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Market Signals- Acreage, Biofuels and the Environment; Economic Issues and Agriculture

Market Signals- Acreage, Biofuels and the Environment

Yesterday’s Commodity News For Tomorrow report, a daily commodity publication provided by the CME Group, stated that, “Bearish macroeconomic forces, technical weakness and wet weather forecasts for Argentina sent corn futures lower, traders said. Sharply lower equities and crude oil set the tone, as traders worried about depressed demand in the face of a global recession.”

“March corn ended down 14 cents to $3.49 1/4 per bushel.”

Likewise, yesterday’s CME report stated that, “Soybeans ended sharply lower, tumbling to eight-week lows on the back of bearish economic views and stabilizing South American crop conditions. The market was met with a plethora of bearish influences Tuesday, with a stronger U.S. dollar, falling crude oil prices and collapsing stock indexes attracting sellers, said John Kleist, broker/analyst with Allendale Inc.”

“March soybeans dropped 52 1/2 cents, or 5.5%, to $9.03 a bushel.”

USDA’s National Agricultural Statistics Service (NASS) provided additional information yesterday that could shed some light on the issue of potential future feed demand, an important variable in corn utilization. In its United States and Canadian Cattle report from yesterday, NASS stated that, “All cattle and calves in the United States as of January 1, 2009, totaled 94.5 million head, 2 percent below the 96.0 million on January 1, 2008. All cows and heifers that have calved, at 41.0 million head, were down 2 percent from the 41.7 million on January 1, 2008.”

In a related item regarding beef consumption, USDA’s Economic Research Service noted in its Livestock, Dairy, and Poultry Outlook report yesterday that, “Increased job losses and other aspects of current domestic economic conditions have dampened consumers’ willingness to dine away from home except in fast-food and casual dining establishments. This decline in eating out has resulted in a shift away from higher quality beef to lower priced beef cuts and processing beef (e.g., ground products) and a narrowing of the spread between Choice and Select cutout values. Lower prices for meat products from pork and poultry are also contributing to downward pressures on beef prices. While packers have recently enjoyed positive margins, declining supplies of fed cattle and the potential for lower retail prices are expected to squeeze packer margins.”

Also yesterday, NASS stated in its United States and Canadian Hogs report that, “U.S. inventory of all hogs and pigs on December 1, 2008 was 66.7 million head. This was down 2 percent from both December 1, 2007 and September 1, 2008. The breeding inventory, at 6.08 million head, was down 2 percent from last year but up slightly from the previous quarter. Market hog inventory, at 60.6 million head, was down 2 percent from both last year and last quarter. The pig crop, at 28.4 million head, was down 4 percent from 2007 but up 6 percent from 2006. Sows farrowed during this period totaled 2.99 million head, down 6 percent from last year.”

Meanwhile, a University of Illinois Extension article from Monday (“Acreage and Biofuels”) examined other variables that will have an impact on the market prices of corn and soybeans.

Monday’s report stated that, “Corn and soybean prices over the next several months will be influenced by several factors. Important among those factors will be the 2009 acreage decisions of U.S. producers and the strength of the biofuels markets.

“Expectations about planted acreage of corn and soybeans in the U.S. are in a wide range and actual planting decisions may remain uncertain for some time. Uncertainty centers around at least three factors. First, the prices of 2009 crop corn and soybeans continue to fluctuate, giving mixed signals to producers about the likely relative profitability of corn and soybeans in the 2009-10 marketing year. Second, there is considerable uncertainty about the relative cost of producing corn and soybeans in 2009. Fertilizer prices were very high in the fall of the year, but have recently declined, at least for some ingredients in some markets. The cost of producing corn in 2009 could vary substantially among producers. The distribution of producers who have paid high input prices and those who may pay lower prices could influence planted acreage, but that distribution is not known. Third, the sharp decline in winter wheat seedings and expected decline in cotton acreage [related item] in 2009 will result in additional acreage for other spring planted crops. The magnitude of that acreage is not known with certainty because some acreage could return to non-row crop production or be idled due to expectations of tighter margins for row crop production. In addition, the large decline in seedings of soft red winter wheat may result in fewer acres double cropped to soybeans.”

With respect to the influence of biofuels on acreage allocations, the University of Illinois article explained that, “Under current conditions of relatively low energy prices and tight margins for ethanol producers, it is believed that the Renewable Fuels Standards (RFS) will determine the level of biofuels production and, therefore, the demand for corn for ethanol. Those standards call for 10.5 billion gallons of renewable biofuels use in 2009 and 12.0 billion gallons in 2010. The standards increase to 15 billion gallons by 2015. Assuming those standards remain in place, how much corn will be used for ethanol production in the 2008-09 and 2009-10 marketing years? The answer is not straightforward. First, mandated use is for calendar years, which do not match corn marketing years. Second, there is some uncertainty about the mix of feed stocks that will be used to meet the mandated level of use. Third, within certain rules, blenders can use surplus biofuels (in excess of the RFS) in 2008 to meet the 2009 requirements and can borrow some of next year’s requirements to meet this year’s standards.

