Ag Economy- Focus on Dairy Sector
Jerry Hirsch reported in today’s Los Angeles Times that, “Frustrated with low milk prices, dairy farmers are selling cows for hamburger meat and threatening to dump milk into sewers. Many are burning through their life savings hoping to survive the slump, and others are exiting the business.”
Mr. Hirsch explained that, “The pain is being felt throughout the U.S. industry, but it’s especially keen in California, the No. 1 dairy state. The Golden State’s 1,800 dairies produce $7 billion worth of milk annually, more than one-fifth of the nation’s supply. Slumping international demand combined with an American public ordering fewer cheese pizzas has turned the milk market sour.
“Current prices are about half of what it costs California producers to feed and milk their herds; every carton sold in the supermarket represents a loss on the farm. Farmers are staying afloat by getting loans secured by every cow, tractor and acre they own. But experts say that if milk prices don’t rise in the coming months, many farmers will burn through their cash and go out of business.”
Today’s L.A. Times article added that, “Through much of last year, the average milk price hovered around $17 per 100 pounds — although consumers purchase milk by the gallon, the industry measures by pounds. The bottom fell out of the market when the economy tanked last fall. Prices now hover around $10, according to the California Department of Food and Agriculture. Farmers generally need at least $16, and often more, per 100 pounds to break even, depending on their debt, feed requirements and other factors.
“It’s good for shoppers. A gallon of milk at Stater Bros. is just $2.02, down 28% from $2.79 a year ago. But it has created havoc in dairyland.
“‘It is a mess. The market just disappeared with the global economic crisis, and unfortunately for dairy producers, they can’t simply turn the cows off to reduce the supply of milk,’ said Michael Marsh, chief executive of Western United Dairymen in Modesto.”
The article pointed out that, “So far, the main government action has been to buy up 238 million pounds of nonfat dry milk powder and 4.6 million pounds of butter since prices started to fall in October. Last week, the USDA said it would provide subsidies to export up to an additional 150 million pounds of nonfat dry milk, 46 million pounds of butterfat and 6 million pounds of cheese to help dry up the surplus. Cumulatively, these USDA actions will support milk prices by about 70 cents per 100 pounds of milk, said Roger Cryan, a National Milk Producers Federation economist.
“Longer term, some farm groups want to change milk price regulations to better account for the cost of production in the system.”
Along these lines, Katie Micik reported yesterday at DTN (link requires subscription) that, “Trapped between high feed prices and low consumer prices, dairy farmers are having a hard time paying the bills.
“Jerry Harvey milks 70 cows on his family farm in Wayne County, Iowa, and he said recently he’s had to borrow $4,000 to $5,000 per month just to cover the costs.”
Yesterday’s DTN article noted that, “Harvey and other dairy producers will be holding a rally in Manchester, Iowa, at the Manchester Livestock Exchange this Saturday from noon to 3 p.m. With milk prices at their lowest since the 1970s, the producers hope to raise awareness about dairy farmers’ plight and to educate the farmers about a bill in Congress being considered by the Senate Committee on Agriculture, Nutrition and Forestry.”
Ms. Micik indicated that, “U.S. Sens. Arlen Specter and Robert Casey Jr., both Democrats from Pennsylvania, proposed the Federal Milk Marketing and Improvement Act that would use the national average cost of production to determine its price…Under the bill, the U.S. secretary of agriculture would be required to reassess the price of milk quarterly. Sen. Specter stated in a press release that it’s a provision that would ensure ‘that extreme price volatility – as farmers have seen in recent months – is mitigated.’”
Katie Zezima reported in today’s New York Times that, “When Ken Preston went organic on his dairy farm here in 2005, he figured that doing so would guarantee him what had long been elusive: a stable, high price for the milk from his cows.
“Sure enough, his income soared 20 percent, and he could finally afford a Chevy Silverado pickup to help out. The dairy conglomerate that distributed his milk wanted everything Mr. Preston could supply. Supermarket orders were skyrocketing.”
Ms. Zezima explained that, “But soon the price of organic feed shot up. Then the recession hit, and families looking to save on groceries found organic milk easy to do without. Ultimately the conglomerate, with a glut of product, said it would not renew his contract next month, leaving him with nowhere to sell his milk, a victim of trends that are crippling many organic dairy farmers from coast to coast.
“For those farmers, the promises of going organic — a steady paycheck and salvation for small family farms — have collapsed in the last six months. As the trend toward organic food consumption slows after years of explosive growth, no sector is in direr shape than the $1.3 billion organic milk industry. Farmers nationwide have been told to cut milk production by as much as 20 percent, and many are talking of shutting down.”
