Experts Ponder Climate Change Impact in Agriculture
According to the Commerce Department, retail sales rose 0.6 percent in June. Normally that would bode well for the economy, but the gains were tempered by an 18.5 percent gain in gasoline sales reflected in last month’s short-lived price spike.
Meanwhile, a concurrent 1.8 percent rise in wholesale prices marked the largest gain since November of 2007. It also fanned investor fears over higher prices even though economists said June’s energy spike was NOT the beginning of a dangerous bout of inflation.
Prices at the pump today are about 40 percent lower than the all-time high of $4.11 per gallon reported by AAA last July. But, many economists are concerned that meaningful recovery of the broader economy will be hampered by curtailed consumer spending due to rising unemployment.
And with the nation’s jobless rate at a 26-year high of 9.5 percent, the labor department announced Friday that unemployment exceeded 10 percent in 15 states and the District of Columbia last month. The rate in Michigan surpassed 15 percent, earning the “Wolverine State” the dubious distinction of being the first state to hit that mark since 1984.
While double-digit unemployment grabs the attention of just about everyone, many rural Americans also are concerned about proposed climate change legislation in Washington. And this week, experts debated the economic impact on agriculture.
Only weeks after the U.S. House passed landmark climate change bill, American agriculture is still coming to grips with the potential impact of cap and trade. A bevy of opinions range from an optimistic Secretary of Agriculture to the American Farm Bureau’s dire warnings of what it calls “seriously flawed” legislation. But new research from a pair of Midwestern universities may shed light on the production impact of higher energy costs for farmers and ranchers.
Bruce Babcock, Iowa State University Economist: "For a typical Iowa corn and soybean producer... somewhere between $5 and $10 per acre."
Iowa State University Economist Bruce Babcock compiled the input costs of nitrogen fertilizer, phosphate, potash, lime, diesel, and propane under the House climate legislation. Babcock concluded that an average Corn Belt farmer would pay five-to-ten dollars more per acre given current crop rotation patterns. The ISU study reflected a 1.5 percent increase in agricultural production costs by 2020. A separate study from the University of Missouri pegs the increase at 3.2 percent by 2020.
And the American Farm Bureau Federation claims cap-and-trade legislation could cost corn farmers as much as $33 more per acre by 2050.
Rick Krause, AFBF Regulatory Specialist: “For farmers and ranchers, fertilizer costs are going to increase because natural gas prices are expected to increase. And fuel prices are going to increase as well.”
Comparing Farm Bureau’s estimates to his own, ISU’s Babcock says the results are actually “comparable” because he only included “most” inputs and measured Co2 costs at 2020 levels – not the projected higher Co2 prices of 2050.
Despite some discrepancies between industry analysis, Babcock stresses that consumers – and not farmers – will bear the brunt of higher input costs.
Bruce Babcock, Iowa State University Economist: "If the cost of producing food or other items goes up then the consumer prices go up to. I think farmers will be largely compensated for any increase in cost by an increase in the price of their commodities. A caveat is if other countries have an increase in production costs."
Climate legislation is currently parked in the U.S. Senate as lawmakers turn most of their focus towards health care policy. But Agriculture Committee Chairman Tom Harkin of Iowa hinted this week he may insert language in the Senate climate bill to allow blends of as much as 15 percent ethanol in American gasoline. The move could supercede current EPA evaluations of increased ethanol blend rates and could be a boon to biofuel producers. The Senate Agriculture Committee is scheduled to discuss the rural impact of climate legislation next week but a significant push on final passage isn’t expected until after the August recess.
House Subcommittee Discusses Crisis in Dairy Industry
According to the National Family Farm Coalition, prices paid to dairy producers plunged 44 percent over the past year in the largest single decline since the Depression. Despite higher input costs, dairy prices dropped from more than $19 per hundredweight in February of 2008 to about $10.00 on Friday.
And in Washington this week, members of the dairy industry pleaded with Congress to intervene on their behalf.
