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Food- Commodity Prices, and Trade Issues

Food- Commodity Prices

New York Times writer Jack Healy reported last week that, “Consumer prices advanced at their slowest pace in 50 years in 2008, raising concerns about deflation as the weakening economy suppressed demand for cars, clothing, electronics and a host of goods and services, the government reported on Friday.

“The Bureau of Labor Statistics reported that the Consumer Price Index fell by a seasonally adjusted 0.7 percent in December, its third consecutive monthly decline, after sliding 1.7 percent in November. The so-called core rate, which excludes volatile food and energy costs, was unchanged.

“For all of 2008, consumer prices grew just 0.1 percent while the core rate rose 1.8 percent, the Labor Department reported.”

The Times article added that, “Economists have warned that prices will probably be flat or continue falling in 2009 as the recession drags on and lower energy costs work their way through the ladder of production.”

More specifically with respect to food, Friday’s price report indicated that, “The food and beverages index was virtually unchanged in December, as increases in the indexes for food away from home and alcoholic beverages offset a 0.4 percent decline in the food at home index. Within food at home, the indexes for three of the six major grocery store food groups declined. The fruits and vegetables index declined 2.4 percent in December, the fourth consecutive decrease, with fresh vegetables down 4.4 percent. The index for dairy and related products turned down in December, falling 0.9 percent after rising 0.4 percent in November. For the year, the indexes for fruits and vegetables and for dairy and related products rose 3.4 percent and 2.7 percent, respectively. The index for meats, poultry, fish and eggs declined 0.5 percent in December, but was up 5.1 percent for the year. The December decrease was driven by a 6.6 percent decline in the index for eggs. The indexes for cereals and bakery products and for other food at home both increased in December. The former index rose 0.3 percent in December and posted an 11.7 percent 12 month increase, while the latter climbed 0.6 percent and was up 9.3 percent for the year. The index for nonalcoholic beverages was virtually unchanged in December and has increased 5.9 percent since December 2007. The index for food away from home advanced 0.3 percent in December while the alcoholic beverages index increased 0.6 percent.”

A USDA Radio Newsline item from Friday also highlighted the food price issue. This brief audio report (MP3)noted that, “The final 2008 numbers are in for food prices and they show food did go up at the fastest pace in 18 years, but food inflation may slow down this year.”

Meanwhile, Jane Palmer reported in yesterday’s Omaha World-Herald that, “It’s a steak lover’s dream come true: Choice grade T-bones for $4.99 a pound and New York and Kansas City strip steaks for $5.99.

“Smart shoppers know those prices usually range from $8.99 to $12.”

The article stated that, “T-bone prices are normally about $8.99 to $9.99 per pound, and they can go up to $11 or $12 in the summer when demand is high, said Al Fink, meat director for Bag ‘N Save stores.

“‘This time of year, people will be cooking more roasts in the crockpot,’ he said. ‘The packers will have a better value on these (steaks) because they don’t want to get backed up. When there is a value, we want to pass that on to the consumer.’

Retail beef prices declined slightly nationwide in the final three months of 2008 in response to weaker consumer demand, said Jim Sawtell, livestock economist for the American Farm Bureau in Washington, D.C. That’s typical for November and December, when Americans eat more turkey and ham.”

And on the issue of agricultural commodity prices, Christine Stebbins noted yesterday at the Commodity Corner Blog (Reuters News) that, “Last week, worries about stress on the Argentine soy crop helped CBOT soybeans and grains recover some of the ground lost after the U.S. Agriculture Department surprised the markets on Monday reporting larger-than-expected domestic Dec. 1 U.S. grain stocks. USDA also raised its forecasts for the amount of grain to be left at the end of this current marketing season. CBOT soybeans, corn and wheat all ended lower for the week, with soy seeing the smallest decline and wheat the largest.

“Questions will continue to hang over 2009 demand for US grain exports and for biofuels, given sagging global economies. But this week the seasonal close watch on southern hemisphere supplies should come back to the fore, with Australia and South Africa weather also watched. The main focus as always, however, will be on South America.”

Yesterday’s update explained that, “Argentina in particular is suffering from drought, with the country’s output already seen being cut due to a lack of rain over the past month. While the now-pollinating corn crop is more vulnerable to the heat and dryness, the weather stress is giving soybeans an even bigger punch. Temperatures are expected daily in the range of 90 to 100 degrees Fahrenheit with no rain in sight. That spells more problems for the world’s number 2 corn exporter and number 3 soybean grower. Markets will factor it in daily, dependent on the latest weather news.

“Over the weekend central Argentina, the main crop region, only received light, scattered rains of 0.10 to 0.75 inch.

“The other big factor feeding into CBOT price movement will be the ongoing tug of war between corn and soybeans for acreage — as the strongest will entice more U.S. plantings of that commodity.”

The Reuters piece also noted that, “As always these days, the final wild card for grain markets will be from outside — namely, Wall Street. If Obama can inject more confidence into the markets, that can only be positive. The financial markets remain full of fear, still perceiving a creaky banking system and an economy of rising unemployment, bankruptcies and knock-on effects overseas.”

As some agricultural commodity prices trade at lower levels concerns about profitability have emerged.

The Associated Press reported on Friday that, “Farmers appear worried about their 2009 profits, and they have scaled back their equipment purchases, according to a survey of bankers in 11 Midwest and Plains states released Thursday.

“The bankers who responded to the monthly Rural Mainstreet survey say the current reduced crop prices, combined with high farm expenses, will create challenges for farmers this year.”

The AP article stated that, “‘As agriculture commodity prices have slumped, farmland price growth has moved into negative territory for a third straight month,’ [Creighton University economics professor Ernie Goss ] said.

