Obama Budget Takes Aim at Farm Payments
According to the Labor Department, U.S. employers slashed 651,000 jobs from their payrolls in February, pushing the national unemployment rate to 8.1 percent… its highest level in 26 years.
Both figures were worse than analysts expected and had bearish implications for Wall Street, where the Dow Jones Industrials traded briefly below 6,500. However, a late session rally capped a volatile week of trading Friday with a weekly loss of 429 points.
And the government tallied a record 31.8 million Americans receiving benefits from the Supplemental Nutrition Assistance Program, or SNAP, – formerly known as food stamps.
President Barack Obama has launched a multi-faceted assault to lift the country out of recession including: a $787 billion stimulus package of increased federal spending and tax cuts; a revamped, multibillion-dollar bailout program for the nation's troubled banks; and a $75 billion effort to stem home foreclosures.
This week, though, Republican leaders made a few headlines of their own, as they sounded the alarm on the President’s record federal budget proposal.
President Obama’s $3.6 trillion budget hit many lawmakers like a freight train this past week. The outline describes sweeping overhauls of America’s health care system and a federally enforced cap-and-trade structure to monetize greenhouse gases and generate billions in new tax revenues. Republicans have come out in force to oppose the increased spending, additional taxes, and an estimated $1.6 trillion deficit.
Rep. John Boehner, House Minority Leader, R-Ohio: “The era of big government is back, and Democrats are asking you to pay for it. The administration's plan, I think, is a job-killer, plain and simple. And it raises taxes on all Americans while we're in the middle of a recession.”
But while the Obama Administration and Democratic members of Congress pledge to authorize the budget in the coming months, the President vowed to slash some government spending.
President Barack Obama: “Over the last eight years, government spending on contracts has doubled to over $500 billion. Far too often, the spending is plagued by massive cost overruns, outright fraud, and the absence of oversight and accountability. We are spending money on things that we don't need, and we are paying more than we need to pay, and that's completely unacceptable.”
One contract deemed unacceptable by federal officials originates from the Department of Agriculture. According to Ag Secretary Tom Vilsack, nearly $400,000 in contracts authorized during the Bush Administration now are labeled “inappropriate”. Vilsack declined to specify further details, but did mention the contract involved “excessive” foreign travel payments to an outside consultant once affiliated with Iowa State University.
Sec. Tom Vilsack, USDA: “What the taxpayers need to know is that every single department of government has now been charged by the president to review in detail the nature of contracts that we've entered into in order to do what American families are doing. American families are sitting down today and trying to decide, "How do we save money? How do we eliminate unnecessary spending?" Their expectation is the government does the same.
USDA also has come under fire for additional belt-tightening proposals in the Obama budget. Under the new plan, farmers earning more than $500,000 in sales would not receive any direct federal payments.
Sec. Tom Vilsack, USDA: "I think the President's focus is directed at farms and ranches that have significant sales. Large income and large sales size farms. These are farms that receive a disproportionate amount of the direct payments. I think over a period of time the President believes, as he campaigned on, that those need to be adjusted."
The $500,000 sales limit sent shockwaves through much of the farm sector this past week. Obama has previously supported bipartisan legislation from Iowa Republican Charles Grassley that would limit payments to individuals making more than $250,000 in adjusted gross income or AGI. Grassley opposes the new method of payment limits despite endorsing the proposal’s goal of trimming federal payments.
Critics of the Obama proposal prefer an AGI trigger for direct payments due to the unreliable nature of farm inputs and the skyrocketing costs of running a modern agricultural operation. According to USDA, more than 125,000 farms make annual sales exceeding $500,000.
Earmarks Raise a Stink in Washington and Iowa
Corn-based ethanol has long been a "sacred cow" for farm state lawmakers. Billions of gallons of the renewable fuel must be used in the coming years to comply with the government’s Renewable Fuel Standard. But industry experts warn that the current blend rate of 10 percent ethanol to 90 percent gasoline creates an enormous roadblock.
This week, Growth Energy, a renewable fuel advocacy group, called on EPA to raise the current 10 percent blend to 15 percent saying the move is not only safe for automobiles but could create as many as 135,000 jobs and pump $24 billion into the American economy.
In addition to federal mandates, ethanol has thrived on millions in research dollars earmarked by Washington lawmakers. But this week other earmarks for rural America drew fire from Congressional Republicans.
The odor earmark is part of a $410 billion spending bill working its way through Congress. The bill includes operational funding for dozens of federal departments and billions more in individual earmarks for various constituencies.
