Keith Good: U.S. Grain Suppliers Could Benefit from Events in Ukraine

    Agricultural Economy

    Jacob Bunge and Tony C. Dreibus reported yesterday at The Wall Street Journal Online that, “Ukrainian farmers are holding on to grain to protect themselves against declines in the country’s currency amid tensions with Russia, making exports from its Black Sea ports ‘increasingly difficult,’ the U.S. Grains Council said Wednesday.

    “Strained shipments of grain from Ukraine, a major wheat and corn exporter, could lead to increased demand for U.S. crops from North Africa, the Middle East and China, according to the Washington-based trade group.

    “The shipment difficulties couldn’t be independently confirmed. Any problems in Ukraine could benefit U.S. suppliers represented by the Grains Council, a nonprofit that develops export markets for U.S. corn, sorghum, barley and other products.”

    The Journal article noted that, “Ports have remained open during Russia’s military incursion into Ukraine’s Crimea region and ‘vessels are loading,’ said Cary Sifferath, the Grains Council’s regional director for the Middle East and Africa. However, shipments are becoming more difficult because ‘we’re seeing farmers holding grain to hedge against a devaluing currency.’

    “The group estimated Ukraine has yet to ship about 3.5 million metric tons of corn, representing about one-fifth of the corn the Eastern European country was expected to export during the 2013-14 season.”

    Bloomberg writer Jeff Wilson reported yesterday that, “Urkaine’s escalating turmoil is signaling that grain buyers may be forced to import more from the U.S. as corn prices rally to a six-month high.”

    Mr. Wilson noted indicated that, “Russia’s troop buildup in Ukraine’s Crimean Peninsula roiled grain markets this week. Corn futures climbed to the highest since September in Chicago today, rebounding from last year’s 40 percent plunge.”

    Meanwhile, Rob Taylor reported yesterday at The Wall Street Journal Online that, “World grain markets may have reacted prematurely to the crisis caused by Russia’s intervention in Ukraine, a senior U.S. agriculture official said Wednesday.

    “Wheat futures climbed to their highest level since early December while corn hit a fresh five-month high Tuesday on concerns that exports from Ukraine and Russia could be disrupted or affected by possible economic sanctions.”

    The Journal article pointed out that, “There are no indications of grain purchases shifting from the region due to buyers looking to other more stable suppliers, said Joseph Glauber, the U.S. Department of Agriculture’s chief economist.

    “‘I don’t have any signs of that at this point,’ Mr. Glauber told The Wall Street Journal in an interview Wednesday in Australia, where he has been attending a government commodities conference.

    “‘The short answer is it’s too speculative,’ he said. ‘I don’t like to second guess markets typically. We’ll evaluate this when we do our own forecasts. But right now I think it’s way too early to say anything about how much exports will be affected.'”

    Yesterday’s article added that, “Mr. Glauber said he expected the Black Sea region would remain a major and growing wheat exporter, with productivity gains and more planting area indicating that the zone will have an even bigger influence on the world market, despite political upheaval. ‘I don’t think this changes those longer-term fundamentals,’ he said.”

    And Reuters writer Karl Plume reported earlier this week that, “The crisis in Ukraine is roiling grains markets, but with wheat already harvested and shipped and global stockpiles of corn that can substitute for Ukrainian maize, it appears unlikely, at least for now, that there will be major global supply shocks.”

    Mr. Plume noted that, “Record stocks in the United States mean U.S. producers have plenty of corn to ship to meet demand should Ukraine shipments be cut off, traders and analysts said.”

    Bloomberg writers Maria Kolesnikova and Rudy Ruitenberg reported today that, “On five Sundays since protests began in Ukraine, Viktor Skochko made the 600-kilometer (372-mile) round trip from his farm east of Kiev to join demonstrations in the capital that ultimately toppled the government. By each Monday, he was back preparing to sow spring crops.

    “‘There are few smiling faces these days, and everyone is worried,’ Skochko, 54, the director of Astarta Holding NV’s Dovzhenko unit in the Poltava region, said by telephone from Yareski village. ‘But there has been no impact so far on our operations,’ said Skochko, who manages 2,900 workers on 43,000 hectares (106,000 acres). ‘By March 15, we will be 100 percent ready to start the planting campaign, weather permitting.’

