FarmPolicy

Agricultural Economy; Biofuels (RFS); and Farm Bill Issues

Agricultural Economy

Javier Blas reported yesterday at The Financial Times Online that, “Corn prices surged this month to an all-time high of $8.4375 a bushel on the back of the worst drought in the US in nearly half a century. But prices have since fallen roughly 5 per cent. The impression is the rally has run out of steam.

“This is far from the real picture. Prices need to rise again – probably setting all-time highs – to dampen consumption that is running ahead of supply. If demand does not slow down, silos will be all but empty before the next harvest arrives in late 2013.

“On paper, the balance sheet for corn supply and demand published by the US Department of Agriculture seems good enough. But in practice, the numbers look a bit shaky. The agency, whose figures are closely watched by the market, first estimates supply and, after that, adjusts the demand data to maintain a minimum level of inventories. This time the USDA is asking for monumental rationing on the demand side. For example, US corn feed and export demand will need to drop to their lowest levels in nearly 20 years.”

The FT article pointed out that, “The USDA is also forecasting lower ethanol production – and thus corn demand. Ethanol output has fallen, but not nearly enough. Worse, the rise in wholesale petrol prices back above $3 a gallon means that ethanol producers are profitable again, even when paying record corn prices.

“Corn is now trading just above $8 a bushel – but traders in the physical market say that prices need to rise to $9-$10 to force demand down enough to meet the consumption levels anticipated by the USDA.”

Rod Smith reported on Friday at Feedstuffs Online that, “The loss of production isn’t over yet, advised Bill Helming at Helming Consulting Services in Olathe, Kan.

“The drought this year is much worse than the drought in 1988, and the odds are that the corn yield and harvest will come in even less than they were estimated in the August report, particularly when considering what will be a major reduction in acres harvested, he said in a paper sent to clients this week.”

Similarly, Bloomberg writer Jeff Wilson reported yesterday that, “U.S. corn farmers hurt by the worst drought in a generation probably will harvest smaller crops than the government forecast this month, based an analysis of dry spells in the past 42 years.”

Meanwhile, the AP reported yesterday that, “One of the worst growing seasons most U.S. farmers can remember is coming to an end with a corn harvest that’s at least three weeks early thanks to an unusually warm spring and suffocating summer.

“The U.S. Department of Agriculture said Monday in its weekly crop progress report that 4 percent of the corn harvest is complete. Normally, just 1 percent of the crop is in at this point in August.”

And a separate AP article from yesterday noted that, “The price of corn rose Monday after the start of the harvest renewed expectations of a smaller crop yield because of drought damage…Corn for December delivery rose 16.5 cents, or 2 percent, to finish Monday at $8.2375 per bushel. That’s the highest level since Aug. 9.”

Also, Bloomberg writer Tony C. Dreibus indicated yesterday that, “The condition of U.S. corn crops was unchanged last week, and soybeans improved as cooler weather eased plant stress from the worst drought in half a century.”

In a more detailed analysis of the market situation for soybeans (“Rationing the 2012 U.S. Soybean Crop”), University of Illinois Agricultural Economist Darrel Good explained yesterday at the farmdoc daily blog that, “There is some expectation that more favorable weather in August in some areas will increase the yield potential of late maturity soybeans. Unless the crop is substantially larger than the August forecast, soybean meal and soybean prices will likely remain high for an extended period in order to ensure the necessary rationing. If the production forecast does not increase next month, new highs in both markets would be expected.”

Beyond the corn and soybean staples, Gregory Meyer reported earlier this week at The Financial Times Online that, “Humble hay has become a key commodity in the US agricultural market, with price gains in drought-stressed areas far outpacing the rally in corn and soyabean prices and further straining the country’s beleaguered cattle industry.

“The price of bales has more than doubled over the past year at auctions in states such as Iowa and Illinois, showing the impact of the severe Midwest drought on forage supplies. Average US hay prices have reached record levels after increasing a more moderate 8 per cent on year.”

With this background in mind, Robert Rodriguez reported over the weekend at the Fresno Bee Online that, “Skyrocketing feed costs and weak milk prices are forcing growing numbers of California’s dairy farmers to sell their herds or file for bankruptcy.

“The situation has become so dire that at least one dairy cooperative is launching a crisis hot line for despondent dairymen and their families.

“‘Things are ugly and getting uglier,’ said Riley Walter, a Fresno bankruptcy attorney representing many financially distressed dairymen.”