Other ag-related earmarks include grape genetic research in New York and stable fly analysis in Nebraska but $1.7 million in Iowa pig odor research has caught the most attention from federal earmark detractors.
Iowa Senator Tom Harkin added the earmark and insists that hog odor research merits federal spending.
Harkin added…’While we will likely hear about it on Jay Leno or the Letterman show, where they will be yukking it up, it’s a profoundly serious challenge.’
Odor issues are virtually a constant issue for the Iowa legislature and lawmakers and private citizens have wrangled over hog confinements.
(Slug “Factory farms no!” or similar line)
Under current earmark provisions, the federal hog study would examine animal diets and how to mitigate ammonia odor from hog operations.
Iowa’s $12 billion hog industry makes the Hawkeye State the number one producer of pork as pigs outnumber humans by more than 6 to 1. But while many Republican lawmakers have made a mockery of the hog odor appropriation, Senator Harkin suggested this week that any critics should tour an Iowa hog farm and examine the scent for themselves.
Senior Market Analyst John Roach Discusses The Volatile Commodity Markets
Visit the Market Analysis page for an expanded discussion of commodity prices with senior market analyst John Roach. Click on this link to find the discussion.
Market Analysis: John Roach, Senior Market Analyst
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For the week, March wheat lost more than 5 cents, while the nearby corn contract moved 2 cents lower.
Soybean prices were mixed with the March contract posting a gain of nearly a nickel, while the nearby meal contract was down $1.60.
In the softs, cotton trended lower again as the May contract posted a loss of $2.67.
In livestock, April cattle lost 7 cents. Nearby feeders were down more than $2. And the April lean hog contract gained $1.60.
In other markets of interest, the Euro declined 35 basis points against the dollar. Crude oil gained 76 cents per barrel. Comex Gold was up 20 cents per ounce. And the Goldman Sachs Commodity Index lost nearly 2 points to close at 334-even.
Roach: Thanks, Mark.
Pearson: Well, what a week it's been again as the federal government tries to deal with the faltering U.S. economy which ties into a weakening global economy which ties into agriculture because we're affected by all of it. With the sell off that we saw in the equity markets this week continuing concern about what's happening with the capital markets where do you see all of this heading for producers out there watching this program throughout the country?
Roach: Well, the good news this week is that although the equity markets continue to erode at a rather rapid pace the grain markets stopped going down. And even the rest of the agriculture markets slowed in their decline a little bit. So, we're starting to perhaps, I'm saying perhaps, starting to distance ourselves or split away a little bit from some of the equity markets and some of the concern and that is the first we've seen that happen. So, that is the most positive news I think we have here today.
Pearson: Let's talk about the energy front which has been a big driver of what's happening with corn prices, ethanol and so forth. Where do you see that heading right now in this global economy we're in today?
Roach: Nearby energy, crude oil actually closed above the 20-day moving average which is a short-term signal that we've changed trends after having slid for a long period of time. We also saw the carrying charge, they call it the contango in the market, it's the difference between the March contract and then the May contract is a little higher, the July is a little higher and so forth. There's been substantial premiums to the distant months which indicates that the nearby demand is squishing the market down on the front while the distant months are higher. That has been widening for really some months until really just in the last couple of weeks and in the last couple of weeks we've seen the nearbys gain relative to the backs, still a very wide carry in the market but they have gained and that's another signal that the energy market is turning a bit more positive. So, we really had a couple of signals this week about the energy market turning and starting to move firmer.
Pearson: As you look at the market from a global standpoint and you look at what's happening with particularly the U.S. dollar and we've seen that trend, we had all the softening the last couple of years, the last several years with the U.S. dollar and then we started to see that trend start to move and I think you've commented on the show and others have that that tends to be pretty much of a long-term cycle.
Roach: It really does and the cycle for the dollar has been strengthening since last summer and moved to new highs again this week. So, another positive sign for the grain market and the agriculture markets in that the dollar strengthened and we didn't lose a lot of ground on the ag markets.
Pearson: We want to get into specifics. Let's talk first about the wheat market, a lot of problems with our wheat crop, a lot of our viewers who are down in the southern plains and the panhandle of Texas and throughout Oklahoma and southern Kansas very dry conditions down there persisting.
