Agricultural Economy: Drought Issues
A news release yesterday from USDA stated that, “As part of continuing steps by the Obama Administration to get assistance to producers impacted by the drought, Agriculture Secretary Tom Vilsack today designated 172 additional counties in 15 states as primary natural disaster areas due to drought and heat, making all qualified farm operators in the areas eligible for low-interest emergency loans. To date, USDA has designated 1,792 counties as disaster areas—1,670 due to drought.
“Earlier this week, President Obama and Secretary Vilsack traveled to Iowa to announce USDA’s intent to purchase up to $170 million of pork, lamb, chicken, and catfish for federal food nutrition assistance programs, including food banks, which will help relieve pressure on American livestock producers and bring the nation’s meat supply in line with demand.”
An updated map of the 2012 Secretarial Drought Designations can be viewed here.
Meanwhile, Bloomberg news reported yesterday that, “U.S. farm income probably will fall in the third quarter as the worst drought since 1956 cuts crop yields and boosts the cost of livestock feed, according to a survey of bankers by the Federal Reserve Bank of Kansas City…‘Higher feed costs and lower cattle prices from forced herd liquidations were cutting livestock profits,’ Fed Economists Jason Henderson and Maria Akers said in the report. At the end of the second quarter, ‘intensifying drought conditions were cutting bankers’ expectations for farm income during the third quarter,’ the economists said.”
Also referencing the Kansas City Fed report, Ian Berry reported yesterday at The Wall Street Journal Online that, “Land prices in key U.S. farm states continued to soar in the second quarter, though the pace slackened as concerns over the drought pared down interest among farmers and other buyers, according to a new survey.
“Prices of nonirrigated farmland in a seven-state stretch of the Midwest and West rose 26% in the quarter through June 30, compared with a year earlier, the Federal Reserve Bank of Kansas City said in a survey published Wednesday.”
(Note: For more on cropland values, see this USDA report from earlier this month).
With respect to more recent weather trends, Bloomberg writer Brian K. Sullivan reported yesterday that, “Lower temperatures and rain forecast for parts of the Midwest won’t be enough to reverse the drought that has pushed crop prices up for months.”
In more specific look at production and price impacts of the drought, University of Illinois Agricultural Economists Darrel Good and Scott Irwin noted in an update posted yesterday at the farmdoc daily blog (“Rationing the 2012 Corn Crop Revisited”) that, “A month ago, we presented alternative supply, consumption, and price projections for the 2012-13 marketing year in the context of addressing the question of whether or not prices were high enough to ration a much smaller crop. We concluded at that time that prices were likely still not high enough if the national average yield was below 135 bushels (see post here). Now that corn prices have moved higher and the USDA has released the first survey-based forecast of 2012 corn yield and production, we revisit the question of rationing.
“Since the size of the 2012 crop is still not known, we present three alternative production, consumption, and price scenarios that differ from the USDA’s projections released on August 10. These alternatives, along with the current USDA projections for the 2011-12 and 2012-13 marketing years, are presented in Table 1. On the production side, all three alternative scenarios use a slightly smaller forecast of harvested acreage than reflected in the USDA’s August survey and slightly lower than used in the analysis of a month ago. The smaller forecast reflects the expectation that both acreage harvested for silage and abandoned acres will exceed producers’ expectations when surveyed for the August report. The expected difference between planted acreage and acreage harvested for grain of 9.4 million acres is more consistent with the experience of the previous dry years of 1988 and 2002.”
After additional analysis, yesterday’s update stated that, “In central Illinois, the current forward bid for harvest delivered corn is near $7.90, but has recently been above $8.00. The balance sheet alternatives presented here suggest that corn prices are now likely high enough to ration the 2012 corn crop if production is near or above the USDA’s current projection. Higher prices, and in some scenarios much higher prices, would be expected if production is less than the current projection in order to initiate more aggressive rationing in the livestock sector…In closing, we underscore the critical assumption about ethanol demand made in this analysis. If alternatives to ethanol can be made available in sufficient quantities at competitive prices, a partial waiver of the RFS mandate, for example, might result in much lower consumption of corn for ethanol than assumed here and reduce the amount of rationing required in the domestic livestock industry.”
