Agricultural Economy – Budget Issues
A paper released yesterday by the Federal Reserve Bank of Chicago (“Farm Income’s Impact on the Midwest Economy,” by David Oppedahl) indicated that, “During the first four years following the Great Recession (which ended in mid- 2009), farmers and ranchers generated the highest levels of real agricultural income since 1973 (see figure 1), which contrasted sharply with the uneven fortunes of the broader economy over this span.
“Yet, since mid-2013, the incomes of crop producers have decreased, while those of livestock producershave increased, as crop (and feed) prices have fallen dramatically, mostly as a result of record or near-record harvests. Hence, risk management remains as critical as ever, as crop producers contend with a downturn in farm income following several years of prosperity.
“Experts from academia, policy institutions, banking, and the farming industry gathered at the 2014 conference to examine these and other farm income trends, plus their interplay with the regional economy.”
Yesterday’s paper added that, “Government payments (both direct subsidies and crop insurance indemnities) have remained an important part of the farm sector’s income, even as market-derived farm income has risen in recent years.
“The number of acres covered by crop insurance has grown significantly, and so have the liabilities of the crop insurance program, which is subsidized and overseen by the USDA. The substantial payouts during recent droughts (especially the one in 2012) underscore the importance and value of crop insurance. Agricultural producers are paying premiums for coverage that has generally increased over time.
“The total value of crop insurance premiums has tended to exceed the total value of indemnities since the mid-2000s, with 2012 being an exception. Much of the farm safety net is legislated through the Agricultural Act of 2014, [Joe Glauber] said. Although nutrition programs have been allocated 80% of this farm bill’s $489 billion in funding, farm commodity, crop insurance, and conservation programs were projected to receive 5%, 8%, and 6% of the funding, respectively, over the 2014-18 period.
“These programs offer an array of choices for managing various risks faced by agricultural producers (including those related to adverse weather conditions and sudden drops in prices for their goods below certain predetermined levels). The current farm bill’s approach relies upon insurance as the primary means by which to protect against agricultural risks and to support farm incomes.”
With this background in mind, Chris Clayton and Todd Neeley reported yesterday at DTN that, “The White House budget proposal for 2016 seeks to cut crop insurance under the argument that such cuts are needed to offset higher projected direct farm-program subsidies.”
The DTN article explained that, “The crop-insurance cut is smaller than in earlier budget proposals, but it would take an average of $1.6 billion a year out of crop insurance, or $16 billion over the next decade. Agriculture Secretary Tom Vilsack said in a discussion Monday with reporters that the crop-insurance proposal was a way to help keep projected farm-bill savings on track.
“Vilsack said one of the challenges of passing the farm bill was how to create sufficient savings. Lower commodity prices indicate higher spending for the new commodity programs — Agricultural Risk Coverage and Price Loss Coverage.
“‘What we see is clearly the possibility that payouts could be $1 billion to $1.5 billion higher than anticipated, but that’s the point,’ he said. ‘The point of having a safety net is if prices come down to a point where they are at or below the sort of breakeven point. You don’t want folks to have to lose the farm.'”
Clayton and Neeley pointed out that, “To offset that higher spending, the White House proposes changing its policies for prevented-planting claims and modifying the harvest-price option for crop insurance. Vilsack noted the harvest-price option ‘has received some criticism in terms of the level of subsidy and the opportunity it creates for a very significant payout.’
“Higher payments for ARC or PLC combined with lower insurance payouts means ‘you end up with pretty much the same ballpark’ of the original farm-bill spending projections, Vilsack said.”
Yesterday’s article added that, “Still, Senate Agriculture Committee Chairman Pat Roberts, R-Kan., a staunch defender of the crop-insurance industry, said the budget proposal ‘ignores the concerns of the nation’s farmers and ranchers.’ Roberts said farmers tell him crop insurance is their key risk-management safety net.
“‘The President’s budget again turns a deaf ear to our nation’s farmers and ranchers by directly cutting the very tool that helps growers produce a safe and affordable food supply year after year. We have seen these types of proposals from this administration before and Congress has been right to ignore them.'”
House Ag Committee Chairman Mike Conaway (R., Tex.) pointed out yesterday that, “At the same time, the President’s ill-timed proposal on crop insurance would jeopardize the ability of producers to insure their crops in a climate of collapsing crop prices, major crop losses, and falling farm income.”
Also with respect to the executive branch budget proposal, Sec. Vilsack indicated yesterday that, “To empower hardworking Americans as they transition out of nutrition assistance programs, we have invested in programs that build the skills they need to get a good paying job while increasing access to fresh, healthy foods as they work towards self-sufficiency.
“The budget also supports programs that give children the nutrition they need to learn and grow, including expanded resources to promote the use of MyPlate and help schools upgrade outdated kitchen equipment as they continue to provide healthy school meals with more whole grains, fruits, vegetables, lean protein and low-fat dairy, and less sodium and fat.”
Meanwhile, Bloomberg writer Alan Bjerga reported yesterday that, “President Barack Obama’s budget would create a single food-safety agency within the Department of Health and Human Services, consolidating responsibilities now shared by the Food and Drug Administration and U.S. Department of Agriculture.