    “Ukraine, once known as the granary of the former Soviet Union, is poised to be the world’s third-largest corn exporter and the sixth-biggest supplier of wheat this year. While grain prices have rallied since the overthrow of Viktor Yanukovych as president increased risk of an escalating conflict with Russia, there is little evidence that farmers will be unable to plant crops or get supplies to export markets.”

    In other developments, the Federal Reserve Board released its Summary of Commentary on Current Economic Conditions yesterday. Commonly referred to as the “Beige Book,” the report included several observations with respect to the U.S. agricultural economy, which have been posted here at Online.

    The Richmond Fed District stated that, “Falling feed costs and higher cattle prices led contacts to believe it will be a good year for livestock producers,” while the Chicago Fed District pointed out that, “Livestock producers reported improving bottom lines driven by higher prices for milk, hogs, and cattle combined with lower feed costs.”

    The Minneapolis Fed district added that, “Cattle and hog producers continued to benefit from high prices and falling feed costs, as did dairy producers.”

    The Kansas City Fed District noted: “Hog prices rose amid an intensifying swine virus outbreak that was expected to constrain pork supplies. In addition, production costs for livestock feeders edged down due to lower feed prices.”

    Kelsey Gee reported in today’s Wall Street Journal that, “Hog prices are soaring to new highs as a deadly swine virus batters the U.S. pork industry and threatens to curtail supplies.

    “Hog futures hit a record intraday high Wednesday and are up 30% this year, making hogs one of the fastest-rising U.S. commodities. The price surge is pressuring profit margins for some meatpackers and is expected to lead to higher costs for shoppers at the grocer’s meat case in coming months” (see related graph).

    The Journal article added that, “Traders have pushed lean-hog futures to records this week as they fret that pork production could fall sharply this summer–a key sales period when U.S. consumer demand for hot dogs and brats typically is highest.”

    An update yesterday at the Economic Research Service (USDA) Chart Gallery webpage explained that, “Over the last 20 years, U.S. dairy producers have faced rapidly changing milk prices and input prices, primarily for feeds. The monthly average U.S. all-milk price has been highly volatile since 1990, particularly in more recent years” (related chart here).

    Brad Tuttle reported this week at Time Magazine Online that, “At the start of 2014, U.S. ranchers had 87.99 million head of cattle, the lowest total since 1951. Long periods of drought in California and Texas are largely being blamed for the declining herd figures, so it’s not like the numbers should come as much of a surprise. Neither should rising beef prices hitting consumers and restaurants (and restaurant customers, of course). Analysts have forecast that beef prices will increase this year and for years to come.”

    In trade related developments, Alexandra Wexler reported yesterday at The Money Beat Blog (Wall Street Journal) that, “U.S. candy makers are hoping that trade partnerships can get them what the farm bill could not–access to more sugar from the global market.”

    Ms. Wexler explained that, “The Trans-Pacific Partnership, a pending trade pact that would include the U.S., Japan, Australia and nine other countries, is the candy group’s next target as a vehicle for sugar reform. The U.S. already has a bilateral free trade agreement with Australia, which went into force in 2005, but sugar and sugar-related products were excluded.

    “Australia is the world’s third-largest sugar exporter, and tariff-free imports from there could help moderate U.S. prices if some kind of weather event, like a hurricane, were to reduce output of the sweetener in the U.S. or Mexico over the next few years.”

    Also, Reuters writer James Topham reported yesterday that, “When it comes to trade policy, Prime Minister Shinzo Abe faces a choice between the fears of Japan’s aging farm lobby and the hopes of suburban families lined up here at a nearly 20-metre long meat counter in a mall showcasing Australian beef… . [A]t the supermarket inside the mall, the daily specials include beef shipped direct from Aeon’s own feed lot in Tasmania, an arrangement that reduces prices for consumers and skirts Japan’s politically strong agricultural co-operative system that many see as an outdated relic of the country’s revival after World War II.”

    The article pointed out that, “‘I don’t think Japanese agriculture will collapse because of the participation in TPP,’ said Toru Wakui, a northern Japan rice farmer, referring to the Trans-Pacific Partnership trade talks. ‘If it happens, it will be from an internal collapse.’

    “This quiet but significant shift suggests Japan’s tough TPP stance aimed at protecting the country’s farmers is losing some of its foundation as more commercial pressures come to bear in Japan and farmers and their buyers work around an inflexible traditional system.”