Samantha Pearson reported yesterday at The Financial Times Online that, “As the world’s biggest exporter of sugar and coffee and the second-largest producer of soyabeans, Brazil has already won the title of an agricultural superpower.
“It may soon be able to add corn to that list. The worst drought for half a century in the US, the world’s top corn exporter, has destroyed one-sixth of the US’s expected corn crop in a month, giving Brazil the chance to grab a greater share of the world market.
“Last month it emerged that US meat companies had turned to Brazil to buy corn, thought to be the first ever Brazilian corn exports to the US.”
Meanwhile, Gregory Meyer reported yesterday at The Financial Times Online that, “Extreme weather has visited Kevin Mainord’s farm business twice in the past two years. In 2011 a wall of water deluged his corn and soyabean fields after US authorities blasted a levee to relieve flooding on the Mississippi river. This year brought drought and weeks of devastating heat.
“Scientists have long warned of more frequent floods and droughts as the world’s climate changes. But for Mr Mainord and many like him, global warming is bogus.”
The FT article stated that, “Climate scepticism among farmers helps explain why carbon emissions are off the US legislative agenda despite the hottest temperatures on record…[E]ven with plenty to lose, farmers’ champions in Washington have fought or diverted attention from climate policy to battle regulation and focus on subsidies.”
A number of recent drought related updates have been posted at CNBC Online in a section titled, “The Drought of 2012.”
At the CNBC drought page, Ag. Sec. Tom Vilsack indicated that, “As this drought continues, we’ll continue to call on Congress to get a Food, Farm and Jobs Bill passed. Meanwhile I promise Americans that President Obama and I won’t stop looking for ways to help farmers and ranchers in this difficult time.”
(Note: Speaking yesterday on his third day of campaigning in Iowa this week, President Obama noted that, “We met farmers who’ve been badly hurt by drought and who now need us to pass a farm bill.”)
Senate Ag. Comm. ranking member Pat Roberts (R., Kan.) stated that, “Unfortunately, the authors of the five-year 2008 farm bill ended critical livestock disaster programs one year early as a budget gimmick to fund other priorities. Today our livestock producers are the victims of that decision…The House of Representatives acted swiftly to pass a key, bipartisan drought assistance bill to help livestock producers that simply extends these expired programs. The bill they approved was fully paid for and returned $256 million to the Treasury. The Senate Democrat leadership failed to even consider the bill before leaving town for the August recess.”
“And, we need to pass a farm bill. As with all businesses in this down economy, people need certainty from the federal government to make plans for the year. This is especially critical for farmers and ranchers because the current farm bill expires on September 30. Allowing the bill to expire does nothing for our economy, but passing a farm bill will.”
Nebraska GOP Senator Mike Johanns noted that, “I was disheartened that the Senate opted to go home for August without extending much-needed, fiscally-responsible disaster relief for farmers and ranchers across the country. Once again, politics is obstructing productivity. Helping those impacted by Mother Nature should be nonpartisan, so I don’t see why some in Washington are so determined to delay assistance for those who feed and fuel America.”
And Sen. Jerry Moran (R., Kan.) pointed out that, “Currently, ranchers and cattlemen are left with without a safety net. The 2008 Farm Bill disaster programs have already expired, leaving livestock producers across our drought-stricken country without the security they need to plan and invest for the future….It is imperative that Congress put the risk mitigation and conservation programs in the Farm Bill back in place, and give America’s farmers and ranchers the long-term certainty they need to produce food, fiber and fuel for this country and the world.”
An update yesterday from the House Agriculture Committee indicated that, “This week during The Ag Minute [MP3], guest host Rep. K. Michael Conaway [R., Tex.] discusses the recent efforts of the U.S. House of Representatives to address critical livestock disaster assistance programs that expired last year. In a bipartisan vote of 223 to 197, the House passed H.R. 6233, the Agricultural Disaster Assistance Act of 2012, which provides risk management tools to those producers currently exposed to drought conditions.”
In part, Rep. Conaway noted that, “Unfortunately for our producers, the Senate closed up shop in Washington, D.C. without considering this legislation. I urge Democratic Majority Leader Harry Reid to reconsider. The Senate needs to act quickly and pass H.R. 6233 so that we can get assistance to our producers now.”