Roach: Very dry conditions. I got a letter just today from one of our subscribers that said they haven't had any rain since September and it's a very dire situation. We know that the acreage is down substantially on this last USDA report out of their outlook conference. They talked about acreage being down about 5 million acres, a little over 5 million acres in total this year on wheat. But we still have big surpluses left over from last year in this country, we still have good sized surpluses leftover from last year in other areas of the world and we had a very big wheat crop in the former Soviet Union countries and so we still have plenty of inventory but we're now starting to bring the northern hemisphere crop out of dormancy. It's the first crop that can have weather concerns upon it and we're starting off with weather concerns in the United States. There's some rain in the forecast for this next week and if we were to get rain that would certainly bring some downward pressure to the wheat market but the absence of rain we're going to see that market percolate and firm up here. We've had drought problems in China although most of their crop is irrigated there and people are a little less worried but we still need to keep our eye on that crop as well.
Pearson: That also plays back into what are we going to do from a sales standpoint? Obviously we're in good sales opportunities as these weather markets start to hit us which we'll start to hear either too wet or too dry as we start to get the other crops in. But in the case of the wheat are we close to selling opportunities here?
Roach: I don't think so. I think we have to give the market a little more opportunity. The main key here too, agriculture markets, is this whole concern about the U.S. economy and the entire world economy and as long as we continue to have that be the headline item every day we're not going to get much for selling opportunities. The last time I was on this show I was optimistic that we might start to see some of this federal money move, some of this stimulus, there's almost $800 billion in the stimulus package and another $75 billion in the housing and another $350 billion from the TARP leftover, those are significant numbers of dollars but the problem is that very little of that is flowing right now. So, we're sitting here in an economy where we have banks that are reluctant to lend money, we're worried about the banks, we're worried about AIG and others and we're not getting any of the money to flow. And so we need to start to see that and it's not very far away. Some of the early money going out to the states is already there and some of it is starting to be spent. I talked with a neighbor of mine that works in the transportation for the county and March 10th is their filing date and the money has to be spent, half of the money has to be spent in the first 180 days, it's use it or lose it. So, we're about ready to turn on that spicket but the marketplace has been so worn out waiting for the money and still dealing with bad news. So, look at that and then think in terms about our ag markets. We've got to have that money flowing, we have to start getting some positive news, economic news and when we see that happen these grain markets and livestock markets that have been beat down will start to get a new life to them and it's just a matter as soon as we start to see that money and we start to see the economic news turn we're going to have rallies in the markets and we'll have selling opportunities.
Pearson: But you're going to hold off until then. So, what do you think, 60 days, 90 days? I know you're always big on that March, April, May time period to make sales anyway.
Roach: We like making grain sales in March, April, May and June. That's when we tend to worry about our crops and we think this year that we'll still have all of the opportunity to worry that we have every spring and this year we have been drug down to artificially low levels, basis levels are telling you that, the futures are too cheap, the cash market is much stronger than the futures market right now and so we're of the opinion that we will have good price surges within this next three to four month period of time.
Pearson: No wheat sales right now. Do you have a target in mind where you think this market could head?
Roach: I really don't know. I never am able to figure out where the numbers are. What we do is we pay a little closer attention to the overbought indicators and we generate a sell signal and we think the market is giving us that signal. We use slow stochastic as our trigger factor, our signal. And so we just wait for that to occur and although it's awfully hard during this kind of environment to have patience that's what we're continuing to tell our subscribers, have patience here, we will have some better opportunities.
Pearson: Let's talk about the corn market. We've seen a lot of pressure through harvest, nice rally, pressure again after the first of the year, pretty normal for all intensive purposes and this is always a time where there's a lot of bad news for corn. March 1st is always a key deadline for Midwest farmers for making payments whether it's for real estate or cash rents or machinery or whatever so it's not uncommon to see pressure around this time. But this week in spite of the fact this is the first week of March the market has held in there.
Roach: The market held together in the midst of bad economic news so that to me is a positive signal. Remember as we look at agriculture markets and we look at the economic drivers around the world China was one of the big drivers, India one of the big drivers. Both of those economies are still growing. The Chinese said that they want to maintain an 8% economic growth. In India they're talking a 6% economic growth. So, we have positive news, it just has a hard time getting to the headline stage.
Pearson: For the corn market at this stage of the game, again, this is not a time when you typically recommend people make sales.
Roach: We're ready to make sales, we're anxious to make sales, we'd like to get some price recovery to do that with but until we do get some recovery we're just going to kind of sit on our hands right now. We think the most important thing right now for a corn or a soybean farmer is to focus in on their crop insurance opportunities. We've got crop insurance levels set, the corn is set at $4.04 and the beans are set at $8.80, the November market on beans is at $8.15 so the market has already got a lot of decline from those insurance guarantee levels and we think that makes very good sense to instead of fretting get your insurance snubbed up. The way the subsidies have been changed this year, the enterprise unit approach for the RA with a harvest time option really look like very attractive price levels to us so we think that's probably the best risk management solution that a farmer has to deal with today and that decision, of course, has to be made within the next couple of weeks.