    Farm Bill

    Marcia Zarley Taylor and Chris Clayton reported yesterday at DTN that, “University of Illinois economist Jonathan Coppess gave some consolation that county-based Agricultural Risk Coverage (ARC) might provide more cushion to Midwest corn and soybean growers than at first expected. What’s more, those projected payments would come on top of any crop insurance indemnities, although unlike insurance, farmers can’t count on payment before October 2015.

    “In a webinar on Wednesday breaking down the new commodity programs, Coppess said that presuming trend yields on corn and soybeans, the initial conclusions show most Midwest corn and soybean farmers would reach the 10% bandwidth of payment protection on the county-based ARC revenue guarantees. Yet, prices would remain above the reference prices needed to trigger payments under the Price Loss Coverage (PLC) program.”

    Marcia Zarley Taylor indicated yesterday in an update at the DTN Minding’s Ag Business Blog that, “In cyclical businesses like farming, what goes up must come down-and it’s usually market prices that adjust much faster than your cost of production. So the tailspin in commodity prices since 2012 is a poignant example of why crop insurance alone can’t be the only safety net for farm income. It also reinforces why you seriously need to research options on the new farm bill’s ARC and PLC programs.

    “As the accompanying chart shows, corn’s crop insurance revenue guarantee (for those with a harvest-price adjustment) bounced around about 225% in the last decade. It peaked at $7.50/acre in 2012, but bottomed at $2.32 in 2005. The beauty of crop insurance is that quickly reacts to market shifts, but it provides little security against multi-year price collapses.”

    Ms. Taylor added that, “The bottom line is that production costs have barely budged since 2013 so a typical corn grower in Illinois who pays average market rents of about $202-$302/acre in 2014 faces a net loss of $41 to $48/acre this year, the University of Illinois says.”

    Meanwhile, a news release yesterday from University of Missouri Extension noted that, “When milk producers first hear of the Margin Protection Program for Dairy Producers, they become confused about the new farm bill safety net.

    “‘It is new and different, but it really isn’t complicated,’ says Joe Horner, University of Missouri Extension economist.

    “Margin insurance, however, takes more planning than the Milk Income Loss Contract (MILC) in past farm bills.”

    In other news, Pete Kasperowicz reported yesterday at The Hill’s Floor Action Blog that, “A new bill introduced Tuesday would prevent people from using food stamps or other federal aid to buy medical marijuana.

    “Rep. Paul Gosar (R-Ariz.) proposed the No Welfare for Weed Act, H.R. 4142, which would prohibit pot from being bought by people using Temporary Assistance for Needy Families (TANF) or the Supplemental Nutrition Assistance (SNAP) programs. TANF is the federal welfare program, and SNAP is commonly referred to as the federal food stamp program.”

    A Government Accountability Office report (“Prepositioning Speeds Delivery of Emergency Aid, but Additional Monitoring of Time Frames and Costs Is Needed“) released yesterday noted that, “The U.S. Agency for International Development (USAID) reduces the average delivery time frame for emergency food aid by prepositioning food domestically–that is, in warehouses in the United States–and overseas. GAO estimates that compared with USAID’s standard shipping process, which can take several months, prepositioning food aid shortened delivery time frames by an average of almost a month for shipments to the World Food Program (WFP). GAO also estimates that prepositioning shortened delivery time frames by an average of more than 2 months for other organizations–‘cooperating sponsors’–that receive USAID grants. In addition, USAID reduces delivery time frames when it diverts shipments en route to overseas prepositioning warehouses to areas with immediate needs. For all cooperating sponsors, GAO estimates that diversions saved, on average, about 2 months.”

    Meanwhile, Ken Anderson reported yesterday at Brownfield that, “The state of Nebraska is joining Missouri’s lawsuit challenging California’s egg production standards.”

    Yesterday, the House Agriculture Appropriations Subcommittee held a hearing  with testimony from the USDA Office of the Inspector General, Phyllis Fong.

    Subcommittee Chairman Robert Aderholt (R., Ala.) noted that, “I plan to approach our fiscal year 2015 bill with three things in mind. They are: 1) Ensuring the Proper Use of Funds through Robust Oversight; 2) Ensuring the Appropriate Level of Regulation to Protect Producers and the Public; and 3) Ensuring Funding is Targeted to Vital Programs.

    “The audits and investigations conducted by the Office of the Inspector General are key to this Subcommittee’s efforts to ensure the proper use of funds; detect and reduce waste, fraud and abuse; and strengthen the management of USDA’s agencies and programs. Your work also is vital to us as we make decisions on how to allocate funds and our oversight work to ensure the funding we provide is properly utilized.”