Ag Economy- Broader View
In a broader assessment of current trends in the U.S. agricultural sector, Iowa State Professor Neil Harl indicated in a recent extension article that, “The agricultural sector is not an economic island. However, the global financial difficulties that have caused severe heartburn for financial firms and most of the global economy have largely bypassed the agricultural sector. It is clear that the longer the meltdown persists the more serious and far-reaching the effects are likely to be on farming and ranching and on rural areas. If investor confidence is not soon restored, credit availability could pose a significant problem for production credit, land purchases and trade in agricultural products and the world-wide demand for agricultural products would likely decline further. Moreover, rural areas have suffered lay-offs with rising unemployment, stock market losses and reduced discretionary spending in addition to the long-term adjustments that have been on-going for decades. These effects seem likely to continue for the next several quarters and, in some instances, beyond. Farming, particularly crop farming, has fared relatively better than livestock farming in recent months but storm signals are flying for crop production.”
Prof Harl added that, “Higher commodity prices in 2007 and 2008 and modest debt levels (compared to the 1980s era) have helped the farming sector in many areas of the country avoid the worst effects of the global meltdown and have enabled agricultural lenders, in general, to maintain healthy balance sheets. But the sharp declines in commodity prices in late 2008, the economic and financial woes of the ethanol industry and the falling demand for agricultural products, especially in developing countries, are impacting the sector to a much greater extent in 2009.”
Meanwhile, the U.S. Department of Agriculture’s Daily Radio Newsline featured a story yesterday entitled, “Ag Banks Strong, But Are Feeling Financial Pressures.” The USDA news item noted that, “Agricultural banks are among the strongest of the nation’s lenders, but even those banks are under financial pressures.” To listen to this one-minute audio report, just click here (MP3).
And recall that last month the Federal Reserve Bank of Minneapolis indicated that, “Farm income decreased in the first quarter, as 58 percent of respondents reported lower-than-normal income and only 15 percent reported income gains. ‘Lower commodity prices have caused a decrease in farm income,’ said a North Dakota lender. Declines that started during the fourth quarter of 2008 continued. Dairy producers were the hardest hit. ‘The price of milk has fallen to well below break-even prices,’ said a Wisconsin respondent. Almost all of the respondents from Wisconsin reported below-average income. Even though nearly a quarter of the Minnesota respondents reported above-average income, this did not offset the 49 percent who reported below-average income.
“Producers apparently are responding to lower profits by reducing capital equipment spending. Over half the respondents reported decreased capital expenditures. Meanwhile, household spending decreased slightly, as 37 percent reported decreases and 21 percent reported increases in household spending.”
Ag Economy- Trade
The U.S. Department of Agriculture’s Economic Research Service (ERS) released a report yesterday entitled, “Outlook for U.S. Agricultural Trade,” which stated that, “The forecast for fiscal 2009 agricultural exports is $96 billion. An improved outlook for soybeans and products more than offsets a downward adjustment for wheat. Fierce competition remains in global grain markets with the grains sector accounting for nearly all the expected annual decline in bulk commodity shipments. The outlook for the global economy has weakened further since February.
“U.S. wheat exports are lowered $1 billion, as abundant global supplies and increased competition reduce shipments and lower unit value. Corn exports rise $300 million as expectations of a tighter U.S. market and some demand recovery raise unit values. Oilseeds and products rise $1.6 billion supported by a 2.4-million ton increase for soybeans and higher volumes and unit prices for soybean products. South America has suffered crop losses and China’s demand remains strong. Recession and a stronger dollar impact U.S. animal product exports. Hides and skins are especially hard hit by slumping demand for leather, and U.S. dairy products face weak global demand. Horticultural exports remain $700 million above last year’s sales. Little to no volume growth is expected, but higher prices for some horticultural products boost export value.”
With respect to imports, the ERS report stated that, “Fiscal 2009 agricultural imports are lowered to $81 billion. A prolonged and severe recession and weak consumer spending reduce import growth to the slowest rate in many years. The lower forecast emanates largely from a sharp decline in value of imports of vegetable oil, horticulture, and tropical products.”
Ag Economy- Slow Planting Progress in Some Regions
Reuters writer Mark Weinraub reported yesterday that, “Planting delays in key areas of the U.S. Corn Belt this spring could lead to tight supplies of corn during the next year, forcing prices higher and further threatening profit margins at ethanol plants and livestock companies.
“The slow pace of corn planting east of the Mississippi River, including major production states such as Illinois and Indiana, could cut ending stocks by as much as 35 percent, according to Joe Victor, analyst for Illinois-based research company Allendale Inc.”
Yesterday’s Reuters article added that, “‘While not enough is yet known to confidently forecast the 2009 U.S. average corn yield, it appears there is risk of the average yield falling below current expectations,’ Darrel Good, extension economist at the University of Illinois, said in a research note. ‘The corn market currently appears to reflect a very low risk of such a shortfall.’”
In addition, Eddie McGriff noted in an article that was posted yesterday at the Southeast Farm Press that, “For the first time in many years, we are faced with delayed planting of peanuts due to wet fields.
