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Ag Economy; Farm Bill; Budget Issues; and, Biofuels

Agricultural Economy

DTN Ag Policy Editor Chris Clayton reported on Friday (link requires subscription) that, “If normal weather returns, it will be a record corn crop this year with a $2 drop in prices, according to new baseline market projections released Friday by the Food and Agricultural Policy Research Institute [related press release, full report].

“The report by FAPRI, an economics group at the University of Missouri, parallels many of the production forecasts released last month at the USDA Outlook Forum, though FAPRI offers higher price projections for producers in some key crops such as corn and soybeans.

“In its summary, FAPRI states in 2014 and beyond average grain and oilseed prices will stay at levels seen this year, but above the average prices seen by producers before 2007.”

Mr. Clayton pointed out that, “FAPRI projects a 96.9-million-acre corn crop planted in 2013 with production at 14.37 billion bushels and an average price per bushel of $5.18. Yield would be 161.8 bushels per acre. FAPRI noted price volatility will continue.

“By comparison, USDA’s baseline projections calls for 96.5 million acres of corn planted, an average yield of 163.6 bushels per acre, a 14.5-billion-bushel corn crop and an average 2013 price of $4.80 per bushel.”

And the DTN article added that, “FAPRI estimates 78.5 million acres of soybeans that will yield 43.5 bushels per acre, for total production of 3.37 billion bushels, with an average price of $11.49 per bushel.

“USDA’s baseline forecasts 77.5 million acres of soybeans planted that will yield 44.5 bushels per acre and produce 3.4 billion bushels overall. USDA projects a market price of $10.50 per bushel.”

A related news update from University of Missouri Extension on Friday indicated that, “The pounds of meat produced in the United States will drop in 2013 for the second time in five years. That includes beef, pork, chicken and turkey, according to a report given to Congress today.

Livestock farmers struggle to fill growing world meat demand, not because of low prices but because of high costs, Scott Brown, University of Missouri economist, reported to House and Senate agriculture committees.”

The release pointed out that, ““When we look at 2013, the big issue for livestock and dairy farmers is feed costs. If we get a decent crop in the bin this fall, 2013 and beyond looks much better,” Brown said.

Crops have produced below-trend-line yields for three years, with 2012 bringing lowest yields.”

“Size of U.S. beef herds dropped in the face of less forage and feed. On the hog side, sow inventory remained stable despite sharp increases in feed costs,” the University of Missouri update said.

Meanwhile, Reuters writer Sam Nelson reported on Friday that, “More drought-relieving rainfall is expected from Friday through the weekend in the United States crop belt, which is slowly recovering soil moisture after suffering the worst dry spell in decades last year.”

In other news, Bloomberg writers Jeff Wilson and Alan Bjerga reported on Friday that, “The amount of corn used for animal feed in the U.S. will be 2.2 percent larger than forecast a month ago as lower prices make the grain less costly for feedlots, the government said. Estimated stockpiles are unchanged as exports are forecast to fall.

“Feed use for the year ending Aug 31. will be 4.55 billion bushels, compared with 4.45 billion projected in February, the U.S. Department of Agriculture said today in a report. Exports will total 825 million bushels, down 8.3 percent from the month-ago forecast and the slowest pace since 1972, the government said. Imports will rise, leaving inventories at 632 million bushels. Analysts expected stockpiles of 646 million bushels.

“The projected cash price farmers receive dropped 10 cents to $7.10 a bushel from the February forecast, the USDA said.”

In a separate Bloomberg article late last week, Jeff Wilson reported that, “The multi-generation reign of U.S. farmers as the world’s largest corn exporters is about to end, after three straight years of slumping harvests ceded market share to Brazil, where production doubled since 2005… ‘The sheer volume of the decline is significant and marks a fundamental change in global trade,’ said Philip Abbott, an agricultural economist at Purdue University in West Lafayette, Indiana. Since prices surged to a then-record $8 a bushel in 2008, Brazil, Argentina, Russia, Ukraine and Kazakhstan have boosted output and improved shipping infrastructure, he said. ‘This is not a trend that will reverse quickly.’”

