FarmPolicy

September 23, 2019

Agricultural Economy; Safety Net Concerns; the Budget; and COOL

Agricultural Economy

Lori Potter reported in yesterday’s Omaha World-Herald that, “There’s adequate money in Nebraska’s ag lending system for 2009, but today’s farmers must bring more than a long-standing relationship with the loan officer to the bank’s front door.

“They should have a business plan, confirmation of collateral and proof of cash flow in their back pockets.

“‘There’s no shortage for any operator, any producer or any business with a sound business plan,’ said Ron Horst of Town & Country Bank in Kearney. ‘That doesn’t change.’

However, borrowers and lenders are likely to discuss risk management in much greater detail than in the past.”

The article added that, “[Jason Henderson, vice president of the Federal Reserve Bank’s Omaha branch] said ag lenders are increasing collateral standards and paying more attention to risk management, which can be a concern for areas where ag land values have declined recently.

“[Ken Mehlin of FirsTier Bank] said farm income in 2009 and 2010 also may decline, but most producers still have opportunities to market crops for at least break-even prices. He originally believed that would be $4 per bushel for corn, but lower fuel and fertilizer costs may put break-even at $3.50 to $3.75 per bushel.”

(Note: To view cost-of-production forecasts for major U.S. field crops from USDA’s Economic Research Service, just download this Excel spreadsheet.)

And in Saturday’s Omaha World-Herald, Steve Jordon reported that, “The Midwest’s rural economy is in its worst shape since at least 2005, according to a survey of the region’s bankers.

“The overall Rural MainStreet Index hit a record low, as did its hiring component, said Creighton University economist Ernie Goss.

“He said bankers have ‘a much more negative outlook for the economy’ this year.”

The article added that, “Goss said farmland prices remain weak and agricultural equipment sales are struggling. The bankers expect continued economic decline in the coming six months, although they were slightly less pessimistic than in the January survey.”

Similarly, Dan Piller reported in Saturday’s Des Moines Register that, “Iowa farmers received another indication that their decade of good times may be nearing an end: Land values dropped by 6 percent in the state in the last three months of 2008, the Federal Reserve Bank of Chicago said.

“The decline in farmland values was the first such drop in a decade, but it surprised few agriculture experts who have watched corn and soybean prices plunge by more than 50 percent since last summer.”

And the Federal Reserve Bank of Minneapolis indicated last month that, “Cash rents and land values dropped slightly from the third quarter. Cash rents decreased slightly in the fourth quarter across all land types and across all of the district. The average drop in the district was 3 percent for nonirrigated farmland, irrigated farmland and ranchland.”

The Minnesota Fed added that, “There is ‘concern going into 2009 with volatility of commodity prices and input costs.’ This comment by a Minnesota ag banker reflects the overall mood of respondents. Most lenders expect profits to drop in the first quarter of 2009. Also, household spending and capital expenditures are expected to fall in the first quarter. Demand for loans will rise, and more agricultural producers will be extending and renewing loans. However, loans may be tougher to get, as 30 percent of respondents expect to increase collateral requirements. After several good years in agriculture for the district, 2009 could be a hard year.”

Meanwhile, Bloomberg writer Jeff Wilson reported on Friday that, “Corn and soybean prices fell to the lowest since mid-December on speculation that government stimulus plans will fail to stem the worldwide recession that has sent demand for commodities spiraling lower.”

Friday’s Commodity News for Tomorrow report, a publication from the CME Group, stated that, “Corn futures ended lower Friday amid general economic gloom, although the market managed to trim losses before the close to end above $3.50. Weaker U.S. stocks and crude oil set the bearish tone, analysts said.”

The CME report added that, “Soybean futures ended lower, extending the market’s two-week down trend, as economic woes continued to send buyers running for cover.”

In a related article, The Wall Street Journal reported on Saturday that, “Light, sweet crude oil for March delivery fell 54 cents, or 1.4%, to $38.94 a barrel on the Nymex.”

As oil prices soften, attention has focused on the economics of ethanol production.

A recent report from the University of Nebraska Extension Service (“Is Corn Ethanol Economically Viable in the Long Run?”) noted in part that, “[W]ith current corn price of about $3.50/bu., corn ethanol cannot compete unless oil prices rise to at least $55/barrel. Without the blenders’ credit, oil price would have to be at least $80/barrel for ethanol to be able to compete.