Meanwhile, Ramsey Cox reported yesterday at The Hill’s Floor Action Blog that, “Sen. Roy Blunt (R-Mo.) called on Senate Majority Leader Harry Reid (D-Nev.) to bring senators back to Washington this week to pass a disaster relief package for farmers.
“In an op-ed Tuesday, Blunt said farmers, ranchers and families desperately need relief from one of the worst droughts in recent history and that one way to help would be for Congress to extend the disaster relief package.
“‘I urge the Senate majority to return to Washington this week and help Missouri farm families by passing critical disaster assistance,’ Blunt wrote.”
An editorial yesterday at the Omaha World-Herald noted that, “Rather than try to iron out the farm-bill differences among the polarized lawmakers, members of Congress are off-duty until early September. Then they will be back in Washington briefly before heading home again to campaign for re-election.
“While the politicians have bickered, the nation’s ag producers have been coping with searing drought, damage to corn and soybeans crops, and soaring feed prices.”
And Bloomberg writer Alan Bjerga reported earlier this week that, “Struck by the worst drought in more than a half-century and the focus of swing-state campaigning, Iowa is getting plenty of attention from politicians. President Barack Obama concludes a three-day trip in the state tomorrow. Representative Paul Ryan of Wisconsin, the newly-named Republican vice-presidential candidate, stopped by the Iowa State Fair earlier this week.
“Some residents, however, would prefer the politicians tend to their chores in Washington, such as passing a new farm bill, rather than barnstorming about the state with their hands out for votes.”
The “Washington Insider” section of DTN reported yesterday (link requires subscription) that, “With regard to the farm bill, there is a growing concern that unless Congress approves the legislation before early next year when CBO conducts its next update of baseline spending for agriculture, this year’s higher crop prices will elevate the baseline number significantly, meaning Congress would need to find offsetting cuts in other farm bill programs. This likelihood can be avoided if Congress approves the farm bill before the end of the year, thus giving supporters of the legislation one more reason to try to speed the process.”
A Financial Times editorial on the Farm Bill noted yesterday that, “Barack Obama, campaigning in Iowa this week during the worst drought in the American Midwest since the 1930s, launched into a vigorous assault on the US Congress for failing to pass the ‘farm bill’ that will set US agricultural support for the next five years.
“A debate over reform is welcome, but the conversation focuses on the wrong targets. Congress’s current plans will make farm subsidies worse rather than better – and with the support, it should be said, of Mr Obama’s administration. Both Congress and the White House should think again.”
The FT item stated that, “The main subject of contention on Capitol Hill is the cost of the food stamp programme that gives prepaid debit-like cards to low-income families to buy food and takes up more than three-quarters of spending under the bill. This reform focus is misplaced, or at least too narrow…[W]hen Congress reconvenes in the autumn, it should widen its focus beyond food stamps and seek fundamental reform of the farm bill. The alternative is five more years of distortion and waste.”
Also yesterday, GOP presidential candidate Mitt Romney announced his Farmers and Ranchers for Romney coalition.
In other news, Ken Anderson reported yesterday at Brownfield that, “Agriculture Secretary Tom Vilsack says he hasn’t had a chance to study that lawsuit filed against the nation’s beef checkoff.
“But responding to a question from Brownfield Tuesday at the Iowa State Fair, Vilsack expressed his support for the checkoff program.
“‘The checkoff program, generally speaking, is an important piece of marketing. It’s an opportunity for us to also do very important research—and so we are supporting the checkoff,’ Vilsack said.”
Renewable Fuel Standard (RFS) -Biofuels
A news release yesterday from Purdue University stated that, “Corn prices pushed higher by the worst U.S. drought in half a century would not necessarily moderate if the federal government’s corn ethanol mandate were temporarily suspended, according to a report by Purdue University agricultural economists.