“The proposal included in the spending blueprint the White House is submitting to Congress on Monday would ‘be charged with pursuing a modern, science-based food safety regulatory regime drawing on best practices of both agencies,’ according to budget documents. ‘It would rationalize the food safety regulatory regime.’
“Congressional passage of the Food Safety Modernization Act in 2011, along with well-publicized outbreaks of illness linked to cantaloupe, spinach and other products, has given momentum to the concept of a single food-safety agency long desired by health advocates. Representative Rosa DeLauro, a Connecticut Democrat, and Senator Richard Durbin, an Illinois Democrat, last week proposed a bill creating such an entity.”
Mr. Bjerga added that, “The biggest spending item in the USDA budget, the Supplemental Nutrition Assistance Program, which distributes food stamps, would decline 0.1 percent to $78.7 billion. Funding for the Commodity Credit Corporation, which includes subsidies for producers of corn, cotton and other crops, will jump 36 percent to $10.3 billion as new programs created under the farm law passed last year begin.”
Beyond agriculture, Amy Harder reported yesterday at The Wall Street Journal Online that, “The administration proposes an overall EPA budget at $8.6 billion, or 5.8% greater than current funding and more than 8% higher than what the administration requested last year.”
The Commodity Futures Trading Commission budget proposal
“Approximately 39 percent of the requested $72 million increase is required for information technology investments that will enhance all of the Commission’s activities, including in particular, market surveillance, financial and risk surveillance, data collection and analysis, and enforcement. The other 61 percent of the funding request supports an increase in staffing and related support, specifically targeting highly critical areas such as enforcement, registration, economic and legal analysis, and examinations.”
In additional reporting on the variables impacting the agricultural economy, Elizabeth Williams reported yesterday at DTN that, “In a quick, windshield tour of recent farmland sales, prices are slightly higher than brokers were predicting, having stabilized from lower values this fall. Areas that had good crops in 2014 are showing the strongest moves.
“For example, a 300-acre farm in Sangamon County, south of Springfield, Ill., sold in the last few weeks for $14,400 an acre to the current tenant. ‘That’s an incredible number,’ reported Randy Hertz with Hertz Farm Management, Nevada, Iowa. ‘But this area had rock-star yields last year where whole farms averaged above 250 bpa corn.’
“In Tipton County, Ind., which has some of the best farmland in the state, ‘we sold two tracts in January at $12,000 or higher per acre,’ reported Howard Halderman with Halderman Farm Management and Real Estate Services in Wabash, Ind. ‘The crowds at each of the five auctions we’ve had since January 1 have been very good and we’ve had good, competitive bidding. The buyers have been generally neighboring farmers.'”
The DTN article added that, “Even in areas with poor crops last year, the land market isn’t collapsing, although it is down from last year. ‘We just sold 660 acres that brought about $500 more per acre than we had expected,’ reported Jay Bargman, farmer and real estate agent in West Bend, in north central Iowa.”
The U.S. Monthly Drought Outlook, released yesterday from the Climate Prediction Center (National Weather Service), stated that, “The very dry January, however, continued across much of California, negating the Water Year-to-Date surpluses most of the state had gained during a wet December.”
Amanda Covarrubias and Lee Romney reported yesterday at the Los Angeles Times Online that, “After one of the driest Januarys ever in California, there may be a glimmer of hope for the parched state: There’s a slight chance of above-normal rainfall for Southern California over the next three months and an even chance for the rest, according to the latest climate models.
“But when the drought will end remains an open question.
“Long-range weather is notoriously difficult to predict, but modeling done by the National Oceanic and Atmospheric Administration, based on sea surface temperatures and other factors, show a possibility that Southern California could experience slightly above-normal rain in the February-through-April period.”
In transportation news, the AP reported yesterday that, “American freight railroads are planning to spend $29 billion this year on upgrades to their tracks, locomotives and other equipment.
“The Association of American Railroads said Monday that this year’s capital spending will be higher than the $27 billion the railroads spent last year.”
The article stated that, “But major railroads have also faced pressure in the past year to improve service, especially in the Northern Plains, because agriculture shipments were delayed while crude oil shipments surged.”
A news release yesterday from University of Missouri Extension indicated that, “A long-running labor dispute has created a big backup of products moving through West Coast ports. Stacks of shipping containers sit at the ports and many ships are anchored offshore waiting to unload their cargo.
“A University of Missouri Extension agricultural economist says the slowdown is affecting the U.S. meat industry.
“‘We exported about 21 percent of the pork, 10 percent of the beef and 19 percent of the chicken produced last year,’ says Ron Plain. ‘In total, over $5 billion worth of meats went out through those ports last year. At the rate we’re going, not near that amount is going to get shipped this year.'”
A news release yesterday from House Ag Committee member Dan Newhouse (R., Wash.) stated that, “In a recent letter sent to the International Longshore Warehouse Union President Robert McEllrath and Pacific Maritime Association Chairman and CEO James McKenna, [Rep. Newhouse] joined 87 colleagues to urge swift resolution to ongoing West Coast port contract negotiations.”
