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Trade; Economic Stimulus; the Ag Economy and Risk Management Issues

Trade Issues

Chris Bryant reported on Friday at the Financial Times Online that, “Leading financial and economic institutions joined Angela Merkel, the German chancellor, in calling on Thursday for countries to prevent their economic stimulus packages from harming global trade.

“The leaders of organisations including the World Trade Organisation, International Monetary Fund and World Bank issued a joint statement in Berlin declaring openness to trade and cross-border investment to be ‘the best preconditions for ensuring that economic momentum is regained on a global scale’”.

The FT article noted that, “Ms Merkel welcomed this revision as an ‘important signal’. She indicated that the participants were agreed that no country could discuss an economic stimulus package in isolation, including the US.”

Edward J. Cody reported in today’s Washington Post that, “The director-general of the World Trade Organization, Pascal Lamy, called Monday for a freer flow of trade information to help guard against protectionism as governments struggle to overcome the global economic crisis.

“Lamy, addressing the WTO’s new Trade Policy Review Body in Geneva, gave voice to rising fears, particularly among poor nations, that governments might succumb to pressure to restrict imports or subsidize home industries in the face of financial instability and economic troubles that have spread around the world since the Wall Street banking turmoil erupted last September.”

In his remarks, Director-General Lamy also stated that, “The seriousness of the global economic situation demands that we make a collective effort to improve the prospects for an early recovery. Completing the DDA [Doha Development Agenda] is by far our most important contribution in that respect. It is also the surest way we have of guarding our individual trade interests and the multilateral trading system against the threat of an outbreak of protectionism.”

With respect to the Doha talks, recall that last week Reuters news reported that, “It is important for the United States under President Barack Obama to set up a new trade team for the Doha round of trade talks to succeed, World Trade Organization chief Pascal Lamy said on Thursday.”

However, Reuters writer Christopher Doering reported yesterday that, “The United States will focus on stabilizing its domestic economy and getting key positions in the administration confirmed before turning its attention to the Doha round of World Trade Organisation talks, U.S. Agriculture Secretary Tom Vilsack said on Monday.

“‘Most of the attention, at least in the short term, will be focussed on getting this economy overall heading in the right direction,’ Vilsack told U.S. wheat growers meeting in Washington.

Senate committees have not yet held confirmation hearings for the Obama administration’s nominees for commerce secretary, Senator Judd Gregg, and U.S. trade representative, former Dallas Mayor Ron Kirk.”

Yesterday’s Reuters article indicated that, “The global economic recession has spurred calls to revive the talks as a way to encourage trade and stave off protectionist actions.

“Trade discussions are becoming ‘broader than they’ve been in the past,’ said Vilsack, noting that the environment and labour standards are important considerations in discussing trade.

“In the meantime, he said the administration will continue to promote bilateral trade agreements, find ways to increase opportunities for U.S. goods and encourage oversees markets to import more American beef.”

Economic Stimulus

With respect to the U.S. domestic economy, David M. Herszenhorn reported in today’s New York Times that, “Senate Democrats on Monday advanced the $838 billion economic stimulus bill, clearing a major procedural hurdle by a razor-thin margin with the help of just three Republicans. Final passage of the bill is expected Tuesday.

“The Senate vote, 61 to 36, which closed debate on the stimulus, symbolized the partisanship that still grips Congress despite President Obama’s call for new cooperation. It also highlighted the rising power of the centrist Republicans who cast the critical votes.

“Under Senate rules, it takes 60 votes to end debate on a controversial bill.

“The three Republicans, Senators Susan Collins and Olympia J. Snowe of Maine and Arlen Specter of Pennsylvania, joined 56 Democrats and two independents in favor. The vote followed a succession of floor speeches by Republicans criticizing the stimulus as a bloated, wasteful spending bill.”

Paul Kane indicated in today’s Washington Post that, “After full approval of the package today, the Senate will send its version of the legislation to a conference with the House, which approved its own $819 billion stimulus bill on Jan. 28 with no Republican votes. While the overall dollar amounts are similar in scope, the packages have pronounced differences. The Senate version, for instance, includes $110 billion more in tax cuts.

“A report from the Congressional Budget Office, issued as the Senate was voting last evening, produced a new cost estimate for that chamber’s legislation, increasing it from $827 billion to $838 billion.”

DTN Political Correspondent Jerry Hagstrom reported yesterday (link requires subscription) that, “An amendment to the economic stimulus bill co-authored by Sen. Ben Nelson, D-Neb., has reduced the amount of money from $171 million to $54 million for fixing and upgrading USDA’s Farm Service Agency computer system.

The House included $245 million for the FSA computer fix, and the difference between the two bills is likely to be a major bone of contention when the House and Senate go to conference on the bill later this week. Congressional leaders have said they will not send members home for the Presidents Day break until the bill is finished.”