The House Agriculture Subcommittee on Livestock, Dairy, and Poultry held a hearing this week to review the economic conditions facing the dairy industry.
Brad Bouma, Plainview, Texas: “The crisis in the country today is huge. It doesn't make a difference if you milk a hundred cows or 3,000 cows. A hundred plus a cow in losses can't be tolerated by this industry."
Today’s economic situation in California’s dairy industry is, in a word, dire. My neighbors, a fifth-generation dairy farm family, just sold their cows. Just a few days ago, three generations were operating that farm. Today, after cows have been milked on that farm for 112 years, that family has left the business.”
Rep. Leonard Boswell, D-Iowa: “What can we do that could get some relief out there really quick?”
James Miller, USDA, Under Secretary for FFAS: “Short term, we should review the full range of creditor options we have not only with FSA, but also other agencies to see if they have programs that could help. The dairy industry is highly leveraged. That is causing stress on dairy farmers currently.”
USDA’s Economic Research Service data indicates that dairy farms are among the most highly leveraged in U.S. agriculture. The industry ranks third in average debt to asset ratio, behind poultry and hogs.
Ray Souza, Turlock, California: “To extend credit to an industry that is not able to pay its bills now will create us digging ourselves a deeper hole. I think credit is fine, but it has to work with a price recovery program at the same time.”
To put things in perspective, a hundredweight of fluid milk, about 11.8 gallons, currently sells for as little as $9 in some parts of the country. Nationally, USDA estimates the cost of production to be $24. Meanwhile, consumer prices for milk have remained virtually the same. That’s because the price of milk paid to a farmer is completely unrelated to the price paid by a consumer at the grocery store. Unlike grain farmers who sometimes hold out for better prices by storing their crops, in the dairy business, it’s either “sell it or smell it.” And cows keep producing whether the economy's in recession or not.
Tom Wakefield, Bedford, Pennsylvania: “It’s no fault of any American farmer we’re in this position. It just so happens the world economy went south and so did our market. And now we’re dealing with extra milk on the market. In factories, you can shut down for awhile. This business is 24/7 and we can’t turn it off and hope it will be better in a few weeks. It doesn't work that way.”
Many small and medium-sized dairy farmers have already shut down operations, while others continue to head to the slaughterhouse to thin their herds. Cow numbers are expected to decline nationally by 145,000 this year.
James Miller, USDA, Under Secretary for FFAS: “Our estimates are as we get into the early part of 2010 begin to see improving returns to dairy producers. I think the question is how quickly will those dairy prices respond and how high will they go so producers can begin recovering their cash costs of producing milk."
Secretary of Agriculture Tom Vilsack has initiated several measures to provide relief to producers. They include $150 million in Milk Income Loss Contract payments. And USDA’s March purchase of 200 million pounds of surplus nonfat dry milk.
Despite government intervention, many dairy farmers say further measures are needed to save their industry.
Gambling Revenue Helps Rural Philanthropy
In Iowa, the state’s Racing and Gaming Commission considered proposals this week from five largely rural counties that say casinos could give their struggling economies a much needed boost.
Whether rural casinos will work may depend on several factors, and could influence whether the commission approves licenses for five more casinos in a state that already is home to 17.
Officials withheld comment on the latest proposals, but did cite 1.4 billion in annual revenue from the state’s currently licensed operations as proof of their success. And as Nancy Crowfoot explains philanthropists also are betting on casinos to help preserve local wealth….
In 2005, Iowa's 17 licensed commercial casinos paid more than $263 million in state gaming taxes. It was the first year that one-half of one percent of those revenues – or $5.4 million -- was designated to create grant-making and endowment building efforts in 85 counties that had no state gaming licenses.A state County Endowment Fund Program disbursed $63,000 to each county. The foundations, established and governed by volunteers in the communities, were required to keep 25 percent in a permanent endowment, the principal of which can never be touched. 75 percent can be distributed to charitable projects within their county ... such as outdoor art for barns ... and computer software for a local historical museum.