“The federal biofuel mandate calls for 50% more corn ethanol by 2015. If the mandate holds, price premiums for corn ethanol will rise until the incentive for that quantity is achieved. Corn ethanol will be profitable. But faltering public support creates concern that the mandate may be changed, and that the blenders’ credit may expire. In that case, the only hope for a profitable industry is that oil prices rise to $80/barrel or more, so that the industry can afford to pay $3.50-4.00/bu. for corn.”

And with respect to spring acreage allocation decisions, Mike McGinnis and Jeff Caldwell reported on Friday at AgricultureOnline that, “Commodity traders are gearing up for price variation in the spring to lure acres. John Tocks, a CBOT floor soybean trader, says the battle for acres should get underway before the end of March.

“‘The USDA Planting Intentions report at the end of March will give us an indication of any acreage battle,’ Tocks says. ‘We’ve also got all of those new insurance rules, fertilizer costs, and the corn/soybean price ratio that will weigh on farmers’ planting decision.’

“The corn/soybean price ratio is determined by averaging the closing prices of the Dec corn and Nov soybean futures contract throughout the month of February. Insurance companies use that average price in determining crop insurance rates. Therefore, farmers use this ratio as a benchmark in their planting decision.” (See related news release, “Spring crop insurance deadline nears,” which stated that, “March 16 is the deadline for farmers across the country to buy crop insurance on many spring planted crops. It is especially important this year because eligibility for federal crop disaster aid is now dependent upon having crop insurance.”)

In the livestock sector, USDA’s National Agricultural Statistics Service (NASS) released its Cattle on Feed report on Friday. The NASS report stated that, “Cattle and calves on feed for slaughter market in the United States for feedlots with capacity of 1,000 or more head totaled 11.3 million head on February 1, 2009. The inventory was 6 percent below February 1, 2008.” (See related graph).

And Bloomberg writer Whitney McFerron reported on Friday that, “Cattle prices fell to a two-month low and hogs tumbled the most in almost a year on signs that consumers are cutting back on meat purchases as the economy slumps.”

Safety Net Concerns

As some variables in the U.S. agricultural economy soften, concern regarding the federal farm safety net has drawn attention.

Jennifer M. Latzke reported recently at the High Plains/Midwest Ag Journal Online that, “[Secretary of Agriculture Tom Vilsack] told wheat producers that, with an increasing environmental emphasis, they should expect to see some of their farm subsidies, already under fire from many in the WTO and from Congress, to be coupled with climate change and conservation efforts.

“‘We should use the climate change discussion as a different way to provide resources to farmers, so it isn’t as trade distorting as some claim our subsidies to be,’ he said. Specifically under fire in the future will be the direct payments wheat growers now receive under the 2008 farm bill.”

An update posted on Friday at the National Association of Wheat Growers (NAWG) Online indicated that, “NAWG and 10 other farm groups wrote Secretary of Agriculture Tom Vilsack this week to emphasize their support for the farm safety net included in the 2008 Farm Bill, particularly the direct payment program.

The letter comes after recent comments by Vilsack, including those made before the joint meeting of the NAWG and U.S. Wheat Associates Boards last week, raised questions in some quarters regarding his Department’s intentions for these programs.”

According to NAWG, the letter stated in part that, “‘Since passage of the farm bill only seven months ago, commodity prices have dropped significantly…At the same time, many input costs are still on the rise, and net farm income is expected to decrease 20 percent in 2009…[D]irect payments are the only component of the safety net currently helping every farmer with base acres to deal with steep increases in input costs, dramatic commodity market swings and increasing uncertainty in the credit markets that they rely on to keep their farms running.’

“While voicing strong support for conservation programs included in the 2008 Farm Bill, the groups also pointed out that participation in many of these programs requires unreimbursed outlays by farmers above and beyond normal operating costs. Farmers who don’t have the means up front to perform conservation activities cannot take part in these programs.”

A full copy of the letter is available here.

Budget

Naftali Bendavid reported late last week at The Wall Street Journal Online that, “Two weeks after passing a $787 billon economic stimulus plan, Congress returns next week to take up another spending bill, this one with a price tag of $410 billion.

“Unlike the emergency recovery plan rushed through Capitol Hill in a matter of weeks, this covers the regular functions of government, from education to agriculture. It is leftover business from the final weeks of the Bush administration, and belatedly sets a formal spending plan for fiscal year 2009, which began Oct. 1.”

