FarmPolicy

Farm Income (ERS Report); Biofuels; Ag Economy; and, the Farm Bill

USDA- Economic Research Service (ERS)- Farm Income Update

Yesterday, the USDA’s Economic Research Service (ERS) updated its 2012 Farm Sector Income Forecast, which stated that, “Net farm income is forecast to be $122.2 billion in 2012, up 3.7 percent from last year [related graph].”

The ERS summary noted that, “Extreme heat and dryness in the Plains and Corn Belt is drastically cutting projected U.S. corn and soybean yields for the 2012 harvest.  Both U.S. corn and soybean supplies for marketing year 2012 are expected to be at 9-year lows.”

Yesterday’s update explained that, “Hit hard by the 2012 drought, U.S. corn production is expected to decline, leading to drops in exports and alcohol for fuel use in marketing year 2012.   While the quantity of corn for grain sold in 2012 is expected to decline almost 7.4 percent, a forecast rise of $1.31 per bushel should boost annual receipts [related graph].

“Scorching heat and a prolonged drought is expected to result in the lowest soybean supply in 9 years.  Soybean sales are expected to experience a significant rise in 2012 as an increase of almost $3 per bushel more than offsets an 8 percent decline in the quantity of soybeans sold [related graph].”

Meanwhile, ERS added that, “A large forecasted decline in milk price as dairy supplies exceed dairy demand in 2012 mean milk receipts are expected to decline significantly…[R]eceipts for both cattle and calves are forecast to increase in 2012, reflecting significant price increases for both…[and]…Hog receipts are forecast to decline as predicted prices decline from 2011 levels [related graph].

In addition, yesterday’s update pointed out that, “Total production expenses in 2012 are currently forecast to rise $18.6 billion (6.0 percent); this follows a $25-billion (8.9-percent) increase in 2011 [related graph].”

And, ERS noted that, “Government payments paid directly to producers are expected to total $11.1 billion in 2012, a 6.3-percent increase over the 2011 program payments.  Direct payments under the Direct and Countercyclical Program (DCP) and the Average Crop Revenue Election Program (ACRE) are forecast at $4.96 billion for 2012.  This 5.4-percent increase in direct payments in 2012 over 2011 is largely due to the fact that the percentage of base acres on which direct payments are made increased from 83.3 percent for the 2011 crop year to 85.0 percent for the 2012 crop year [related graph].”

“Estimated conservation payments of $3.7 billion in 2012 are largely unchanged from 2011,” the ERS update said.

Also yesterday, ERS indicated that, “Median total farm household income increased by 5.4 percent in 2011, to $57,067, and is expected to increase another 1.2 percent in 2012, to $57,762. Most farm households operate small farms and rely solely on off-farm income, which is forecast to rise 3.2 percent in 2012. In contrast to the farm households that operate small farms, households associated with commercial farms derive the majority of their income from farming activities. Their median income from farming increased an estimated 7.9 percent in 2011 to $84,697, and their total household income also increased by 7.9 percent, to $127,054 [related graph].”

Mark Peters reported yesterday at The Wall Street Journal Online that, “The USDA forecast shows livestock and poultry producers are struggling with rising feed costs without the same price rise for their animals, while dairy farms face both higher costs and a decline in milk prices.

“‘It is important to understand and remember that thousands of farm families, particularly livestock and dairy producers, continue to struggle with drought,’ U.S. Agriculture Secretary Tom Vilsack said in a statement.”

Gregory Meyer reported yesterday at The Financial Times Online that, “‘Essentially, you have a situation where the increase in prices offsets the reduction in the quantity produced and sold during the year,’ said Mitch Morehart, a USDA economist.”

And Bloomberg writer Alan Bjerga summarized yesterday that: “Income will rise 3.7 percent from a revised $117.9 billion in 2011, the U.S. Department of Agriculture said today in a report on its website. The forecast is up from $91.7 billion in February. The value of crops will rise 6.7 percent to $222.1 billion, an all-time high, while revenue from livestock sales will decrease 0.1 percent to $165.8 billion, the USDA said. Expenses such as diesel fuel and animal feed will increase 6 percent to $329.1 billion.”

Biofuels

Reuters writer Charles Abbott reported yesterday that, “U.S. ethanol production will fall by 10 percent in the coming year as rising prices from the drought cut exports in half, a University of Missouri think tank forecast on Tuesday.

“The Obama administration is weighing whether to relax a requirement to use corn-based ethanol in gasoline as meat and dairy farmers complain that demand for corn-based biofuels is driving up the cost of food.

“But the record-high corn prices caused by the worst drought in half a century will cause a 10 percent decline in ethanol production next year, according to the Food and Agricultural Policy Research Institute, or FAPRI.”

Mr. Abbott added that, “Virginia Governor Bob McDonnell joined governors of seven other states — Texas, Georgia, New Mexico, Arkansas, North Carolina, Maryland and Delaware — in asking the Environmental Protection Agency for relief from the so-called ethanol mandate. They say the Renewable Fuels Standard is disrupting livestock production and causing severe economic harm.”