“Normally, we are dealing with dry conditions in May and producers with irrigation are able to circumvent this problem by watering and planting on time. However, with wet weather, all producers are affected.
“Many fields will not be able to be planted until sometime next week, which forces planting into the first week of June.”
And an item posted on Wednesday at Southeast AgNet Online indicated that, “The recent rainfalls have really slowed planting progress.” The item included a one-minute audio recap of peanut planting delays in Alabama, Georgia and Florida.
Yesterday’s Congressional Quarterly Midday News Update reported that, “As a historic bill aimed at curbing climate change gains momentum in the House, a group of about 25 Democratic senators has started to lay the groundwork for the daunting job of moving the legislation through their chamber.
“The crux of their strategy? Follow the House, where the Energy and Commerce Committee has approved a climate change bill that would cap emissions of carbon dioxide and set up a system for polluters to buy and sell emissions permits.
“‘The House is going to prove the politics. If Waxman can get a deal, we’ll look at how we can build something like that in the Senate,’ Senate Majority Whip Richard J. Durbin, D-Ill., said, referring to House Energy and Commerce Chairman Henry A. Waxman, D-Calif.
“The Senate group, described as ‘the climate champions’ by one aide, is led by Senate Environment and Public Works Chairwoman Barbara Boxer, D-Calif., and Sen. John Kerry, D-Mass. Senate Majority Leader Harry Reid of Nevada and Durbin are also taking part in group meetings, with the aim of crafting a successful strategy for bringing a climate bill to the Senate floor.”
Yesterday’s CQ item noted that, “The senators have been meeting every Tuesday for about a month in an effort to begin building a consensus around the House measure before it even arrives on their side of the Capitol. House leaders still must work with the eight other committee chairmen who share jurisdiction over the legislation before Waxman’s bill can hit the floor.”
Nonetheless, recall that in a hearing last Tuesday (May 19) held by the Senate Environment and Public Works Committee on issues associated with climate change legislation, Ranking Member James Inhofe (R-Oklahoma) indicated that, “It is interesting that we are having this hearing right now. I have no doubt in my mind Madam Chairman that the House is going to pass a bill and it will come over here and it won’t pass here. There are not the votes right now for cap and trade in the United States Senate- its not even close.”
In a brief response to this observation, Committee Chairman Sen. Barbara Boxer (D-California) noted that “I thought I had seen it all, but now the Republicans are criticizing Democrats for being pro business…Sen. Inhofe, before he has even seen what we produce out of this Committee is predicting that the Senate will vote no…I just think the people of America expect more of us than to predict the failure of a bill that we haven’t even worked on.”
To listen to both Sen. Inhofe and Boxer’s remarks in their own words, see this FarmPolicy.com audio clip from last Tuesday’s Senate hearing (MP3-1:16).
A news release issued yesterday by the National Corn Growers Association stated that, “The National Corn Growers Association today thanked President Obama for his statement that advanced renewable transportation fuels will be one of the nation’s most important industries of the 21st Century, and that corn-based ethanol must remain viable to achieve this vision.
“‘With oil prices on the rise, ethanol’s critical role in the U.S. economy, especially promoting energy security, is more important than ever,’ NCGA President Bob Dickey said. ‘We are pleased to hear the president’s clear statement of corn-based ethanol’s pivotal role in the nation’s future energy strategy, and we will continue to make sure the Administration understands the current and future value of corn ethanol.’
“In his May 27 letter to the Governors’ Biofuels Coalition, President Obama noted that improved energy efficiency combined with biofuels provide ‘the primary near-term option for insulating consumers against future oil shocks and for lowering the transportation sector’s carbon footprint.’”
Recall that Philip Brasher, writing on Wednesday at the Green Fields Blog (The Des Moines Register), indicated that, “In his letter, Obama didn’t mention directly either of the most controversial issues facing his administration – the EPA’s climate analysis and a proposal from the ethanol industry to raise the ethanol limit to 15 percent. He focused on the need to develop next-generation biofuels, but cited a need to keep the existing industry viable.”
An editorial posted earlier this week at The Financial Times Online stated that, “Food commodity prices remain near historic highs. Food riots destablised countries around the world last year – more than the financial crisis – and may well return. If food was ever a soft policy issue before, it now rivals oil as a basis of power and economic security.
“Like all commodities on which power depends, food is dealt in with hardening self-interest. Fearing political trouble at home, countries with surplus food have imposed export restrictions. Food-importing nations have in reaction entered large farmland leases with African states. Most of the deals are murky, many are inequitable and some are rightly denounced as land grabs.
“Importers worried about food security may not care. But if, geopolitically, food is the new oil, countries contemplating agricultural land deals – as investors or as hosts – should heed history’s lessons on natural resource exploitation.”