Meanwhile, National Farmers Union President Tom Buis indicated yesterday that, ““The economy is, by far, the number one concern on the minds of rural citizens across the country. It is very important for Congress to act, and act quickly, to get our nation’s economy moving again and restore consumer confidence…[M]ost notably, both [the Senate and House stimulus] packages expand nutrition assistance programs. This will help farmers, who as a result of the economic downturn have experienced decreased demand for their products; and families, millions of whom have lost jobs, put food on the table.”

Ag Economy – Risk Management

In a closer look at key economic variables from agricultural economy, Bloomberg writer Jeff Wilson reported yesterday that, “Soybeans rose for a fourth straight session and corn gained on speculation that the U.S. government will lower its estimates for world output in a report tomorrow, after dry weather damaged crops in Argentina and Brazil.

“Smaller soybean and corn crops may be forecast for both countries, a Bloomberg News survey showed last week. Reduced harvests may boost demand for U.S. supplies. Hot, dry weather hurt the crops in Argentina and Brazil, the world’s biggest exporters after the U.S. The conditions may persist through Feb. 17, said Mike Tannura, a T-Storm Weather forecaster in Chicago.”

Mr. Wilson noted that, “Soybean futures for March delivery advanced 1 cent, or 0.1 percent, to $10.02 a bushel on the Chicago Board of Trade. Last week, the price rose 2.1 percent, snapping a three-week slump. The most-active contract touched a record $16.3675 on July 3.

“Corn futures for March delivery rose 0.25 cent, or 0.1 percent, to $3.775 a bushel, the third consecutive gain. Last week, the price dropped 0.5 percent, the fifth straight decline. Corn surged to a record $7.9925 on June 27.”

And yesterday’s Commodity News For Tomorrow report, a daily commodities newsletter provided by the CME Group stated that. “U.S. wheat futures closed higher on crop concerns, weakness in the U.S. dollar and positioning before a government crop report, analysts say. Dryness in China and the U.S. southern Plains continue to be concerns, they say. The regions received some moisture during the weekend, but more is needed, they say. ‘The precipitation wasn’t great enough to boost any soil moisture, so that’s bringing concerns back into the market of the ongoing dryness situation in the southern Plains,’ says Terry Reilly, analyst for Citigroup. ‘Concerns over the China winter wheat crop are still lingering in the market.’”

“CBOT March wheat jumped 8 cents to $5.65 a bushel,” the report said.

A University of Illinois Extension article from yesterday (“Focus on South America”) explained that, “A number of factors continue to influence corn and soybean prices. One of the more important factors recently has been weather and crop conditions in South America, particularly in Argentina.

“Argentina and Brazil are large exporters of soybeans and soybean products and Argentina is typically a large exporter of corn. Recently, Brazil has also exported large quantities of corn as production has exceeded domestic requirements. The size of those crops, then, has the potential to influence the export demand for U.S. corn and soybeans.”

The article provided a detailed look at corn and soybean production estimates for Brazil and Argentina and concluded by stating that, “Following record world production of coarse grains, wheat, and soybeans in 2008, some problems have emerged for 2009. The most notable, as outlined here, is in South America, but dry conditions have also been noted in parts of China and Australia. Production issues will become increasingly important over the next three months.”

Meanwhile, Hyun Young Lee reported in today’s Wall Street Journal that, “Market participants are tracking progress on the U.S. economic-stimulus package, which many hope will at least prevent a further slide in crude prices.

“Light, sweet crude for March delivery settled down 61 cents, or 1.5%, at $39.56 a barrel on the New York Mercantile Exchange on Monday.”

And Ronald D. White reported in today’s Los Angeles Times that, “Nationally, the Energy Department said, a gallon of gasoline was averaging $1.926, up 3.4 cents over the previous week and $1.034 below the price at this time last year.”

With the current price of oil and gasoline in mind, Bloomberg writer Tina Seeley reported late last week that, “The Agriculture Department is in discussions with the Environmental Protection Agency about raising the amount of ethanol blended into the U.S. gasoline supply, U.S. Agriculture Secretary Tom Vilsack said.

“About 21 percent of the U.S. capacity for ethanol production is idle, according to ethanol-maker Archer Daniels Midland Co.”

The article indicated that, “‘I do think it’s important for us to look for strategies to make sure the infrastructure of the ethanol industry is preserved, because it is a key component to this new energy future the president’s laid out,’ Vilsack, a former Democratic governor of Iowa, said today in an interview with Bloomberg News in Washington.

“Ethanol demand has fallen as gasoline use dropped since last summer. By increasing the blend, demand for ethanol will be boosted even as gasoline use falls. The U.S. recession exacerbated an ethanol supply glut as demand for transportation fuels dropped.”

The Bloomberg article added that, “The EPA in November said it would require gasoline to contain a 10.2 percent blend of biofuels this year.

“Vilsack said the discussions so far haven’t included ‘specific numbers. We’ve just begun the conversation.’”