More broadly with respect to trade issues, Howard Schneider reported in Saturday’s Washington Post that, “President Obama is pursuing what are arguably the most aggressive trade talks in a generation, an unexpectedly broad initiative for a politician who has been critical of free-trade agreements.

“Taken together, the negotiations are global in ambition, encompassing Europe and potentially much of Asia and covering economic sectors that are particularly important to the United States. Even major economies not directly at the table — notably China, India and Brazil — are meant to be influenced by the outcome.”

The Post article added that, “To the Obama administration, it’s the logical response to sluggish job growth, the failure of the Doha round of global trade talks and the fear that trade restrictions incubated in places such as China and India could become the global norm unless countered.”

Also, AP writer Jim Abrams reported yesterday that, “‘The Obama administration suddenly has this highly ambitious trade agenda that they’ve laid out,’ said John Murphy, vice president for international affairs at the U.S. Chamber of Commerce. ‘Now the challenge is going to be executing.’

First, Obama must nominate a successor to [U.S. Trade Rep. Ron Kirk], who in January announced plans to step down. Then, he has to work with lawmakers to restore a procedure called trade promotion authority that is regarded as key to getting trade treaties finalized and approved by Congress.”

 

Farm Bill- Policy Issues

Deborah Barfield and Christopher Doering reported in Saturday’s Des Moines Register that, “Sen. Thad Cochran of Mississippi said he’ll work to protect Southern farmers as he helps craft a new farm bill amid heightened pressure on Congress to cut federal spending.

“‘We’ll do the best we can … to be sure that it’s equitable and fair,’ said Cochran, top Republican on the Senate Agriculture, Nutrition and Forestry Committee.”

The Register article stated that, “Some Midwest farmers respect Cochran as someone who knows a lot about agriculture and strongly supports farm interests. They don’t believe he will have enough influence to stop the move toward crop insurance and away from direct payments, which are popular with Southern farmers…[S]outhern farm groups and lawmakers hope Cochran’s leadership means they’ll fare better in 2013 than in the farm bill debated last year, when Sen. Pat Roberts of Kansas was the committee’s ranking Republican.”

In more specific news regarding crop insurance, Friday’s FAPRI baseline update stated, “With record indemnity payments for 2012 crop losses, crop insurance net outlays exceed $13 billion in fiscal year (FY) 2013. Over the FY 2014-22 period, net outlays average a little under $9 billion per year” (at page one).

And, Marcia Zarley Taylor reported on Saturday at the DTN Minding Ag’s Business Blog that, “Crop insurance not only deflected a financial disaster on grain farms after last summer’s epic drought, it warded off a meltdown for Main Street businesses as well, a new study by University of Nebraska-Lincoln economists Eric Thompson and Brad Lubben finds.

“Farmers in the four states studied–Iowa, Nebraska, South Dakota and Wyoming–had collected a record $4.5 billion in 2012 insurance claims through March 4. Those payments not only helped growers cover losses and afford to plant another crop in 2013, but preserved more than 20,000 jobs in ag-related businesses, the economists concluded.”

The DTN update added that, “Critics have questioned the necessity of a subsidized crop insurance program, but they forget that Congress has a long history of approving ad hoc aid, especially in election years. Shifting to a private-public partnership where producers pay some of the cost and where claims can be paid in a timely manner offers many economic and societal benefits.”

In other news, Dow Jones writer Bill Tomson reported on Friday that, “The U.S. Department of Agriculture said Friday it is proposing to require more detailed country-of-origin information be placed on meat labels, spelling out where the animal was born, raised and slaughtered.

“Cuts of beef, pork, chicken, lamb and goat meat now labeled simply as a product of one or more countries would have to go into more detail, adding new complexity and expense for meat packers and retailers.”

