January 19, 2020

Ag Economy; Farm Bill; and, the Budget

Agricultural Economy

Jesse Newman and Jacob Bunge reported in today’s Wall Street Journal that, “Broker Pat Karst thought the farm being auctioned late last month would be scooped up. The 98-acre plot was of decent quality, and the volunteer fire station in Arlington, Ind., where his firm was holding the sale, was packed with farmers.

Instead, the evening ended with the latest in a spate of failed auctions, after the top bidder dropped out far below the asking price. ‘The moral of the story is: unrealistic expectations from sellers and more caution on the side of the buyer,’ said Mr. Karst, who acknowledged he, too, thought the property would fetch a higher price than offered.

The flop reflects a broader turning point in one of the U.S.’s biggest recent asset booms. From 2009 to mid-2013, average prices for agricultural land in the U.S. rose by half, while in Iowa, Nebraska and some other Midwest farm states, prices more than doubled, according to U.S. Department of Agriculture data from last August. That helped fuel economic prosperity across the Farm Belt while stoking fears about a possible bubble.”

The Journal writers explained that, “Now there is mounting evidence the boom is fizzling out. Farmland prices in Iowa fell 3% over the second half of last year, and those in Nebraska fell 1%, according to estimates from the Farm Credit Services of America, an Omaha, Neb., lender that calculates weighted averages based on land quality. Reports from U.S. Federal Reserve Banks across the Midwest late last year showed prices flattening or slipping from the previous quarter. A monthly survey of Midwestern lenders by Omaha-based Creighton University in January found the outlook for farmland and ranchland prices was the weakest in more than four years.

Despite the falling property values, agricultural analysts say a repeat of past farm-belt collapses is unlikely. Farmer income is expected to remain strong and debt levels are low, according to USDA figures” [see related graph].

Today’s Wall Street Journal article stated that, “But prices have plunged for corn, a key U.S. crop. After rising to all-time highs in 2012—driven by growing demand and tight supply because of a historic drought—prices for the biggest U.S. crop dropped 40% last year, thanks to a record harvest of 14 billion bushels. The Federal Reserve warned in January that corn prices, then around $4.28 a bushel, won’t cover farmers’ anticipated cost of raising the crop this year. Prices have since climbed to about $4.40 a bushel, compared with about $8.31 in August 2012.

“Soybeans, the nation’s No. 2 crop, have also lost value. Meanwhile, with the Fed scaling back its stimulus efforts, buyers of U.S. farmland face the prospect of higher interest rates after years of cheap borrowing.”

The Journal article noted that, “Michael Duffy, professor of economics at Iowa State University in Ames, Iowa, projects lower income for farmers could drive the price of farmland down 20% to 25% over the next several years.”

Newman and Bunge pointed out in their Journal article that, “Adding comfort, today’s agricultural sector looks markedly different than it did during the last farmland bust, in the early 1980s. Then, a roughly 50% drop in land values and rising interest rates led to high levels of debt when viewed as a percentage of farmers’ assets. That forced many farmers out of business and spurred failures among dozens of agricultural lenders. Farmers’ debt-to-asset ratio is currently estimated at 10.3%, less than half what it was in 1985, according to the USDA.”

Note that an update yesterday from USDA’s Radio News Service (“Lower Farm Income Doesn’t Translate Into A Farm ‘Crisis’”), which included remarks from USDA Chief Economist Joe Glauber, rhetorically asked: “Will this year’s lower farm income bring on a 1980’s style farm financial ‘crisis?’”  The one-minute audio report can be heard here.

More specifically with respect to the Fed scaling back its stimulus efforts, in a House Financial Services Committee hearing this week, Ag Committee Chairman Frank Lucas (R., Okla.) asked Federal Reserve Chairman Janet Yellen about Quantitative Easing and farmland values.

Chairman Lucas indicated that, “…[B]ut when we undo Quantitative Easing, what’s the effect going to be on things like farm land prices or stock market prices for that matter, equities?”

Chairwoman Yellen noted that, “Well, I would agree that one of the channels by which monetary policy works is asset prices, and we have been trying to push down interest rates, particularly longer term interest rates. Those rates do matter to the valuation of all assets, both stocks, houses, and land prices, and so I think it’s fair to say that our monetary policy has had an effect of boosting asset prices.

