February 19, 2020

USDA Reports; CFTC Issues; and Crop Insurance

USDA Reports

The U.S. Department of Agriculture released three reports yesterday highlighting several important variables in the U.S. and global agricultural economy.

The USDA’s Economic Research Service (ERS) released its 2009 Farm Sector Income and Costs Forecast, which stated that, “Net farm income is forecast to be $71.2 billion in 2009, down $18.1 billion (20 percent) from the preliminary estimate of $89.3 billion for 2008 [related graph]. Still, $71.2 billion would be 9 percent above the average of $65 billion earned in the previous 10 years.”

The report explained that, “In 2008, the farm sector was whipsawed by highly volatile domestic and international macroeconomic forces. Prices of both farm commodities and farm production inputs spiked in the first half of the year and then plunged in the latter half. The U.S. farm sector is perhaps more intertwined with the world economy than ever. Demand arising from both the growing populations and rising incomes in other countries has expanded markets for farm commodities and increased competition for critical production inputs such as fuel, feed, and fertilizer.”

With respect to production estimates, ERS stated that, “Corn production [related graph] is projected to total 12-13 billion bushels in 2009, which would be the second highest on record. Soybean production [related graph] is projected to be near 3 billion bushels and the fourth highest on record.

“It is expected that 2009 will be another good year for the farm economy, bolstered by strong demand for feed crops, oilseeds, and food grains, though earnings will not equal those of 2007 and 2008. Net farm income, projected at $71.2 billion, would be the fifth largest on record, as would net cash income ($77.3 billion) and value added ($108.8 billion).”

The ERS summary indicated that, “The value of crop production is expected to decline $20.7 billion in 2009, but still remain $10.6 billion above the value of crop production in 2007. The value of livestock production is expected to decline $11 billion, due to a $12-billion drop in dairy production [related graph]. With farm production costs (most notably, feed, fertilizer and fuel) also projected down in 2009, net value added is forecast to be down $17.3 billion (12.6 percent).”

More specifically on the issue of production costs, the ERS report stated that, “Following an expected increase of $36.2 billion (14.2 percent) in 2008 to a nominal record $290.6 billion, production expenses [related graph] are forecast to decrease $13.5 billion (4.6 percent) in 2009 to $277.1 billion, the second highest level ever. This drop would be the first since 2002 and the largest nominal decline ever. Still, forecast expenses for 2009 would constitute a larger share of gross farm income—79 percent—than in 2008.”

And with respect to federal farm subsidy payments, yesterday’s summary explained that, “Direct government payments are expected to total $11.4 billion in 2009, down from the $12.4 billion paid out in 2008 [related graph]. This level would be 27 percent below the 5-year average for 2004-08. Direct payments under the Direct and Countercyclical Program are forecast at $4.89 billion for 2009, almost a 5- percent decrease from the average for the previous 5 years. This decrease is primarily attributed to producers giving up a portion of their direct payments upon enrolling in the Average Crop Revenue Election Program (ACRE) in 2009. This program was recently authorized by the Food, Conservation, and Energy Act of 2008 (2008 Farm Act), whereby direct payments in 2009 will be reduced by 20 percent for ACRE enrollees, even though few if any ACRE payments will actually be made in this calendar year. In general, direct payment rates are fixed in legislation and are not affected by the level of program crop prices. The small fluctuations across calendar years are the result of changes in the number of farmers taking advantage of optional advanced payment in December, affecting the share of the payment rolled into the following calendar year. As of last December, very few advanced payments were made.

Countercyclical payments are forecast to increase from $720 million in 2008 to $1.2 billion in 2009. The drop in cotton prices in the latter half of 2008 is responsible for this projected increase in program payments. Since 2006, only upland cotton and peanuts have received countercyclical payments. Under the 2008 Farm Bill, the timing of countercyclical payments will change. For crop years 2008 through 2010, producers will receive two countercyclical payments. A partial payment will be made after 180 days of the marketing year and the final payment will be made beginning the following October 1st.

Marketing loan benefits—including loan deficiency payments, marketing loan gains, and certificate exchange gains—are projected at $685 million in 2009, up from $90 million in 2008. In 2009, upland cotton producers will realize almost 99 percent of the total marketing loan benefits. The other crops receiving marketing loan benefits are wool, mohair, and pelts. Although prices have declined from their peaks in 2008, marketing loan benefits are still not available to the remaining program crops at current price levels.”

Bloomberg writer Alan Bjerga reported yesterday that, “‘We’re obviously concerned’ with the projected drop in income, U.S. Agriculture Secretary Tom Vilsack told reporters today in Washington. While a dropoff from a record year is not unusual, Vilsack said the department is looking for ways to assist farmers who may be in financial jeopardy.”

