Keith Good: Rail Service Problems Persist; Hog Prices Rebounding

    Transportation Issues

    Gregory Meyer and Robert Wright reported yesterday at The Financial Times Online that, “Protracted rail shipping delays have led to deep discounts for grain prices in the north central US, weeks before a huge harvest is expected to put the transport network under new stress.

    “Commercial silos in North Dakota are offering farmers only $2.70 a bushel for corn – about $1 less than benchmark prices – due mainly to the costs of securing capacity on adjacent tracks, traders and agricultural groups said.”

    The article explained that, “Problems are most acute on the BNSF, owned by Warren Buffett’s Berkshire Hathaway, and Canadian Pacific railroads. A federal railroad regulator will hold a hearing on service problems on Thursday.

    “Far from river barge networks, northern plains states rely heavily on railroads to move agricultural commodities. Rail delays lengthened after a bumper 2013 crop was followed by an extremely cold winter that slowed and shortened trains.

    “Some farmers suspect railroads’ rising shipments of crude oil from North Dakota’s Bakken shale formation have sidetracked grain, a contention railroads dismiss.”

    The FT writers added that, “The most recent reported speeds for BNSF’s grain trains, however, were still 9 per cent down on last year’s second quarter – an indication of congestion… . [T]rain speeds on Canadian Pacific, the other railroad suffering serious problems because of the backlog, are down 11 per cent on the same period last year but sharply up on far lower speeds earlier in the year.

    “CP has told the Surface Transportation Board, the railroad regulator, that changes in its ordering system for railcars should boost its ability to handle traffic in the coming harvest by 15 to 20 per cent.”

    Meanwhile, Kelsey Gee reported in today’s Wall Street Journal that, “Hog prices are rebounding from six-month lows, as investors anticipate demand for pork chops and bacon will pick up soon.

    “Retailers have snubbed pork since prices, spurred by a shortfall of hogs, surged to all-time highs in July.

    “The lack of demand helped prices pull back, and now some investors think they are at a level where grocery stores and restaurants are starting to increase their orders for pork.”

    Ms. Gee noted that, “Hog and pork prices rallied for months, notching new records nearly every week through July 15 on expectations a swine virus would dramatically reduce supplies.

    “While many animals did die from the porcine epidemic diarrhea virus, farmers were able to feed hogs to reach heavier weights amid the lowest costs for grain in years, muting the virus’s impact on pork supplies.

    “In its most recent monthly report, the USDA raised its forecast for pork production this year by 20 million pounds, to 22.78 billion pounds.”

    The Journal article added that, “While the USDA’s new forecast still represents a 1.8% drop in production this year, investors seized on signs supplies would expand and pushed prices to the lowest levels since February. Futures prices fell about a third from the July peak of $1.339 a pound. Now, expectations for demand to return to the pork market are leading some to bet hog prices will climb.”

    Also, Alex Frangos reported yesterday at The Wall Street Journal Online that, “One piece of comforting news about China’s economy has been low inflation. About 45 million breeding pigs might have something to say about that.

    “The issue is the price of pork, a staple meat that Chinese would prefer not to live without, and which has an outsized effect on China’s consumer-price index. While China’s government doesn’t officially disclose the weightings in its inflation index, economists figure food makes up 30% of the inflation basket. Pork is a chunk, and a volatile one at that.

    “Lately, pork prices have been subdued, and so has inflation overall, staying well below Beijing’s 3.5% inflation target all year. Yet China’s pig breeding cycle looks to be near an inflection point. China counted just 45 million sows in July, 11% below its peak and the lowest point since the Ministry of Agriculture’s current data set began in 2008 [related graph].”

    The Journal article indicated that, “It takes up to 20 months for Chinese farmers to raise a sow to breeding age, have it produce piglets and then raise them for slaughter. Pork supply could start to tighten toward the end of this year and, because of the lead time, not recover for a while after that. The family gatherings and parties of Lunar New Year next February could see a higher than normal spike in prices.”

    Farm Bill

    Neil Shah reported in today’s Wall Street Journal that, “After soaring in the years since the recession, use of food stamps, one of the federal government’s biggest social-welfare programs, is beginning to decline.

    “There were 46.2 million Americans on food stamps in May, the latest data available, down 1.6 million from a record 47.8 million in December 2012. Some 14.8% of the U.S. population is on the Supplemental Nutrition Assistance Program, or SNAP, down from 15.3% last August, U.S. Department of Agriculture data show.

    “Food-stamp use remains high, historically speaking. The share of Americans on the benefit–which lets them buy basics like cereal and meat and treats like cookies, but not tobacco, alcohol or pet food–is above the 8% to 11% that prevailed before the financial crisis.”

    The Journal article pointed out that, “Declining use of food stamps is a positive signal for the economy. It suggests that recent improvements in labor markets are reaching more Americans, especially lower-income ones. If more Americans have cash, that could fuel spending, a primary driver of the economy. For years, the recovery has been disappointing, partly because weak growth in inflation-adjusted wages has limited consumer demand for goods and services.”

    “And experts expect enrollment and costs to keep falling: As more Americans find jobs and collect paychecks, fewer will be eligible, lowering program costs. The Congressional Budget Office sees food-stamp costs–now running at $80 billion, or 0.5% of gross domestic product–returning to 1995 levels around 0.35% as a share of GDP in five years [related graph],” the article said.

    Mr. Shah added that, “But plenty of new people seek assistance each month. And changes to SNAP likely will keep rolls from dropping back to the levels of previous decades. States have expanded their outreach to get more people to apply for SNAP, which the federal government pays for. Eligibility requirements have eased, and a much bigger share of those eligible now enroll.”

    Political Notes

    Kyle Trygstad and Alexis Levinson penned an update yesterday at Roll Call Online titled, “The 10 Most Vulnerable Senators,” while Kristina Peterson reported yesterday at The Wall Street Journal Online that, “Republicans control the House and need to gain six seats for a majority in the Senate, an outcome that independent analysts say is increasingly likely due to Mr. Obama’s low approval ratings and an election map that forces Democrats to defend seats in some GOP-leaning states [related graph].”

    Ms. Peterson noted that, “Regaining a Senate majority would give Republicans full control of Congress for the first time since 2007. It also would end what has been a relative rarity in Congress: divided control of the House and Senate. Five of the past 10 Congresses, dating to 1995, have been under Republican control, with two under Democratic control and the bulk of three sessions divided.”

    And Janet Hook reported in Saturday’s Wall Street Journal that, “Overshadowed by their party’s battle for control of the Senate, House Republicans are setting their own ambitious goal for the midterm elections: Expanding their majority to near a post-World War II high.

    “It won’t take much to get there: House Republicans say they hope to pick up 11 seats, which would bring them to a 245-190 majority–strength the GOP hasn’t seen since 1947, when it had 246 House seats.”

    Ms. Hook explained that, “But hitting that target might prove difficult. A gerrymandered political map has left few incumbents of either party vulnerable to serious challenge, leaving the fall midterms to be waged on a small battlefield. Voter interest in the election has been low, and many voters have soured on the GOP over the last four years.

    “Those factors suggest that, although Republicans enjoy many political advantages this year, 2014 isn’t yet shaping up as a ‘wave’ election, where one party swamps the electoral landscape [related graph].”

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