“It’s — we have tried to look carefully at whether or not broad classes of asset prices suggest bubble-like activity. I’ve not seen that in stocks generally speaking. Land prices I would say suggest a greater degree of overvaluation.”

A video replay and transcript of the exchange this week with Chairman Lucas and Chairwoman Yellen is available here, at Online.

Meanwhile, Bloomberg writer Jeff Wilson reported yesterday that, “Corn is no longer king on Todd Wachtel’s 5,500-acre farm in Illinois. After prices fell to a three-year low in January, he will cut planting by 20 percent in 2014 and devote half his land to soybeans, which are cheaper to grow and just as profitable for the first time in four years.

“Across the Corn Belt, growing the biggest U.S. crop had been an easy choice for farmers since 2009. Annual revenue was $150 per acre more than soybeans on average for Wachtel, who sowed 3,450 acres of corn in 2013, or 63 percent of his land. This year, lower prices mean both crops will earn $10 to $20 an acre, so Wachtel is reducing his risk by sowing more soybeans, which cost $220 less per acre to grow than corn.”

And with respect to trade and agricultural exports, David Pierson reported yesterday at the Los Angeles Times Online that, “The developing world has largely usurped U.S. manufacturing, but emerging economies are increasingly big customers of American farmers.

Between 2000 and 2013, American fruit, grain, meat and dairy sold overseas nearly tripled to $140.9 billion, making agricultural products one of the hottest exports in the last decade, according to a U.S. Department of Agriculture report released Wednesday” [see related graph].

Mr. Pierson stated that, “Developing countries with growing middle-class populations and strengthening currencies powered the binge on U.S. food, which has been a boon for California almond growers, Iowa soybean farmers and others.

Emerging consumer markets such as China’s are struggling to feed massive populations with ever growing demand for richer diets.”

In related news, Lucy Hornby reported yesterday at The Financial Times Online that, “China has given up one of its most sacred tenets and effectively abandoned its policy of being self-sufficient in grain as its population outpaces the ability to grow its own food.

“Beijing has increasingly imported grains and food but has maintained an ideological emphasis on producing as much domestically as possible. For the first time however it has now set a grains output target well below domestic consumption rates, implying a move away from that ideological commitment to producing all the grains it needs – which has been central to Communist party thinking for decades.”

Also, Vicki Needham reported yesterday at The Hill’s On the Money Blog that, “President Obama is heading back to the Pacific Rim in April to visit several countries vital to moving his massive trade agenda and important to global security.

“Obama will travel to Japan, South Korea, Malaysia and the Philippines to discuss a broad array of issues from trade and economics to security.”

In a separate blog update yesterday at The Hill, Ms. Needham reported that, “The U.S. ambassador to Singapore expressed confidence on Wednesday that negotiators will resolve their differences and eventually forge a far-reaching Asia-Pacific trade pact.

“U.S. Ambassador Kirk Wagar said the 12 nations involved in the ongoing talks are aiming to quickly wrap up work on the Trans-Pacific Partnership (TPP).”

However, Ms. Needham indicated in an update yesterday evening at The Hill that, “The House’s top Democrat said Wednesday she is opposed to trade promotion authority (TPA) legislation introduced last month by a trio of lawmakers.

“House Minority Leader Nancy Pelosi (Calif.) said Wednesday that she doesn’t support a measure authored by two Republicans and former Senate Finance Committee Chairman Max Baucus that would provide President Obama with ramped up powers to help smooth the passage of trade deals.

Pelosi made clear on Wednesday night that she isn’t opposed to the concept of TPA, also known as fast-track authority, but she can’t support a bill introduced by Baucus, House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee ranking member Orrin Hatch (R-Utah).”

The Hill update added that, “At the Democratic retreat Wednesday night, Pelosi clarified that her remarks from earlier Wednesday were directed at the Camp-Baucus-Hatch bill introduced in January, and were not a rejection of Obama’s trade agenda.”

In other news, an update yesterday from the International Food Policy Research Institute (IFPRI) stated that, “Increased demand for food due to population and income growth and the impacts of climate change on agriculture will ratchet up the pressure for increased and more sustainable agricultural production to feed the planet. A new report by [IFPRI] measures the impacts of agricultural innovation on farm productivity, prices, hunger, and trade flows as we approach 2050 and identifies practices which could significantly benefit developing nations.