Mr. Rodriquez noted that, “In the past eight months, 28 San Joaquin Valley dairies have filed for bankruptcy in the U.S. Bankruptcy Court’s Fresno office, up from 24 in 2011 and 10 in 2010.

“Most bankruptcy filings this year have been since April, and many more are expected, Walter said.”  (The Bee article also included this graphic illustration).

(Recall also that House Ag Committee ranking member Collin Peterson (D., Minn.) recently noted that, “And frankly, dairy, if we don’t get this [Farm] bill done, dairy is the one segment of agriculture that is in the most jeopardy and the most danger, because we have a program that doesn’t work right now. If we have this new margin insurance system in place, it would basically make the feed cost increases less of a problem, because what you’d be able to do is protect your margin above feed cost, and so the feed cost goes up, you’ve still got the margin on top of that, so it insulates the dairy industry from these gyrations, not only in prices of milk, but also in prices of feed. So without it, I think dairy’s got some very tough time ahead. And I would argue it’s probably the most important thing that needs to get done, sooner rather than later.”)

From an international perspective, Reuters news reported yesterday that, “The surge in grain prices this summer means some German poultry farmers are facing bankruptcy and retail prices for poultry meat need to rise, the country’s poultry industry association ZDG said on Monday…[C]orn and soybean prices have reached record highs this summer as the worst drought in 56 years ravaged crops in the U.S. Midwest and a heatwave slashed Russia’s grain harvest.”

Meanwhile, Victor Davis Hanson noted in an opinion column in today’s Wall Street Journal that, “While the drought will hurt all farmers and may bankrupt some, the threat of disaster is a constant for growers, who by their nature and habit cope. In the 1930s, ’50s and ’60s, serial droughts nearly wiped out the Midwest farming belt. The seemingly endless dry weather of 1988 was the worst since the Dust Bowl of the 1930s. Thankfully, far more farmers now carry crop insurance than in ’88, which will help keep them afloat…The parched summer of 2012 reminds us that we still live in an often tragic world that all our high-tech devices and therapeutic gobbledygook cannot quite overcome. The comfortable life of smartphones, reality TV and Facebook seems a birthright only because it is predicated on the talents of Americans who, with little fanfare, put a bounty of food on our tables and the world’s.”

In addition to relatively higher prices for some commodities, the 2012 drought also continues to roil traffic on the Mississippi river.

John Schwartz reported in today’s New York Times that, “Low water levels caused the Coast Guard to periodically close an 11-mile section of the Mississippi River to ships this month.

“The river, shrunk by the summer’s drought, has fallen to levels near the records set in 1988, putting a squeeze on river navigation that has required barge operators to run fewer barges at a time and to load them more lightly.”

In a more detailed look at transportation and infrastructure issues, beyond problems caused by this year’s drought, Chris Clayton reported yesterday at the DTN Ag Policy Blog that, “The United Soybean Board released a study Monday by Informa Economics looking at the flow of agricultural commodities to market and the increasing challenges due to the inability of states and the federal government to spend more on roads, highways, locks and dams, and ports. As the report’s executive summary points out, ‘The U.S. transportation infrastructure system is rapidly deteriorating.’

“According to the study, ‘Decaying roads, bridges, railroads and transit systems cost the United States economy $129 billion annually.’”

Biofuels (Renewable Fuel Standard)

While the corn harvest continues, and the supply and demand balance sheet gains more certainty, issues regarding biofuels and the Renewable Fuel Standard continue to percolate.

The Chicago Tribune editorial board noted yesterday that, “Anyone who likes a hamburger with a glass of milk to wash it down should welcome relief from the ethanol mandate.”

An editorial yesterday at The Financial Times Online stated that, “In the short term, the Environmental Protection Agency has the ability to issue a waiver to the RFS if implementing it would ‘severely harm’ the economy or the environment. The present conditions amply meet that requirement.

“The biofuels industry argues, rightly, that the effect of waiving the RFS might not be immediate or dramatic. Refiners will still need large volumes of ethanol to meet fuel quality standards, so production would not dry up overnight.”

The FT item noted that, “RFS requirements can also be met using the tradeable credits known as Renewable Identification Numbers, issued when ethanol is produced. Because there is a substantial backlog of those credits, refiners can use them to meet their obligations rather than demanding physical ethanol, again blunting the effect of an RFS waiver.

“Ethanol producers also point out that if output does fall, it will cut the supply of distillers’ grains, the protein-rich byproduct used as animal feed, so increasing demand for other crops such as soya.

“Nevertheless, suspending the RFS would probably help ease corn prices – next year more than this.”