“The farmland index dipped to 36.6 in January from December’s already low 37.1. That’s well below the high of 81 the farmland index hit last January.

“More than 58 percent of the bankers surveyed said they expect farm expenses to be the biggest risk to farm viability in 2009, while 42 percent said lower crop prices would be the greatest hazard.” 

Commodity price levels, particularly for corn, also impact the profitability of ethanol production.

Reuters news reported on Saturday that, “Average U.S. ethanol distillers remained in the red this week as prices fell for both the finished product and corn, the main input.

“The ethanol crush spread was practically unchanged at 20 cents a gallon, using the formula of the Midwest ethanol price, minus the corn price divided by 2.8.

“Operating costs such as natural gas prices and overhead trim the crush spread by about 25 cents per gallon, bringing net margins to -5 cents a gallon.”

Saturday’s Reuters article explained that, “Corn is the main input cost for U.S. ethanol makers. March corn closed at about $3.91 a bushel on Friday, down about 29 cents from last week.

“Ethanol prices fell about 6 cents a gallon to $1.58/$1.60 in the Midwest market, dealers said. Prices for the fuel fell as oil prices fell about $6 a barrel to $36.51 over the week.

A downturn in ethanol margins over the last several months has deepened a series of production shutdowns and curtailments as the hardest-hit distillers slow operations.”

The article added that, “Even cellulosic ethanol companies that hope to make a new alternative motor fuel from non-food sources like agricultural waste and fast growing grasses and trees, have had troubles. Construction of BlueFire Ethanol Inc’s planned Lancaster California cellulosic plant will be delayed until the company raises more funding.

“U.S. capacity to make ethanol has jumped since last year to nearly 11.2 billion gallons per year.

“The U.S. Renewable Fuels Standard mandate requires 11.1 billion gallons of biofuels to be blended into gasoline in 2009, which gave producers hope that margins would turn around this year.”

On the issue of cellulosic ethanol production, a USDA news release from Friday stated that, “Agriculture Secretary Ed Schafer announced today that USDA Rural Development has approved the first ever loan guarantee to a commercial-scale cellulosic ethanol plant. The $80 million loan to Range Fuels Inc., Soperton, Ga., comes from the Section 9003 Biorefinery Assistance Program authorized by the 2008 Farm Bill.

“‘The investment in this facility – which will make cellulosic ethanol from wood chips – has the potential to significantly advance the timetable for second generation ethanol production in this country,’ Schafer said. ‘I visited the pilot plant last October and was excited to see how well the technology works. The funding announced today helps the Bush administration fulfill its commitment to reduce America’s dependence on foreign oil by developing alternative, renewable energy sources. USDA is proud to work with the private sector to lead this important breakthrough in renewable energy production.’”

The news release indicated that, “The project is expected to produce an estimated 63 jobs. When fully operational in 2010, the plant is expected to produce approximately 20 million gallons of cellulosic ethanol per year.”

Trade Issues

Bloomberg writer Jennifer M. Freedman reported on Friday that, “The U.S. lodged a complaint at the World Trade Organization against the European Union’s decade- long ban on imports of American poultry, saying the policy violates global trade rules.

“U.S. chicken and turkey can be rinsed with chlorine, which is forbidden in the 27-nation EU. European agriculture ministers decided in December to maintain the ban, spurning an attempt by EU regulators to change the rules that outlaw the use of chlorine in poultry-cleaning products.”

The article explained that, “EU Industry Commissioner Guenter Verheugen asked the ministers to allow U.S. poultry that included a guarantee it had been rinsed with water. Most farm chiefs, including Germany’s Ilse Aigner and France’s Michel Barnier, rejected the proposal. U.S. officials see the ban as a test case on lifting EU trade and other regulatory barriers.

“‘We regret the U.S. decision to resort to WTO dispute settlement on this issue,’ Peter Power, the European Commission’s trade spokesman, said in an e-mail from Brussels. “We will carefully study the U.S. claims and will engage in consultations in good faith.”

For more information on this development see this news release, which was issued on Friday by the U.S. Trade Representatives Office.

In other trade news, Bloomberg writer Jeremy van Loon reported on Friday that, “Russia, the third-largest wheat exporter, called for ‘special conditions’ for food and agriculture products within the World Trade Organization, saying that would help it modernize after the Soviet era.

“Protecting the world’s food supply is as important as energy security and agriculture shouldn’t be considered just a ‘traded good,’ Russian Agriculture Minister Alexei Gordejew said today in Berlin. Russia needs significant investments to modernize farms, including access to funds and credit, he said without elaborating.

Russia is in negotiations to join the Geneva-based WTO, an international body of voluntarily participating nations that seek to establish rules over trade. The financial and economic crises have led many countries to put aside considerations of global trading regulations, including subsidies for industries, in order to save their economies, Gordejew said today.”

And on the issue of the Doha round of WTO trade talks, Reuters news reported yesterday that, “Brazilian President Luiz Inacio Lula da Silva urged U.S. President-elect Barack Obama on Monday to make completing the Doha round of world trade talks a priority, saying a lack of political will in Washington had undermined efforts to reach a deal.

“‘We were within a millimeter of reaching a deal. But at the last moment I would say the U.S. government didn’t have the political will for a deal because it was the end of (U.S. President George W.) Bush’s mandate,’ Lula said in his weekly radio broadcast.

“‘But I think it’s important that Obama takes the initiative again so we can conclude the Doha round because it will be a huge help for poorer countries at this moment of crisis, especially those that have economies based on agriculture.’”

Keith Good