Mr. Bjerga added that, “Vilsack said he’s especially concerned about dairy farmers. Milk futures have plunged 54 percent since the end of June and retail prices may decline as much as 4 percent this year, the USDA said last month. With dairy-product revenues projected to drop 35 percent in 2009, farmers may begin to kill their milk cows, creating a beef glut that would harm other livestock producers, he said.”

Also yesterday, ERS released its Agricultural Baseline Projections, noting that, “USDA Agricultural Projections for 2009-18, released in February 2009, provides longrun projections for the farm sector for the next 10 years. These annual projections cover agricultural commodities, agricultural trade, and aggregate indicators of the sector, such as farm income and food prices.”

As noted, there are numerous variables highlighted in the Baseline Projections, one of which focused on acreage, where the report stated that, “Projections for field crops reflect provisions of the Food, Conservation, and Energy Act of 2008 (2008 Farm Act), which are assumed to continue through the projection period. An important change in the 2008 Farm Act was the reduction in the maximum acreage enrollment in the Conservation Reserve Program (CRP). Rather than the previous cap on enrollment of 39.2 million acres, the new farm legislation sets the maximum at 32 million acres, beginning on October 1, 2009. With CRP enrollment at 34.8 million acres on September 30, 2008, this policy change provides some additional cropland for potential use in production rather than tightening cropland availability over the projection period.

“Sustained high prices prompted by strong demand combined with reduced CRP enrollment keep U.S. cropland use high in the projections [related graph]. Although declining somewhat from the high plantings in 2008 of over 252 million acres, projected plantings for the 8 major field crops remain near 250 million acres over the next 10 years.”

More specifically, ERS noted that, “A gradual shift to corn away from other crops reflects the high levels of domestic corn-based ethanol production and gains in exports that keep corn demand and producer returns strong. Following a decline in 2008, corn acreage increases to 90 million acres by 2011 and remains at or above that level over the remainder of the projection period.

“Soybean plantings decline over the next several years, but remain above 70 million acres as net returns remain favorable.

“Wheat plantings decline from the high level of 2008 as producer returns are lower. Wheat acreage falls below 60 million acres in the longer run as weak demand growth reduces the crop’s competitiveness for land relative to other crops.”

(See this graph depicting corn, soybean and wheat acreage projections).

Reuters news reported yesterday (article posted at DTN, link requires subscription) that, “U.S. farmers will plant 88.0 million acres of corn, 60.5 million acres of wheat, 74.0 million acres of soybeans and 8.4 million acres of upland cotton this year, the Agriculture Department said in its ‘baseline’ report on Thursday.”

The article noted that, “USDA will conduct a survey of farmers to produce its planting intentions report at the end of March.”

ERS also summarized long-term projections on the issue of federal farm payments; stating that, “Direct government payments to farmers are projected to fall from $12.4 billion in 2008 to an average of less than $10 billion annually in 2009 to 2018. After 2010, price-dependent program benefits represent a declining share of payments [related graph].

Strengthening domestic and international demand holds prices for most crops above levels that would result in marketing loan benefits or counter-cyclical payments. For example, even with stochastic considerations (included here to capture potential variation in farm program benefits due to variability in production yields), payments for marketing loan benefits and counter-cyclical payments for feed grains are minimal, totaling less than $100 million from 2010 through 2018.

Projections of government payments under the Average Crop Revenue Election (ACRE) program (assuming stochastic yield variability) exceed $600 million in 2010 and reach almost $400 million in 2011, reflecting reductions in prices from recent highs. Lower ACRE payments of less than $200 million annually are projected for subsequent years, reflecting relative stability in agricultural commodity markets in the projections and assumed moderate levels of producer enrollment in the program.”

The third important report released yesterday by USDA was the “Farms, Land in Farms, and Livestock Operations 2008 Summary,” which was issued by the National Agricultural Statistics Service (NASS).

NASS indicated that, “The number of farms in the United States in 2008 is estimated at 2.2 million, 0.2 percent fewer than in 2007. Total land in farms, at 919.9 million acres, decreased 1.56 million acres, or 0.2 percent, from 2007. The average farm size was 418 acres, unchanged from the previous year. The decline in the number of farms and land in farms reflects a continuing consolidation in farming operations and diversion of agricultural land to nonagricultural uses.”

Yesterday’s NASS report also included two interesting graphics; this one depicts the change in farm numbers by state since 2007, and this one depicts the average farm size by state in 2008.