“In spite of the uncertainty surrounding biofuels production, it is clear that if the Renewable Fuels Standards are maintained, there will be large increases in the use of corn for ethanol production over the next two years and beyond. The USDA projects use during the current marketing year at 3.6 billion bushels. We would expect use to exceed four billion bushels in 2009-10 and to exceed five billion bushels by 2015-16.”

More specifically, Monday’s article stated that, “The likely increase in corn use for ethanol, along with a rebound in U.S. corn exports, during the 2009-10 marketing year, suggest that planted acreage of corn in the U.S. in 2009 needs to be maintained at least at the level of 2008. For soybeans, an increase n planted acreage is not needed in 2009 if the U.S. average yield is near trend value of 42.5 bushels and use during the 2009-10 marketing year increases by less than 250 million bushels (8.4 percent).”

In a related item, an update posted on Monday at the Domestic Fuel Blog stated that, “Increasing the approved level for ethanol that can be blended into gasoline is the number one priority for the ethanol industry this year, and recently support for that goal has been indicated by two major players in Congress and the administration.

Senator Jeff Bingaman (D-NM), chairman of the Senate Energy and Natural Resources Committee, said in a recent New York Times interview that he thought government regulations that limit ethanol content to 10 percent should be reconsidered.

“‘I believe we could go to E-12, or E-14 or E-16 without causing any great problems with vehicle operation,’ he said.

“Bingaman said the EPA and the Energy Department are currently conducting tests on higher blends and results could be available within a year or so.”

As biofuel production continues to have an impact on acreage allocation decisions, researchers have examined the potential ripple effects that these changes in acreage allotments might have on other sectors.

In the March edition of Amber Waves, a magazine published by USDA’s Economic Research Service (ERS), Scott Malcolm and Marcel Aillery penned an article entitled, “Growing Crops for Biofuels Has Spillover Effects.”

In part, the ERS article noted that, “Volatile petroleum prices, along with Federal policies aimed at reducing U.S. dependency on oil imports and mitigating climate change, have sparked rapid growth in biofuel demand. In response, production of agricultural commodities that serve as feedstock for biofuels has increased. Federal policy initiatives and private-sector investment point to continued growth in biofuel production and, consequently, increased demand for agricultural products.”

The article added that, “Growing demand for corn and other biomass feedstocks will transform the agricultural landscape as regional cropping patterns adjust and production practices adapt. While biofuels have been viewed as an environmentally preferred alternative to fossil-based fuels, there is growing concern about the potential effects of feedstock development on resource use and environmental quality. By increasing demand for agricultural feedstocks, the new RFS will encourage increased production of crops that may lead to conversion of land for use in crop production, and more intensive use of fertilizers and other inputs, increasing the potential for environmental degradation.

“Higher demand for corn, for biofuel as well as for animal feed and human food, has increased corn production in traditional corn-growing regions and elsewhere. As farmers responded to higher corn prices, prices and production levels for other crops adjusted as well. Crop producers have generally benefited from higher returns to corn and other grain crops. Some livestock and poultry producers, however, are worse off. More corn going to biofuels, together with reduced production of soybeans, sorghum, and other feed crops, has contributed to a net increase in grain feed costs for livestock producers. The availability of distillers’ grains, a byproduct of corn-based ethanol production that can be used as a feed supplement for some livestock, may lessen the impact on feed costs (see ‘Grain Prices Impact Entire Livestock Production Cycle‘). These changing feed markets, according to ERS analysis, will prompt a slight decline in animal production.”

After additional analysis, the Amber Waves article stated that, “As more of the Nation’s land is cultivated and as farmers adjust cropping patterns and production practices, the farm sector’s impact on soil and water likely will change. The shift to corn, for example, has largely displaced soybeans and small-grain crops that are generally less input intensive. Higher commodity prices also may intensify use of both irrigation and chemical inputs that enhance crop yield. Much of the new acreage under cultivation may occur on marginal lands that are more highly erodible.

ERS model results indicate that meeting biofuel targets will raise total nitrogen fertilizer use by an estimated 2.0 percent over previous expectations for 2016. Higher fertilizer use reflects increases in both cropland cultivated and intensity of applied fertilizer in corn production (see ‘Recent Volatility in U.S. Fertilizer Prices: Causes and Consequences‘). Nitrogen use rises in all regions except the Delta, where additional soybean acres supplant more fertilizer-intensive crops. The Northern Plains show the largest increase in nitrogen use, reflecting expanded production of corn.”