    During yesterday’s hearing, Reps. Sanford Bishop (D., Ga.), Jeff Fortenberry (R., Neb.) and Chellie Pingree (D., Maine) all suggested closer oversight with respect to farm program payment limitation issues and specifically noted scrutiny should be focused on “actively engaged” legal constructs. audio clips from yesterday’s hearing include:

    • Rep. Fortenberry noting in an exchange with Inspector General (IG) Fong that he was interested in “exotic legal arrangements that help skirt payment limitations and actively engaged rules, if you will, for the appropriation of farm payments.  This is an area that I think we need to take a closer look at.”  Audio clip– (MP3- 1:15).
    • Rep. Pingree noting lawmakers have expressed particular interest in “actively engaged” rules- audio clip (MP3- 3:23).
    • In response to a comment from Rep. Sanford Bishop, IG Fong points out that the “actively engaged” issue is “difficult and complex.”  Audio clip (MP3- 0:43).
    • Rep. Pingree discussing oversight issues with IG Fong associated with SNAP compared to farm program payment programs- audio clip– (MP3- 3:55).
    • In a response to a question from Rep. Fortenberry, IG Fong suggests looking at implantation issues associated with crop insurance and conservation programs- audio clip (MP3- 0:57).

    CFTC- Commodity Futures Trading Commission

    Scott Patterson reported yesterday at The Wall Street Journal Online that, “President Barack Obama’s nominee to head the Commodity Futures Trading Commission will pledge to aggressively enforce rules against misconduct and beef up oversight of derivatives markets in a Senate hearing Thursday.

    “Timothy Massad is expected to point to his time spent overseeing the Treasury Department’s bank-rescue program for the past three years, noting that derivatives played a key role in the financial crisis, according to prepared testimony reviewed by The Wall Street Journal.”

    The Journal article noted that, “The Senate Agriculture Committee, which oversees the CFTC, will also hear testimony from Sharon Bowen, a securities lawyer at Latham & Watkins LLP, and brokerage executive J. Christopher Giancarlo to fill CFTC commissioner slots.”

    Bloomberg writer Silla Brush reported yesterday that, “Three nominees for seats at the top U.S. derivatives regulator face questions about how tenaciously they’ll enforce the Dodd-Frank Act’s restrictions on the swaps market at a Senate confirmation hearing in Washington.

    “Timothy Massad, 57, the Treasury Department official nominated by President Barack Obama to serve as chairman of the five-member Commodity Futures Trading Commission, has drawn skepticism from outside interest groups about his views on regulation and how he’d lead the agency.”

    The Bloomberg article noted that, “‘He’s really something of a blank,’ Marcus Stanley, policy director for Americans for Financial Reform, a coalition including the AFL-CIO labor federation, said of Massad in a telephone interview yesterday. ‘He doesn’t have a policy or substantive record at least in the areas regulated by the CFTC.’

    “The financial reform group as well as Better Markets, a nonprofit group founded by Atlanta hedge fund manager Michael Masters, say the nominees should answer questions about their views on the role of speculation in commodity markets and the reach of Dodd-Frank rules overseas.”


    University of Illinois ag economist Scott Irwin indicated yesterday at the farmdocDaily blog (“Implying the Probability of an EPA Reversal on the Write Down of the Renewable Mandate from the RINs Market“)  that, “In a farmdoc daily post on February 19th, it was argued that the RINs market provided an early warning signal about another change in EPA policy.  More specifically, the rise of D6 ethanol prices relative to D4 biodiesel prices suggested that RINs traders believed the odds of the EPA reversing the proposed write down of the renewable mandate for 2014 in final rulemaking had increased sharply. The ‘coupling’ of D4 and D6 RINs prices indicated a revised expectation that the renewable mandate for 2014 would exceed the E10 blend wall.  Figure 1, updated from the February 19th post, shows that D4 and D6 prices have continued to track one another, albeit with some erosion in D6 prices compared to D4 prices (about 5 cents).

    “Analysis in another post on February 28th indicated that the big winner from a reversal of the write down of the renewable fuels mandate for 2014 was likely to be the biodiesel industry.  The reason was that biomass-based diesel was cheaper than E85 in most scenarios in terms of compliance costs for obligated parties under the RFS.  The purpose of today’s post is to drill down further and imply the probability of an EPA reversal by comparing current RINs values with the predictions from a simple joint probability model of RINs valuation.”

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