On the other hand, a news release yesterday from Growth Energy indicated that, “Following the recent petitions to waive the Renewable Fuel Standard (RFS) by the Governors of Arkansas, North Carolina, Texas, Georgia and New Mexico, Co-Chairman of Growth Energy’s Board of Directors, General Wesley K. Clark (Ret.) and Growth Energy CEO, Tom Buis sent a letter to the governors explaining why a waiver is unnecessary.

“The letter explains the flexibility of the RFS and how obligated parties can easily meet the volume requirements this year.”

Zack Colman reported yesterday at The Hill’s Energy Blog that, “Biofuels groups said Tuesday that political pressure from governors to waive the renewable fuel standard (RFS) this year is starting to strain the industry by sending ‘instability signals’ to investors.”

The Hill update added that, “‘I think just the fact that people are filing waivers kind of creates turbulence in the system,’ Brent Erickson, executive vice president with the Biotechnology Industry Organization, said during the conference call… Erickson said the governors requesting relief from the corn ethanol quota all host significant livestock operations in their states. He said getting a corn ethanol RFS waiver to help that industry could kill private-sector confidence in advanced biofuels.”

Agricultural Economy

A news release earlier this week from Sen. Ben Cardin (D., Md.) stated that, “[Sen. Cardin], Barbara A. Mikulski (D-Md.) along with Senators Chris Coons (D-Del.), Tom Carper (D-Del.), and Kay Hagan (D-N.C.) sent a letter to U.S. Secretary of Agriculture Tom Vilsack on Monday urging the federal government to do more to help poultry growers survive the emergency drought now gripping the nation…[T]he severe drought in the Midwest has caused corn prices to go up by as much as 60 percent, making it harder for poultry growers to feed their flocks.”

And a recent update at DairyGood.org noted that, “The ongoing drought has permanently impacted lives and livelihoods on dairy farms across the country. Not only have dairy farmers battled difficult climate conditions, the drought has come on the heels of severe economic downturn. Many farmers are left with decreased equity, lower yields and no reserves.”

Meanwhile, the AP reported yesterday that, “The remnants of Hurricane Isaac could bring welcome rain to some states in the Mississippi River valley this week, but experts say it’s unlikely to break the drought gripping the Midwest.

“Along with the deluge of rain expected along the Gulf Coast when Isaac makes landfall, the National Weather Service predicts 2 to 6 inches of rain will fall by Sunday morning in eastern Arkansas and southeast Missouri, much of Illinois and Indiana and parts of Ohio.”

On a separate issue regarding global food prices, Reuters writer Sybille de La Hamaide reported yesterday that, “G20 nations taking stock of the third global food price surge in four years will wait for September’s crop report from the U.S. Department of Agriculture before deciding whether to take joint action on the issue, France’s farm minister said on Tuesday.

“Senior officials held a conference call on Monday on rising prices after drought in the United States and poor crops from Russia and the Black Sea bread basket stirred new fears about food supply and inflation.”

Sameer C. Mohindru reported yesterday at The Wall Street Journal Online that, “Record prices of corn and soybeans could trigger changes in crop plantings in the U.S., with the two commodities set to gain acreage at the expense of cotton, an agricultural economist said.

“Cotton has lost acres this year to other commodities that yield greater profit, and it may lose further in 2013, Scott Stiles, an economist at Arkansas State University, said in an interview.

“Based on today’s commodity price relationships, 550,000 acres to 620,000 acres, or more than 4% of this year’s U.S. cotton acreage, could shift out of cotton in 2013, Mr. Stiles said.”

Julie Jargon reported in today’s Wall Street Journal that, “Restaurant chains are in a pickle, caught between soaring ingredient costs and fears that raising prices will turn off their budget-conscious customers, who generally remain pessimistic about the economy.

“Companies like McDonald’s Corp., Buffalo Wild Wings Inc. and Chipotle Mexican Grill Inc. are taking different approaches to the dilemma. Some are trying to pass on rising costs to customers to avoid squeezing their profit margins. Others are holding the line on prices or emphasizing their existing low-cost menu items to keep consumers coming through the door.”

More broadly, Reuters writer Naveen Thukral reported yesterday that, “Faced with sluggish domestic demand and the record cost of fattening animals — the result of a steep rise in the prices of corn and soybeans as drought grips the top exporter, the United States — Chinese hog producers are being forced to sell their herds.

“China’s food price cycle is driven in large part by pork, the country’s staple meat. And while it is in abundance now, in about six months, meat stocks are expected to fall as a result of the sell-off, resulting in a surge in prices.

“Any increase in food prices is expected to push up inflation, which now sits at a comfortable level, having cooled from last year.”