“The book, Food Security in a World of Natural Resource Scarcity: The Role of Agricultural Technologies, released today, examines 11 agricultural practices and technologies and how they could help farmers around the world improve the sustainability of growing three of the world’s main staple crops – maize, rice, and wheat.”


Farm Bill- Policy Issues

Secretary of Agriculture Tom Vilsack was a guest on yesterday’s AgriTalk radio program with Mike Adams where he discussed issues associated with implementing the new Farm Bill.  An unofficial transcript of yesterday’s conversation is available here.

Mike Adams asked Sec. Vilsack yesterday: “Now, as you mentioned, the key is implementation. How is that going? How quickly can you implement this farm bill?”

Sec. Vilsack noted that, “Well, I think it’s important for folks to know that each title of a farm bill has rules and regulations and notices that have to be prepared and filed in order for us to be able to implement. And we’ve begun a process of prioritizing within each title what those rules and regulations, what is required.

I can tell you, Mike, that I’ve instructed our team to put a keen focus initially on disaster assistance. The reality is our livestock producers have waited a very, very long time for help and for resumption of these disaster programs. There are four programs in full that need to be looked at. A couple of them don’t necessarily require a lot to get implemented, but two of them will require us to go through a rule-making process. We want to be able to do that as quickly as we possibly can.”

When asked if the Farm Bill could be implemented this year, Sec. Vilsack explained: “That’s difficult to say. I have not yet seen all of the titles and all of the steps. But I can tell you that there are literally hundreds and hundreds, if not thousands of actions that have to be taken. This is a 900 page bill, Mike, with lots of new programs and lots of new opportunities which make me very optimistic and hopeful about the future of agriculture and rural America.

“Part of the challenge, Mike, is that we can get a rule prepared, but it has to be reviewed by our general counsel’s office, it has to be reviewed pursuant to rules and regulations and law by our budget and policy folks, and then it has to be reviewed by OMB, the Office of Management & Budget, before it can be published. Then there are comment periods, and then if there are lots of comments, people ask for extension of comment periods, so it’s hard to pin down in terms of having everything done in 2014.

What I will tell you is we will have it prioritized based on what we think is most helpful and most important to people on the farm, on ranches and in rural America, and we will systematically and as effectively as we can implement this thing, and we will be fairly transparent about this so that people will know where we are in the process. And as I say, I think the first order of business is gonna make sure that we get these disaster programs in a place where people can get help and assistance, because they’ve waited for, in some cases, a couple of years.”

Yesterday’s AgriTalk discussion also focused on trade issues and biofuels; Sec. Vilsack noted on the issue of the Renewable Fuel Standard that, “We are, at USDA, anyway, not going to wait for whatever decision EPA makes. We’re going to make sure that we are aggressive in terms of creating market opportunities. And we are hopeful that EPA will take into consideration all of the comments that they receive from all over the country about the importance of maintaining a solid renewable fuel industry.”

Meanwhile, agricultural economists John Newton (University of Illinois) and Cameron Thraen (Ohio State University) indicated yesterday at the farmdoc daily blog (“The Dairy Safety Net Debate Part III: The Compromise Dairy Safety Net Solution”) that, “In our previous farmdoc daily posts ‘The Dairy Safety Net Debate of 2013: Parts I and II’ (see here and here) we offered an independent analysis of the dairy margin protection programs put forth and passed by the U.S. House of Representatives and the U.S. Senate. This research demonstrated that a safety net program encompassing both the milk price and the feed price in the form of an income-over-feed-cost margin would succeed in providing need financial relief to dairy farmers during times of low milk production margins. We also identified and discussed three significant issues: (i) adverse gaming, (ii) functional equity of dairy market stabilization, (iii) and the distribution of program benefits.