And an update yesterday from Rep. Sanford Bishop (D., Ga.) stated that, “Today, [Rep. Bishop], member of the House Appropriations Subcommittee on Agriculture and Co-Chairman of the Congressional Peanut Caucus, welcomed a recent win for the U.S. pecan industry.
China recently announced that they have lowered the import tariff on in-shell and shelled pecans from 24% to 10%. Last summer, Congressman Bishop hosted representatives from the China Nut Roasters Association in Georgia to discuss issues surrounding trade in pecans.”
Meanwhile, the USDA’s Economic Research Service released a paper yesterday titled, “NAFTA at 20: North America’s Free-Trade Area and Its Impact on Agriculture,” which stated in part that, “With a few exceptions, intraregional agricultural trade is now completely free of tariff and quota restrictions, and the agricultural sectors of the member countries–Canada, Mexico, and the United States–have become far more integrated, as is evidenced by rising trade in a wider range of agricultural products, substantial levels of cross-border investment, and important changes in consumption and production.”
Shawn Donnan reported yesterday at The Financial Times Online that, “If all goes to plan in the coming months, Mike Froman, US trade representative, is set to land arguably the biggest prize in the country’s recent economic history.
“The 12-country Trans-Pacific Partnership, now nearing conclusion almost seven years after the US joined negotiations, is daunting in size and scope and dwarfs the North American Free Trade Agreement with Canada and Mexico that went into effect two decades ago.”
The FT article noted that, “Negotiators from the US, Japan and the 10 other countries in the TPP are now involved in almost constant discussions. Chief negotiators meeting in New York last week continued to make progress on important issues. Teams from the US and Japan will be in Washington again this week working on their own bilateral deal focused on agricultural and auto products.”
In prepared remarks yesterday to the National Association of State Departments of Agriculture, Ambassador Froman noted that, “In fact today’s playing field is so uneven, it means we’re in a particularly good position to benefit from TPP. That’s because our market is already broadly open. Our average applied agricultural tariff is only 5.3 percent and we don’t use regulations as a barrier to trade. By contrast, the average applied agricultural tariff is 8.9 percent in Malaysia, 16.2 percent in Vietnam, and 19 percent in Japan. As a result of that imbalance, our trade agreements disproportionately lower barriers to other markets and support good-paying jobs here in the United States.
“At the same time we’re working to conclude this agreement with the Asia-Pacific, we’re also working on our negotiations with the European Union, the Transatlantic Trade and Investment Partnership, or T-TIP. There, we’re focused on knocking down tariff and non-tariff barriers that have prevented American producers from competing in that market. Our goods exports to the EU have basically been flat for the last few years, and we need through T-TIP to find a way to enter that market. As we’ve made clear, we’re not trying to force anyone to eat anything, but we do think decisions about what’s safe should be made by science, not by politics. And we think a trademark and common names system which protects the right of European producers to sell over a billion dollars of cheese and meat in the U.S. each year is a better place to start than a system which shuts U.S. producers out of Europe completely.”
Jacob Bunge reported in today’s Wall Street Journal that, “Last spring, for the first time in 20 years, Indiana farmer Jim Benham planted his fields entirely with soybean seeds that hadn’t been genetically modified to withstand herbicides.
“It wasn’t because the 63-year-old suddenly had embraced the anti-GMO movement. Instead, he was drawn to a nearly 14% per-bushel premium for non-GMO soybeans offered by a local grain terminal, which sells them to Asian feed processors.
“Mr. Benham is among a small but growing number of Midwestern farmers moving away from biotech seeds developed by Monsanto Co. , DuPont Co. and other companies in response to lower crop prices over the past two years that have slashed farm profits.”
Mr. Bunge indicated that, “Food companies pay extra for non-GMO grain and oilseeds due to the relatively small supply and the cost of separating those crops from the genetically modified versions that dominate the U.S. Farm Belt.”
Today’s article added that, “Many farmers prize GMO crops, saying they help increase yields and can curb pesticide use because some biotech plants produce their own bug-killing toxins. But U.S. corn prices have tumbled about 50% over the past two years, while soybeans have fallen about 35%, prompting some farmers to revisit non-GMO crops as a way to preserve profits.”
Reuters writer Tom Polansek reported yesterday that, “Cargill Inc has started selling a variety of genetically modified Syngenta AG corn seed that previously disrupted U.S. grain trading now that China has approved imports of the biotech crop.
“Cargill, one of the top U.S. grain exporters, began selling seed containing the Agrisure Viptera trait last month and scrapped a policy that required farmers to give the company prior notice of deliveries that may contain Viptera corn, spokesman Mark Klein said.
“The agribusiness giant eased its policies on Viptera corn after suing Syngenta AG over the trait last year, when China had a ban on imports of the genetically modified crop.”
Reuters writers Nestor Rabello and Reese Ewing reported yesterday that, “Brazil’s struggling sugar and ethanol mills got more good news on Monday after the government granted an expected increase in the national blend of the biofuel in gasoline to 27 percent on Feb. 15 from the current 25 percent, industry officials said.”