The Food and Agriculture Organization of the United Nations noted yesterday in a news release that, “Early indications point to a reduction in global cereal output in 2009 from the 2008 record, according to FAO’s latest Crop Prospects and Food Situation report. Smaller plantings and adverse weather look likely to bring grain production down in most of the world’s major producers.

“While conditions are generally favourable for winter wheat throughout Europe and the United States, planted area in these countries has declined, reflecting the prospect of sharply reduced returns compared to last year, combined with persisting high input costs, the report said.”

Meanwhile, a Dow Jones News article from yesterday (posted at DTN, link requires subscription) reported that, “European Union grain production in 2009-10 is forecast at 296 million metric tons, unchanged from the January estimate, analysts Strategie Grains said Thursday.

“The 2009-10 production is now expected to be down 5 percent on the year, said the report.

“Soft wheat production estimates for 2009-10 were down marginally from last month’s at 132.2 million tons, down 5.6 percent on the previous year’s 140.1 million tons. The group revised down its 2008-09 soft wheat output by 200,000 tons.”

CFTC Issues

A news release issued yesterday by the House Agriculture Committee stated that, “Today, the House Agriculture Committee approved legislation to increase the transparency and strengthen oversight of futures, options and over-the-counter (OTC) markets. By voice vote, the Committee approved the Derivatives Markets Transparency and Accountability Act of 2009 as amended, a bill sponsored by Committee Chairman Collin C. Peterson of Minnesota.

“The legislation, H.R. 977, will bring greater transparency and oversight to futures and OTC derivatives markets. It toughens position limits on futures contracts for physically-deliverable commodities as a way to prevent potential price distortions caused by excessive speculative trading. The bill also imposes a clearing requirement on OTC derivatives contracts and empowers the Commodity Futures Trading Commission (CFTC) with the ability to suspend trading in naked credit default swaps under certain circumstances.”

Associated Press writer Marcy Gordon reported yesterday that, “Congress is moving forward on an ambitious project to impose new government reins on the financial markets. A House panel on Thursday cleared a measure to expand regulation of complex financial instruments and the authority of a small federal agency.

“The legislation authored by Rep. Collin Peterson, D-Minn., chairman of the House Agriculture Committee, also would give the government authority to suspend trading in credit default swaps — a form of insurance against loan defaults — in certain circumstances.”

The AP article added that, “The legislation would require the use of clearinghouses to provide transparency for transactions in credit default swaps and other derivatives, the complex financial products that have ballooned in global trade and, critics say, pose a threat to the system’s stability.”

The article also explained that, “Peterson said the measure would go to the full House for a vote. There could be a delay, however, because the House Financial Services Committee may assert jurisdiction over the bill, according to congressional aides.

It would expand the authority of the Commodity Futures Trading Commission, one of the smallest federal agencies, by giving it criminal prosecution power over companies and individuals that violate antifraud rules — something only the Justice Department is now empowered to do. And it specifically prohibits the Federal Reserve from regulating the derivatives markets, saying either the CFTC or the Securities and Exchange Commission could step into that role.”

Sarah N. Lynch reported yesterday at The Wall Street Journal Online that, “The U.S. House Agriculture Committee adopted an amendment to a derivatives bill which would give the Commodity Futures Trading Commission the authority to suspend trading of certain credit-default swaps with consent of the president.

“The amendment adopted by the committee clarified that the CFTC would only be able to suspend trading of so-called ‘naked’ credit-default swaps in which purchasers of the swaps don’t have an underlying interest in the bonds.

“It also clarified that a trading suspension could only be imposed on those credit-default swaps if they are related to securities that are subject to a short-selling ban ordered by the U.S. Securities and Exchange Commission.”

Crop Insurance

Jeff Caldwell reported yesterday at AgrcultureOnline that, “Indemnity prices for corn and soybeans (for yield-based policies) are high for ’09 — not quite as high as last year — at $4 and $9.90 per bushel, respectively. Prices for revenue-based insurance policies will be nailed down at the end of this month.

“But, input costs and other expenses to get the ’09 crop raised are also high, meaning a higher percentage of coverage may be necessary to afford the same protection in the event insurance payments become an income source. Add to that a few changes to federal crop insurance this year, and it will be important to do your homework before nailing down your policies.”

The article noted that, “In 2008, according to the insurance industry website, 272 million acres of farmland nationwide were protected through the federal crop insurance program. Crop insurance payouts were big in parts of the country last year. In Iowa, for example, flooding caused many losses. Then, grain prices fell, altering the ratio between premiums and amounts paid.”

Keith Good

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