“Since our last post The Agricultural Act of 2014 (here) was passed by both Houses of Congress and signed into law by President Obama on February 7, 2014. In today’s post we will demonstrate how The Agricultural Act of 2014, through the Margin Protection Program for Dairy Producers, has partially addressed our earlier concerns by (1) excluding the dairy market stabilization program and (2) altering the premium schedule for both small and large dairies. First, we review the margin protection provisions in the new law, and second we examine to what extent adverse gaming incentives and distributional effects may still exist. In addressing these issues we will demonstrate that the distribution of program benefits no longer follows closely the distribution of milk production and is more aligned with the benefit distribution of the Milk Income Loss Contract (MILC) program. We will also explain that adverse gaming incentives still exist, and in the absence of formal rate making procedures can be significantly reduced by instituting a gap between the sign-up date and the beginning of the coverage period.”

Also yesterday, a news release from National Crop Insurance Services noted that, “Senate Agriculture Committee Chairwoman Debbie Stabenow told crop insurers this week that in addition to farmer support, new coalitions would be needed to defend the policy from critics in the future.

“Agriculture’s work with the conservation community will be at the forefront of that effort, and Dan Wrinn with Ducks Unlimited (DU) Monday said the relationships forged during the Farm Bill debate would continue well into the future.”

Meanwhile, Teresa Watanabe reported on the front page of yesterday’s Los Angeles Times that, “[California farmer Bob Knight] s fighting to save his family’s livelihood and the farming heritage of Redlands — a city so named for the deep red earth that once produced the nation’s largest crop of navel oranges.

And his unlikely ally in the high-stakes gamble is the Los Angeles Unified School District.

In an effort to support local farmers and bring more healthful food to schoolchildren, the nation’s second-largest school system has pledged to take whatever high-quality produce Knight and others in his 31-member local farming alliance can grow.”

And Helena Bottemiller Evich reported yesterday at Politico that, “Lawyers are pitching state attorneys general in 16 states with a radical idea: make the food industry pay for soaring obesity-related health care costs.

“It’s a move straight from the playbook of the Big Tobacco takedown of the 1990s, which ended in a $246 billion settlement with 46 states, a ban on cigarette marketing to young people and the Food and Drug Administration stepping in to regulate.

“There are plenty of naysayers, just as there were in 1994 when Mike Moore, Mississippi’s attorney general, famously suggested suing the tobacco industry. But a number of nutrition and legal experts think a similar strategy could be applied on the food front — especially as obesity-related diseases have surpassed smoking as a major driver of health care costs.”

Also yesterday, Eric Lipton reported in The New York Times that, “The corn refinery and sugar industries, bitter rivals in the manufacture of billions of dollars’ worth of sweeteners for sodas and other high-calorie foods, covertly funded dueling nonprofit groups in Washington in a multiyear effort to grab market share, while also stoking fears among consumers about possible health risks, court records made public in a federal lawsuit between the two parties show.

“The lawsuit, which has brought hundreds of pages of secret corporate emails and strategy documents into the public domain, demonstrates how Washington-based groups and academic experts frequently become extensions of corporate lobbying campaigns as rival industries use them to try to inflict damage on their competitors or defend their reputations against such assaults.”

And Tom Hamburger penned an article on the front page of today’s Washington Post titled, “‘Soft lobbying’ war between sugar, corn syrup shows new tactics in Washington influence.”

In other policy news, Ramsey Cox reported yesterday at The Hill’s Floor Action blog that, “The Senate passed a bill Wednesday that would require the administration to report to Congress on the harmful effects too much algae are having on fish.

“Sen. Bill Nelson (D-Fla.) introduced S. 1254, the Harmful Algal Bloom and Hypoxia Research and Control Amendments Act, which would require the Under Secretary of Commerce for Oceans and Atmosphere to establish a national harmful algal bloom and hypoxia program and report a plan for Congress to address the issue.”



Paul Kane and Wesley Lowrey reported in today’s Washington Post that, “After a dramatic vote, the Senate cleared the critical 60-vote threshold Wednesday that allowed for passage of legislation to suspend the Treasury’s borrowing limit.

“The cliffhanger vote was scheduled for 15 minutes, but it lasted an hour. It ended when Senate Minority Leader Mitch McConnell (R-Ky.) and his leadership team voted to end a potential GOP filibuster, casting votes that left them exposed to attacks from conservative opponents.

After the filibuster threat was choked off, the Senate approved the debt ceiling legislation on a party-line vote, 55 to 43, sending it on to President Obama for his signature, ensuring that the Treasury will not default on more than $17 trillion in federal debt.”

Keith Good

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