In livestock developments, Curt Thacker noted yesterday at Barron’s Online that, “As of early February, Department of Agriculture wholesale prices for choice-grade beef, the better-quality grade found in grocery stores, are down about 2.5% from levels a year ago, and pork prices are off 6%. Choice beef fell 3.5% on the week, to $136.87 per hundredweight, while pork slipped 0.2% to $56.83.”

Mr. Thacker explained that, “The meat industry, like so many others, is reeling from declining global demand. But unlike other commodity sectors where someone can flip a switch and cease operations, animal life cycles prevent livestock producers from reacting speedily to market signals. Thus, meat producers who were scaling back production in response to record-high feed costs must keep cutting.

Yet supplies of meat and poultry are still ample — even with those production cutbacks — because exports have slowed. That hurts producers and processors, but is good for consumers’ pocketbooks. Supermarkets and other retailers are expected to offer good deals at the meat counter during February to boost sales until spring, when the backyard-grilling season starts.”

As variables in the agricultural economy fluctuate, producers have a variety of tools to assist them in managing their risk. Two of these tools include crop insurance and the new ACRE program.

An Iowa State University Extension publication from last week (“Crop Insurance Has Some Changes for 2009”) stated that, “Crop insurance indemnity prices, guarantees and premiums were all at record levels for corn and soybeans in 2008. Current market conditions make it unlikely that those levels will be reached again in 2009, but they will still be attractive. The Risk Management Agency has announced indemnity prices of $4 per bushel for corn and $9.90 per bushel for soybeans for APH (yield) insurance guarantees for 2009, the second highest prices ever offered. Prices for revenue insurance policies will not be known until the end of February.

“Producers should carefully calculate their insurance coverage needs before meeting with their crop insurance agent this year. Higher input costs and lower indemnity prices mean farmers will have to choose a higher percentage level of coverage to protect their costs of production.”

The article added that, “Loss payouts in Iowa for 2008 crops were substantial. Yield losses from flooding and wet weather were significant, but the biggest factor was the large decrease in market prices from February to harvest time. As of late January, insurance companies had paid out an average of $20.47 per acre for corn losses and $24.52 per acre for soybeans losses. Payments amounted to 90 percent of the premiums paid by Iowa farmers for corn, and 139 percent of the premiums paid for soybeans.”

Stu Ellis, writing today at the Farm Gate Blog (University of Illinois Extension) noted that, “The bullish market of the past two years is history. But the high cost of production is the present. How do you manage production, marketing, and revenue risk in the current environment?”

Mr. Ellis highlighted a few different packages that make analysis of crop insurance needs more simple: “The Premium Calculator will provide your crop insurance premium regardless of the county in which you farm in the 12 North Central states plus Maryland. After entering your state, county, and crop into the calculator, along with your 2009 APH yield, you will be provided with a table that indicates crop insurance premiums for various coverage levels and your yield and revenue guarantees for both farm-level insurance policies and county-level products. The Biotech Yield Endorsement is also detailed. The advantage of the premium calculator will help you create a crop budget before you have to meet with your crop insurance agent early in March. The Premium Calculator can be downloaded into Microsoft Excel software on your computer, or you can use the online calculator.”

Today’s update also highlighted the Payment Simulator, which “will evaluate a range of insurance products for both corn and soybeans in Minnesota, Iowa, Illinois, Indiana, and Maryland,” as well as the “What If” analyzer, a tool that “will compute your crop insurance premium, calculate your payment from various crop insurance products with prices and yields that you supply.”

With respect to ACRE, DTN Executive Editor Marcia Zarley Taylor reported yesterday (link requires subscription) that, “Don’t let what seems like complicated mechanics of the new Average Crop Revenue Election program cloud your vision, advises one of the architects of ACRE.

“‘Some individual circumstances might not fit this new farm safety net alternative,’ said Carl Zulauf, an Ohio State University economist who has studied ACRE and its prototype since 2002. But for most grain producers, ACRE likely offers a substantially better defense in years of low farm incomes than the current deficiency price system, he outlined in a recent analysis.

“Growers have until June 1 to elect ACRE, and USDA won’t set final ACRE guarantees until fall. But Zulauf found that based on January prices, ACRE’s 2009 revenue program offers Ohio corn, soybean and wheat producers a per-acre revenue guarantee that is at least 80 percent higher than traditional farm program supports, a trend with applications across most of the U.S. grain belt. Because ACRE’s revenue guarantees cannot adjust more than 10 percent a year, he estimates that those who elect ACRE will maintain that advantage through the 2012 crop year ‘no matter what happens to price and yield over the next few years.’”

The DTN article noted that, “For a detailed analysis of how to make your ACRE decision, see recent presentations by Ohio State University economist Carl Zulauf at http://aede.osu.edu/people/publications.php?user=zulauf.1

Keith Good