inauguration.

“‘What Governor Vilsack does, in many respects, will have to comport with, and I would expect it would comport with what Obama said during the campaign and what his issue papers have said that he had out for public discussion during the campaign,’ Grassley said Tuesday morning.”

A replay of Sen. Grassley’s entire telenews conference from yesterday is available here (MP3).

Doha

Aaditya Mattoo and Arvind Subramanian penned an opinion item that was posted yesterday at the Financial Times Online, which noted that, “The recent G20 summit communiqué included a commitment by world leaders not to impose protectionist measures. The ink was barely dry before a number of countries took measures to protect domestic companies. Russia imposed a number of import tariffs. India slapped restrictions on steel. France created a fund to protect French companies. The US and the European Union are contemplating state aid for the domestic auto industry. Earlier, China had increased its value added tax rebate for exports and is now publicly worrying that the renminbi is, yes, overvalued.

“As the financial crisis has morphed into a crisis in the real economy, the world is facing a sharp and perhaps prolonged economic slump. In these circumstances, resurgent protectionism is a real threat, especially since pre-existing anxieties about globalisation are widespread. Restrictions on trade and investment would deepen the recession and undermine efforts to reduce poverty.

“Recognising these dangers, and to head off protectionist pressures, leaders at the G20 summit called for a completion of the Doha development agenda of trade negotiations at the World Trade Organisation. But the current Doha agenda cannot adequately deal with all the challenges facing the trading system.”

After additional analysis, the authors stated that, “Finally, there are challenges for collective action from agricultural and oil markets. Prices in these markets have dropped sharply recently, but we should not forget that only a few months ago, we witnessed a new and dangerous form of protectionism – on the export side – in agriculture, and a cartelised oil market interacting with high demand to deliver unprecedentedly high prices. The global trading system does not effectively regulate export restrictions in agriculture and, most strikingly, no mechanisms exist for blocking collusive government action in the most important traded commodity – oil. Multilateral rules will have to address these gaps.

“Is it realistic for the trading system to aim for a broad agenda which includes exchange rates, environment, state aid, and oil and agricultural markets? Ironically, a bigger agenda that addresses the new concerns would improve the prospects of success because there would be greater scope for give-and-take between the major trading countries. China will have to recognise that its exchange rate policies can provoke a protectionist reaction; the US and EU will have to refrain from excessive recourse to contingent and environmental protectionism and to subsidies; and emerging market countries such as India will have to appreciate that keeping markets open will require an effort on their part to lower their significant trade barriers.

“In the wake of the financial crisis, the challenges on trade are becoming more urgent. The new Bretton Woods process is an opportunity to rethink not just the architecture for international finance but also international trade. How much a successful Doha will deliver can be debated but the importance of issues that Doha does not address is becoming glaringly evident. It is in this sense that the world must now look beyond Doha.”

And a Reuters news article from yesterday, which was posted at DTN –link requires subscription, reported that, “The global economic crisis and a downturn in agricultural prices will make it more difficult to secure a world trade pact in 2009, a top European Commission official said on Tuesday.

“‘We were very close to a Doha agreement (in 2008) and it is clearly a missed opportunity,’ Jean Luc Demarty, Director-General, European Commission Agricultural and Rural Development Department, said.

“‘It will be more difficult in 2009. Protectionist pressure will increase which gives so high a value to what could have been achieved in 2008,’ he told reporters after speaking at the annual Oxford Farming Conference.”

Keith Good