Farm Bill

A recent FAPRI report comparing the House Committee and Senate farm bills has been updated with a correction.  An accounting error in the original analysis had caused FAPRI to overestimate CCC outlays for cotton under the House Committee bill by a cumulative $377 million over the FY 2013-FY 2022 period. Correcting the accounting error has no impact on crop supply, demand or prices, but does change estimates of government outlays and net farm income. After making the correction, the sum of 10-year CCC and crop insurance outlays is essentially identical under the two bills for the selected program changes examined in the report.

Reuters writers Carey Gillam and Charles Abbott reported today that, “Congress needs to pass a new Farm Bill and fast or risk putting U.S. farmers in financial jeopardy as they need to decide on how much winter wheat to plant and how much to spend on corn and soybean seeds, plus make other decisions critical to American food production, a number of farming experts said this week.

“With the current package of Farm Bill programs due to expire Sept. 30, the chorus of voices from the countryside demanding action by lawmakers is growing louder.

“However, even these farm experts acknowledge that passage before Sept. 30 appears unlikely because of election year politics and a deeply divided Congress.”

The article noted that, “If there is no agreement on a farm bill next month, the most likely step would be for Congress to pass a short-term extension of current law, a common step used in the past when Congress needed more time.”

Chris Clayton reported yesterday at the DTN Ag Policy Blog that, “With the backdrop of one of the nation’s biggest farm shows, farmer leaders of major agricultural groups declared that they expect members of Congress to spend their preciously few legislative days next month passing a five-year farm bill before the current legislation expires.

“The coalition ‘Farm Bill Now’ has grown to 46 agricultural groups and trying to push leaders of the House of Representatives to bring the House Agriculture Committee’s bill to the floor for a debate and vote. Members of the coalition spoke Tuesday at the Farm Progress Show.”

Mr. Clayton noted that, “Steve Wellman, president of the American Soybean Association, who farms around Syracuse, Neb., said farmers are counting on Congress to come back with renewed focus. Wellman said jobs tied to agriculture, as well $134 billion in ag trade, could be hurt if lawmakers are unable to approve new farm programs for the next five years.”

Rep. Rick Crawford (R., Ark.) noted in a news release this week that, “In an effort to urge leaders in Washington to pass a five year Farm Bill, I joined a bipartisan group of House members in signing a discharge petition that will push the Farm Bill toward a final vote. The House Farm Bill, which was passed by Democrats and Republicans on a 35-11 vote, shows how both parties can work on critical legislation in a bipartisan fashion. In joining my colleagues on advancing the discharge petition, I am working to put farm families in Arkansas ahead of Washington’s partisan politics.”

And Rep. Tammy Baldwin (D., Wis.) note in a news release this week that, “‘Congress must act now on a five-year bill.  An extension of the current farm bill, which contains wasteful spending including direct payments to millionaires, is not a solution,’ said Baldwin.  ‘Both the House and Senate bills contain serious reforms to our nation’s dairy policy.  These reforms need a full and thoughtful debate to ensure that we move in the right direction for Wisconsin dairy farmers,’ Baldwin said.”

A news release yesterday from Senate Ag Committee Chairwoman Debbie Stabenow (D., Mich.) indicated that, “[Sen. Stabenow] today announced new crop insurance options for Michigan’s cherry growers, many of whom did not have access to federal crop insurance when they faced this spring’s freezes and frosts. Currently, growers can only get crop insurance for sweet cherries in Grand Traverse and Leelanau Counties. There is no crop insurance presently available for tart cherries. Today’s announcement expands crop insurance for sweet cherry growers in Antrim, Benzie, Manistee, Mason, and Oceana counties, and begins the process to develop insurance options for tart cherries.”

For a closer look at crop insurance issues and specialty crops, see this recent article by former USDA Chief Economist Keith Collins (“Crop Insurance & Specialty Crops”), which was published this month in the Crop Insurance Today magazine.

A Reuters update from yesterday noted that, “The drought that ravaged U.S. farmland this summer will likely cause total crop insurance losses of more than $13 billion, and perhaps up to $20 billion, disaster modeler AIR Worldwide said on Tuesday.”

And University of Illinois Agricultural Economist Gary Schnitkey noted yesterday at the farmdoc daily blog (“Crop Insurance in 2013”) that, “The 2012 drought raises question about crop insurance coverage in 2013. Specific questions that have been asked are: 1) how much will the Actual Production History (APH) yields decline in 2013 as a result of poor yields in 2012, and 2) will 2013 crop insurance premiums increase as a result of the 2012 drought?”

Dr. Schnitkey noted that, “APH yields on many farms will decrease as a result of the 2012 drought. However, there are limits on the decrease that can occur because of potential yield substitutions and APH yield decline limits. Still, the low yields in 2012 will serve to drag down APH yields for the coming 10 years on most farms. Premiums in 2013 likely will not increase because of the 2012 drought.”

Keith Good

Posted by Keith Good • August, 29, 2012 • 4:06 am