In a related item regarding the environment and agriculture, a recent Congressional Research Report (CRS) entitled, “Environmental Quality Incentives Program (EQIP): Status and Issues,” stated that, “The Environmental Quality Incentives Program (EQIP) is a voluntary program that provides farmers with financial and technical assistance to plan and implement soil and water conservation practices. EQIP is the largest agriculture conservation financial assistance program for working lands. EQIP was first authorized in 1996 and was most recently revised by Section 2501 of the Food, Conservation, and Energy Act of 2008 (P.L. 110-246, the 2008 farm bill). It is a mandatory spending program (i.e., not subject to annual appropriations) and is administered by the U.S. Department of Agriculture’s (USDA’s) Natural Resources Conservation Service (NRCS). Funding is currently authorized to grow to $1.75 billion in FY2012. Eligible land includes cropland, rangeland, pasture, non-industrial private forestland, and other land on which resource concerns related to agricultural production could be addressed through an EQIP contract.”

On page three of the report, the CRS writers explained that, “The 1996 farm bill authorized EQIP funding of $130 million in FY1996 and $200 million annually from FY1997 through FY2002. The 2002 farm bill significantly increased the annual authorized funding level incrementally from $400 million in FY2002 to $1.3 billion in FY2007. EQIP funding levels were revised in Section 1203 of the Deficit Reduction Act of 2005 (P.L. 109- 171) to limit funding to $1.27 billion in FY2007, while extending the authorization through FY2010 and providing $1.27 billion in each of FY2008 and FY2009, and $1.3 billion in FY2010.

“The 2008 farm bill further increased the annual authorized funding levels incrementally from $1.34 billion in FY2009 to $1.75 billion in FY2012. Funding under EQIP is mandatory (not subject to annual appropriations), and the program receives authorized amounts each year under the borrowing authority of USDA’s Commodity Credit Corporation (CCC). Congress, however, has limited EQIP funding below authorized levels in every year since FY2005, through annual appropriations bills. Figure 1 identifies the authorized and actual funding levels for EQIP. The Senate-reported FY2009 agriculture appropriations bill (S. 3289, S.Rept. 110-426) would limit EQIP to $1.05 billion for FY2009—a reduction of $285 million from the authorized level of $1.34 billion in the 2008 farm bill. Final action on FY2009 agriculture appropriations is pending.”

Economic Issues and Agriculture

Patrick Barta reported in today’s Wall Street Journal that, “A delegation from Thailand, the world’s biggest rice exporter, is asking Vietnam to help it stabilize the tumbling price of rice — the latest indication of how agricultural markets have changed in the months since riots over food costs gripped parts of the developing world.

“Industry experts aren’t expecting any major price-fixing accords between the two countries, which together control about 45% of global rice exports.

“A Thai participant in this week’s meetings in Vietnam, held with representatives of its rice industry, emphasized that the two countries are speaking only in general terms about how to keep prices from falling from current levels.”

Today’s Journal article explained that, “Just a few months ago, residents in poor countries took to the streets to protest the soaring price of rice and other food. Since then, grain prices have fallen about 30% from their peaks in mid-2008, according to the Food and Agriculture Organization of the United Nations.

“The price of Thai rice, a global benchmark, has dropped to about $600 a ton from nearly $1,000 in May.”

Domestically, a news release issued last week by the National Cotton Council stated that, “The U.S. cotton industry continues to face ‘a very competitive and difficult economic climate’ but there are some reasons for optimism in the coming year, National Cotton Council Economist Dr. Gary Adams says.”

The release added that, “In describing the world outlook for 2009, Adams said world cotton production is projected to fall 4.3 million bales to 105.5 million bales – the smallest crop since 2003. World mill use will recover to 113.8 million bales. The smaller crop and increased mill use would allow stocks to decline to 56.3 million bales from 62.2 million in 2008.”

Meanwhile, the Associated Press reported yesterday that, “Georgia lawmakers are trying to revive the peanut’s good name.

“The lunch box staple didn’t used to be such a tough sell, but Georgia’s vital crop has taken a whipping since a nationwide salmonella outbreak tied to peanut products from a Blakely, Ga., plant, has sickened more than 600 people and been linked to nine deaths.

“Lawmakers in the state that is the nation’s leading peanut producer are guzzling down bags of peanuts, organizing peanut butter events and offering the legumes boiled, shelled and just about any other way to all who are willing to eat them.”

The AP article added that, “Georgia takes special stock in its favored crop. Its most famous politician, Jimmy Carter, was a peanut farmer, and the industry employs 50,000 people and packs an estimated economic impact of $2.5 billion — more than double that of the next leading state, Texas.”

And on the economic new stimulus package, which President Obama signed into law yesterday, American Farm Bureau Federation President Bob Stallman stated yesterday that, “The American Farm Bureau Federation is pleased with the broadband, renewable energy and tax provisions contained in the stimulus package that was signed by President Barack Obama today. These provisions will help the agriculture industry and all Americans through the economic recovery period.”

Keith Good