The article noted that, “American Meat Institute President J. Patrick Boyle criticized the proposal;” while National Cattlemen’s Beef Association (NCBA) President Scott George stated on Friday that, “The proposed amendments will only further hinder our trading relationships with our partners, raise the cost of beef for consumers and result in retaliatory tariffs being placed on our export products.”

 

Budget Issues

Pete Kasperowicz reported on Friday at The Hill’s Floor Action Blog that, “It’s now the Senate’s turn to pass a spending bill for the rest of fiscal year 2013 [FY 2013 continuing resolution (CR)].

“The House approved its version of the bill this week, which many Democrats opposed because it locks in the $85 billion sequester. Senate Democrats will try to include language giving the Obama administration more flexibility to implement the sequester, by letting federal agencies shift money between programs.”

The Hill update noted that, “The House and Senate have just two and a half weeks to avoid a government shutdown by reaching agreement on the House bill and whatever the Senate passes.”

With respect to the Senate measure, David Rogers pointed out yesterday at Politico that, “Paying a price for his indifference, President Barack Obama is expected to get little or none of the extra money for health care and Wall Street reforms which the administration has been seeking in a six-month stopgap spending bill coming to the Senate floor this week.”

An update posted on Friday at the National Sustainable Agriculture Coalition Blog (NSAC) stated that, “The Senate announced that it will begin consideration of its own FY 2013 CR on Monday.  Whereas the House CR includes only two updated funding bills, the Senate CR is expected to also include the full FY 2013 bills for Agriculture, Homeland Security, and Commerce-Justice-Science appropriations bills, as negotiated by the House and Senate last year.  Recall that House and Senate appropriators had nearly finalized a full-year omnibus appropriations package for FY 2013 back in December, but that package never came to fruition as all attention drifted to the separate fiscal cliff deal negotiated by White House and Senate Minority Leader Mitch McConnell (R-KY).”

The NSAC update pointed to the Senate Appropriations Committee’s FY 2013 Agriculture Appropriations bill from last April and also looked forward ahead with a discussion on the FY 2014 Budget Resolutions (see related article from today’s Wall Street Journal, “Opening Budget Bids Set Parties’ Battle Lines.”)

Specifically, Friday’s update stated that, “Each year, the House and Senate are supposed to develop budget resolutions to guide yearly spending decisions. This year, both chambers of Congress must produce budget resolutions by April 15; otherwise, members will not be paid their salaries until the late in 2014 under the terms of a previous agreement.

“House Budget Committee Chairman Paul Ryan (R-WI) will release his budget on Tuesday, March 12, and the Committee will debate the resolution on Wednesday, March 13.  The Ryan budget is expected to include deep cuts to farm bill spending.”

“The Senate Budget Committee is expected to debate its own FY 2014 budget resolution on Thursday, March 14.  We currently expect the Senate Budget proposal to contain farm bill spending levels closer to the $23 billion cut that the Senate adopted last year during the initial farm bill debate.  We also expect the Senate budget to have higher discretionary spending levels for agriculture compared to the House bill.”

With respect to the executive branch, Jeremy Herb reported on Friday at The Hill’s Defense Blog that, “The Obama administration will release its 2014 budget more than two months late on April 8, according to congressional sources.”

And, a news release Friday from Sen. Chuck Grassley (R., Iowa) stated in part that, “[Sen. Grassley] made the following comment after receiving a response from Department of Agriculture Secretary Tom Vilsack about meat inspectors being furloughed as a result of sequestration.  Last week, Senator Chuck Grassley and eight other senators sent a letter to Vilsack expressing questions and concerns over the proposal to furlough meat and poultry product inspectors.  The Department of Agriculture’s response can be found here.

  Here is a comment from Grassley.

“‘I’m concerned the Department of Agriculture is not doing everything possible to avoid something as drastic as furloughing meat and poultry product inspectors… [T]he response I received today was unsatisfactory and left me with additional questions,’ [Sen. Grassley said.]”