Pearson: That's right and the deadline will be coming up the middle of March so people need to be on top of that. So, making sales you're getting close, do you have a target there on where you want to make sales or just whenever this stochastic thing hits? When do you think that's going to be?
Roach: Well, I think from a time standpoint we're just going to have to get some better economic news on the forefront or we're going to have to get a weather issue or planting concerns that trump the economic worries. One of the things that producers need to understand is the biggest increase that we saw around the world last year in wheat and coarse grain production came in developing countries that this year are going to struggle to find the money to plant. They are not going to be able to get the big crops that they had last year. We're going to have smaller production in the northern hemisphere. We're even talking in this country in the USDA outlook conference of reducing total planted acreage. So, as profitability comes down American farmers are going to find that they have the competitive advantage and so we think you just have to kind of play the game here for a little bit longer and wait for a little bit of weather concern, a little bit of planting concern.
Pearson: Alright, play the game in soybeans then too?
Roach: Same way -- the soybean market already had its first weather problem, it was down in South America when we had Argentina, areas of Brazil and Argentina, where we had a drought that looked like it was really going to reduce the crop and then rains came along and so we've had our first weather surge there. That weather surge has now passed and we're now on the down side of it. We think the market is trying to base its way out here and that we'll get some price appreciation as we move into the spring. We still have the acreage battle to fight and although people think we're going to be increasing bean acres in a lot of the major Midwestern region corn is still more profitable than soybeans.
Pearson: And the other issue is input costs and a lot of producers are playing chicken with getting those ordered and in this year based on certainly the extremely high prices we saw last fall and now that we're seeing some breaks a little bit in that.
Roach: I think it's probably a good game to continue to play chicken with too because I think that particularly in the wheat country where it's been dry they're not going to put on some fertilizer in some of those areas and I think our fertilizer demand in the rest of the northern hemisphere is going to be pulled down and I think the supplies they're still very profitable for the fertilizer manufacturer so I think we're going to end up with bigger supplies as we move a little bit closer into the spring.
Pearson: Real quick, John, the cotton market, what are your thoughts there?
Roach: The cotton market is going to be the one that really loses acreage this year and that's not been worrying the market, low levels of demand has been worrying the market. Again, I think that's another market that as we see the economy start to signal some signs of stabilization that we can see recovery in that market.
Pearson: Let's talk about fed cattle. Obviously there's been a challenge there, a small cow herd and yet relatively low prices.
Roach: Fewer numbers of cattle on feed, we’re down about 5% from where we were a year ago but the demand is down enough that we're really struggling with prices. And yet as we look at the cattle crush and that is the purchase of feeder cattle in the future, the purchase of corn and then the sales of fat cattle we're in the upper 70% to 80% of what that crush profitability ever shows on the board. So, there are opportunities out there but you have to be awful cautious and be careful of your replacement animal values and then you have to be willing to, on strength you have to be willing to hedge those cattle. Until we get clear though this economic issue doing cattle on a hedged proposition makes better sense.
Pearson: Certainly we've had some cheaper feeders this week too, sharp break there.
Roach: Sharp break there and it starts to make it work very quickly as soon as the feeders back off.
Pearson: Hog market, numbers going forward, what is your outlook there?
Roach: Numbers we had a pretty good move up in the market. This week the packers are giving up their profits, they are looking out forward, they're seeing better demand coming out forward, they're seeing some smaller numbers coming out forward so we think that's kind of the bottom ebb here and we should move up. Our normal seasonal move in the hog business is to strengthen our way from here all the way into mid-summer. We think that’s likely to happen again this year.
Pearson: Good opportunity to cover feed needs before these grain markets start to rally?
Roach: I think that's the main thing right now, cover feed needs to take yourself out to the middle of summer, to get through whatever kind of initial weather issues that we may have.
Pearson: Get that covered and you would do that on the board or cash or whatever works?
Roach: I'd like to get it done in the cash market but basis values are so darn tight that it's a little bit difficult so you may have to come to the futures market until we see a little bit of that basis softening.
Pearson: John Roach, as usual some excellent insights, our senior market analyst with us on the show tonight. That will wrap up Market to Market. Now, before we go we'd like to remind you that many public television stations across the country are seeking your investment in quality television programming. If you value the information you receive each week on programs like Market to Market why not phone in a pledge and invest in the service that provides you with timely information and accurate market analysis. Until next time, thanks for watching. I'm Mark Pearson. Have a great week.
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