Also, in an update this week at the Center for Global Food Issues, Dennis T. Avery discussed current U.S. biofuels policy.

A news release yesterday from Rep. Bob Goodlatte (R., Va.) indicated that the Environmental Protection Agency (EPA) yesterday announced the “opening of a 30-day public comment period on requests from 156 Members of Congress, led by Congressman Goodlatte, and the Governors of Arkansas and North Carolina to waive the Renewable Fuel Standard (RFS) requirements.”

In part, Rep. Goodlatte noted that, “The current drought and diminishing corn crop will devastate our economy if the RFS is not waived. I urge livestock producers, businesses small and large, and others impacted by the RFS mandate to submit their comments to the EPA. I implore Administrator Jackson to review these comments closely and take action as soon as possible to help ease corn supply concerns and protect American livestock and food producers, consumers, and the economy as a whole.”

DTN writer Todd Neeley reported yesterday (link requires subscription) that, “Now that EPA is forced to consider a possible waiver of the Renewable Fuels Standard in light of a drought-induced short corn crop, several economists have been trying to get a handle on what might happen if at least a partial waiver is granted.

“A number of recent studies from experts at Purdue University, Iowa State University and the University of Illinois paint different scenarios depending on what EPA decides to do with the 13.2-billion-gallon RFS for 2012.”

Farm Bill Issues

A news release yesterday from Sen. Kent Conrad (D., N.D.) stated that, “[Sen. Conrad] met with dozens of North Dakota farm leaders today to provide an update on the prospects for a new five year bill after the House of Representatives declined to formally consider the legislation before adjourning for the month of August.

“‘The entire Senate has done its job. We carefully negotiated a new five year bill that enjoyed broad bipartisan support,’ Senator Conrad said. ‘We are prepared to negotiate a compromise with the House, but before we are able to do that, they need to reverse course and make the bill a priority. North Dakota’s farm and ranch families deserve that much.’”

A news update Friday from Sen. Michael Bennet (D., Colo.) indicated that, “‘Farmers and ranchers all across Colorado are struggling through one of the worst droughts in decades,’ Bennet said. ‘The 2012 Farm Bill we passed in the Senate contains a number of provisions that will help producers weather this difficult growing season. The House of Representatives needs to take up and pass the Farm Bill as soon as it resumes session in September so farmers and ranchers have access to assistance and the certainty they need to plan for the future.’”

And Sen. Amy Klobuchar (D., Minn.) recently met with constituents, and noted that she hopes the bill will make it through Congress shortly after recess.

Meanwhile, the AP reported yesterday that, “There will be more whole grains on school lunch menus this year, along with a wider selection of fruits and vegetables and other healthy options. The challenge is getting children to eat them.

“‘We don’t want healthy trash cans. We want kids who are eating this stuff,’ said Kern Halls, a former Disney World restaurant manager who now works in school nutrition at Orange County Public Schools in Florida.”

The article added that, “New Department of Agriculture guidelines taking effect this fall set calorie and sodium limits for school meals. Schools must offer dark green, orange or red vegetables and legumes at least once a week, and students are required to select at least one vegetable or fruit per meal. Flavored milk must be nonfat, and there’s a ban on artificial, artery-clogging trans fats.”

And Sarah Okeson reported last week at The Springfield News-Leader (Mo.) Online that, “Few people complained when Missouri quietly began saving money in a federal nutrition program for low-income families by eliminating cheese for children and some women.

“But once the state’s dairy farmers got involved, Missouri moved within days to reinstate cheese in the Women, Infants and Children program.”

The article noted that, “Missouri’s WIC program has asked federal regulators for permission to restore cheese and evaporated milk for children and all women, said Gena Terlizzi, a spokeswoman for the Missouri Department of Health and Senior Services.

“‘We are awaiting USDA approval of our plan to again include cheese and evaporated milk in these food packages,’ Terlizzi said.”

In other policy news, Alan Rappeport and Hal Weitzman reported earlier this week at The Financial Times Online that, “US food and agriculture companies are spending millions of dollars campaigning against a proposal that would force them to reveal their use of genetically modified ingredients.

“They claim that complying with the law would push up costs, which, they warned, would be passed on to customers.

“Companies including Coca-Cola, PepsiCo, General Mills, Monsanto and DuPont have invested $25m to defeat California’s Proposition 37.”

For more on GMO related issues, see this FarmPolicy.com update from last week.

Keith Good

Posted by Keith Good • August, 21, 2012 • 3:54 am