“The report, ‘Potential Impacts of a Partial Waiver of the Ethanol Blending Rules,’ suggests that corn prices could fall under some scenarios should the U.S. Environmental Protection Agency grant a partial waiver of the Renewable Fuel Standard’s corn ethanol provision – but only under certain market conditions. The EPA received a request by a consortium of livestock industry organizations to waive part of the mandate that effectively requires corn ethanol be blended with gasoline.”
In other news regarding biofuels, The Wall Street Journal editorial board indicated today that, “Our indefatigable friend Bob Dinneen—the ethanol lobby’s old reliable—is back with a nearby letter, and as always we’re more than happy to give him his say. But just as the Renewable Fuels Association president never lets any claim about his industry slip by unchallenged, a word or two is in order about his line that ethanol lowers gas prices.
“Not least because Mr. Dinneen’s trade group is running an ad campaign across the Midwest asserting that the ethanol mandate reduced the price of a gallon of fuel by 89 cents in 2010 and $1.09 in 2011. That is, the average U.S. price at the pump of $3.52 last year would have been $4.61 without the mandate. What a deal!
“The source for these remarkable claims, which Obama Agriculture Secretary Tom Vilsack has also mentioned in a few speeches, is a series of papers by economists Xiaodong Du and Dermot Hayes. But they’ve turned out to be the corn stover of academic research, if that’s not an insult to corn stover.”
The Journal noted that, “Mr. Hayes of Iowa State University and Mr. Du of the University of Wisconsin use monthly data about ethanol production and the profit margin of oil refiners—known as the crack spread—to estimate the relationship between the two variables. The major problem is that ethanol production over the period the duo studied increased more or less steadily thanks to the mandate. Crack spreads also showed a steady trend because of the world oil markets.
“If economists compare one steady trend to another steady trend without the right statistical controls, they can easily conclude that one trend was caused by the other even if they have no causal relationship in the real world. We’re borrowing here from the details in a new paper by MIT economist Christopher Knittel and the University of California Davis’s Aaron Smith, who demolish this ‘classic example of spurious correlation.’
“The claim that ethanol cuts gas prices is so silly that Messrs. Knittel and Smith have a little fun. To show how silly, they take ‘the same empirical models’ Messrs. Du and Hayes used and replace the crack spread with the unemployment rate. The model then ‘proves’ that if the U.S. had eliminated ethanol production in 2010, joblessness would have plunged by 60%, a finding that is statistically significant.”
Dairy Issues- Gov. Andrew Cuomo –New York Yogurt
Thomas Kaplan reported in today’s New York Times that, “After two hours, the Yogurt Summit ran out of spoons.
“Dozens of dairy farmers, food-industry executives, politicians and reporters had gathered Wednesday at a theater here for the official ‘New York State Yogurt Summit,’ presided over by the state’s biggest yogurt booster, Gov. Andrew M. Cuomo.”
The Times article noted that, “Mr. Cuomo has been a vocal champion of the yogurt industry, in part because it has emerged as an unexpected and rare growth sector in economically struggling areas of upstate New York, and in part because it has become a reliable magnet for positive publicity. The industry has been growing because of the exploding popularity of Greek-style yogurt, which requires significantly more milk to produce than does regular yogurt, and which has benefited from a proximity to New York’s dairy farms.”
Today’s item added that, “Mr. Cuomo praised the yogurt industry’s growth as ‘staggering’ and ‘unbelievable’: 29 yogurt plants, up from 14 in 2000; 1.2 billion pounds of milk used annually; 8,070 people employed. Chobani, for example, which started in 2005 with 5 employees, now has 1,200 in New York State.
“The State Assembly speaker, Sheldon Silver, said he hoped New York would become ‘the yogurt capital of the United States, if not the world.’ And Dean Norton, the president of the New York Farm Bureau, suggested yogurt could provide New York with an agricultural version of California’s Silicon Valley — the ‘yogurt empire,’ in his words.”
Azam Ahmed and Ben Protess reported in today’s New York Times that, “A criminal investigation into the collapse of the brokerage firm MF Global and the disappearance of about $1 billion in customer money is now heading into its final stage without charges expected against any top executives.
“After 10 months of stitching together evidence on the firm’s demise, criminal investigators are concluding that chaos and porous risk controls at the firm, rather than fraud, allowed the money to disappear, according to people involved in the case.”