Ceci Connolly and Lori Montgomery reported in Saturday’s Washington Post that, “Less than a week after signing the largest economic stimulus package in U.S. history, President Obama is turning his attention to the nation’s long-term financial condition with an unprecedented effort to rein in government spending.

“To kick off the effort, the new president has invited about 130 people to the White House State Dining Room on Monday for a ‘fiscal responsibility’ summit, a marathon session on long-term budget-busters such as Social Security, Medicare, federal purchasing and tax policy.

The session is intended in part to counter Republican criticism that the new administration’s costly response to the economic crisis is needlessly pushing the country deeper into debt.”

And Lori Montgomery and Ceci Connolly reported in yesterday’s Washington Post that, “President Obama is putting the finishing touches on an ambitious first budget that seeks to cut the federal deficit in half over the next four years, primarily by raising taxes on businesses and the wealthy and by slashing spending on the wars in Iraq and Afghanistan, administration officials said.

“In addition to tackling a deficit swollen by the $787 billion stimulus package and other efforts to ease the nation’s economic crisis, the budget blueprint will press aggressively for progress on the domestic agenda Obama outlined during the presidential campaign. This would include key changes to environmental policies and a major expansion of health coverage that he hopes to enact later this year.

A summary of Obama’s budget request for the fiscal year that begins in October will be delivered to Congress on Thursday, with the complete, multi-hundred-page document to follow in April.”

***

Meanwhile, Rod Smith reported last week at Feedstuffs Online that, “Livestock and poultry producers are particularly worried about President Barack Obama’s appointment of Prof. Cass Sunstein as director of information and regulatory affairs in the White House Office of Management & Budget (OMB). Sunstein is an avowed animal rights supporter.

“According to the Center for Consumer Freedom, Sunstein, in remarks to a Harvard University conference on animal rights in 2007, proposed a ban on hunting for sport and adoption of the European model of animal welfare, and he questioned the ethics of eating meat and poultry. (His speech can be listened to at http://video.google.com/videoplay?docid=2586700172704318361. It starts at 39 minutes into the video.)

“In a 2004 book titled ‘Animal Rights: Current Debates and New Directions,’ he proposed that animals should be permitted to bring lawsuits, with lawyers acting on their behalf, according to the center.”

Mr. Smith added that, “At the same time, sources acknowledged there’s no clear evidence that Sunstein would push an animal rights agenda, one noting that he wrote an op-ed piece for the New York Times in 1998 supporting the rights of cattle producers to bring a lawsuit against Oprah Winfrey over her comments about beef.”

COOL

A U.S. Department of Agriculture news release from Friday stated that, “Agriculture Secretary Tom Vilsack today announced that the final rule for the Country of Origin Labeling (COOL) program will go into effect as scheduled on March 16th. He also released a letter inviting stakeholders to follow additional voluntary labeling practices. The rule, published in the Federal Register on Jan.15, 2009, has been under regulatory review by USDA pursuant to a Jan. 20, 2009, memorandum from the President’s Chief of Staff.

“‘I strongly support Country of Origin Labeling – it’s a critical step toward providing consumers with additional information about the origin of their food,’ said Vilsack. ‘The Department of Agriculture will be closely reviewing industry compliance with the rule and will evaluate the practicality of the suggestions for voluntary action in my letter.’”

The Associated Press reported on Friday that, “In calling for the stricter guidelines, the Obama administration is breaking from rules announced by the department shortly before President George W. Bush left office. The labeling law was enacted in a wide-ranging farm bill last year, but much of it was left up to interpretation by the Department of Agriculture.

“Supporters of the labeling law were not happy with the Bush administration’s version of the rules, which they said allowed meat companies to be vague about where an animal was born, raised and slaughtered.

“The Bush administration rule, which won praise from Canada, still takes effect next month. Vilsack told stakeholders the administration will write new rules if the meat industry does not comply with the voluntary standards.”

A news item released by the National Farmers Union on Friday indicated that, “National Farmers Union President Tom Buis commended U.S. Department of Agriculture (USDA) Secretary Tom Vilsack today for his actions to implement mandatory country of origin labeling (COOL). Vilsack announced today he has asked meatpackers to meet the clear intent of Congress when labeling their products.

“‘COOL has little value if products are not clearly labeled with their true country of origin,’ Buis said. ‘I’m pleased Secretary Vilsack acknowledges this and is taking the appropriate steps to ensure our food is properly labeled.’”

For complete information on the COOL statute and regulation, just click here.

Keith Good

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