 

Biofuels- RINs

University of Illinois Agricultural Economists Scott Irwin and Darrel Good noted on Friday at the farmdoc daily blog (“Exploding Ethanol RINs Prices: What’s the Story?”) that, “The objective of this post is to provide a brief explanation of the underlying cause of the recent very sharp increase in the price of ethanol (D6) RIN credits and to identify the factors that might influence future price direction. As described in an earlier post by Nick Paulson, ‘RINs are the basis of the accounting system created by the Environmental Protection Agency (EPA) for use in enforcing the fuel mandates outlined under the RFS2. A RIN is a 38-digit number assigned to each gallon or batch of renewable fuel produced or imported into the U.S. Each RIN travels through the supply chain with the biofuel it is associated with until it is separated, at which point the RIN can be applied towards the mandate of an obligated party (fuel blender) or traded among other obligated parties or speculative traders, potentially for application towards the mandate at a future time. Thus, the RINs system allows obligated parties to meet their individual mandates by applying RINs representing biofuels which they have physically purchased and blended, or those which were purchased from another party through RIN trading.’

“Until very recently, the price of ethanol (D6) RINs traded at a relatively low price and in a relatively narrow range (Figure 1). The low value of the D6 RINs from late 2009 through 2012 reflected the combination of the positive profitability of blending ethanol and the large inventory of excess RINs. As long as ethanol blending was profitable, the blending mandate was not substantially larger than the blend wall, and RIN credits were in plentiful supply, the value of D6 RIN credits to meet the blending mandates was low.”

After additional analysis, the farmdoc update stated that, “The speed and magnitude of the recent increase in the price of D6 RINs is indeed startling. The run up in prices may include some unusual speculative buying, but the value of D6 RIN credits is fundamentally supported by the ethanol blend wall. Two possible developments could alter that fundamental support and result in declining RIN values. First, a more rapid expansion of ethanol blending through E15 or E85 would expand the blend wall and reduce the demand for D6 RIN credits to meet the renewable (ethanol) biofuels mandate. Second, a reduction in the RFS mandate for renewable fuels would also reduce the demand for D6 RIN credits. While neither of these developments is on the immediate horizon, developments should be closely monitored. Without a resolution to the ethanol blend wall issue sometime soon, a portion of the renewable (ethanol) mandate beginning in 2014 may have to be satisfied with advanced biofuels or advanced biofuels RIN credits (D4 or D5), most likely biomass-based biodiesel (D4). If that is the case, the price of D6 RINs could be supported up to the price of D4 biodiesel RINs. Those D4 RINs are currently trading at about $.10 premium to D6 RINs.”

Reuters writers Joshua Schneyer, Sabina Zawadzki and Ron Bousso reported on Saturday that, “The soaring cost of ethanol credits for oil refiners is boosting gasoline prices and could crimp fuel supplies, threatening to send U.S. pump prices higher during the peak summer driving season, industry officials and traders warned on Friday.”

Ben Goad reported on Friday at The Hill’s RegWatch Blog that, “An oil-and-gas industry official on Friday urged Congress to repeal new renewable fuel standards (RFS) set forth by The Environmental Protection Agency, warning that the regulations could lead to a national gas supply problems and damage to millions of cars.

“In testimony at an EPA hearing in Ann Arbor, American Petroleum Institute (API) Vice President of Regulatory and Economic Policy Kyle Isakower called the RFS mandate ‘unworkable.’”

Meanwhile, Samantha Pearson reported yesterday at The Financial Times Online that, “Brazil is set to cut taxes this month in the country’s ethanol industry as the government looks to throw a lifeline to the biofuel’s struggling producers and curb inflation.

“Pedro Mizutani, vice-president of Raízen, Brazil’s largest seller of sugar and ethanol, told the Financial Times that after discussions with the industry the authorities are preparing to reduce the tax burden on ethanol from R$120 (US$62) per cubic metre to R$25.

The FT article added that, “The tax cut is one of the biggest moves yet by the government to support ethanol producers, many of whom are facing bankruptcy because of heavy debts and difficulties competing with subsidised petrol prices in Brazil.”

Keith Good