The idea behind the creation of the county foundations was to give residents a place to donate -- or bequeath in their will – a means of holding some of their wealth in the county in which they lived.
Angela Dethlefs-Trettin, Director, Iowa Council of Foundations, Des Moines, Iowa: "And it’s a wonderful opportunity for communities to really create a vehicle and say to citizens who live there or who have lived there and say, 'let's give back, let's make a difference in the places where you lived and have raised your families'."
Until the county foundations were created, few rural areas offered a place to stimulate home-town philanthropy with a focus on endowment.
As a result, much of the wealth accumulated by area farmers and other residents may have, upon death, transferred to heirs -- many of whom may have left town, or even moved out of state.
A five-year study of probate records by the Community Vitality Center at Iowa State University, revealed Iowans annually transferred nearly $5 billion. In central Iowa's Greene County-- the study showed $30 million dollars were transferred annually.
Rick Morain, Editor/Publisher, Bee & Herald Newspapers: "If we could capture just five percent of that, in a few years we'd have a huge endowment built up that we could use for improving quality of life and increasing economic development activity and so forth in this county."
In the Greene County Community Foundation's four-year existence, $236,000 has been raised both through funds generated annually from gaming tax revenues and from contributions by some 200 individuals. The individuals not only get a tax deduction, but are also eligible for a 20 percent state tax credit.
Jacque Andrew, President, Greene County Community Foundation: "What sweetens the pot is that tax credit that folks are eligible for if they contribute to an Endow Iowa Endowment. So that helps a lot."
As for giving money back to the communities in the form of matching grants, the 35-member Greene county board has awarded 71 grants totaling nearly $250,000. The money as gone toward, among other things, the cost of scoreboards for Little League in Jefferson, playground equipment in Rippey, and the installation of wireless broadband and new computer desks for the library in Churdan.
Lawrence Geisler: Board member, Greene County Foundation: "Well it's been a wonderful help to the town of Churdan. I live just outside it and it’s a little town of about 400 people and other the two year period the town has received about $16,000 and that's a lot of money for a small town."
While these expenditures may not seem like a big shot in the arm there are some who envision the foundation exerting a much broader impact on the local economy.
Rick Morain, Editor/Publisher, Bee & Herald Newspapers: "For instance, I think the IRS laws will allow funds like that to be used for, for training, for economic development purposes, for an incubator if the foundation board decided to take a chance on economic incubator."
To finance such ventures will demand the county community foundation keep growing and will require residents like Alice Walters, to think ahead.
Alice Walters, Jefferson, Iowa: "When I turned 89 I thought I ought to update my will and things like that."
Walters donated $25,000 to the Greene County Community Foundation.
Alice Waters, Jefferson, Iowa: "This was county-wide and it would touch so many of the people that I had worked with in the Extension Service and just seemed like a good idea to do that."
While some residents have embraced the foundations, philanthropy isn't quite as successful in all of the 85 county foundations created with state gaming taxes. Several haven't grown much beyond their annual allocation from the gambling industry.
But while some counties see little, if any, growth in assets, the Iowa Council of Foundations points to the overall significant growth statewide.
Angela Dethlefs-Trettin, Director, Iowa Council of Foundations, Des Moines, Iowa: "...when we look at just even those 85 counties, so June of '05, they had about $16.6 million or so in total assets, a great start for all those 85 counties when you think about it."
Three years later, as of June 2008, there was over $40 million in assets in the 85 counties.
With numbers like that, many feel the use of state gaming taxes to jump start local philanthropy ... was worth the gamble.
For Market To Market, I'm Nancy Crowfoot.
Market Analysis: Tomm Pfitzenmaier, Markey Analyst
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For the week, September wheat gained 13 cents, while the nearby corn contract lost nearly 25 cents.
Rumors that China will dump half-a-million tons of soybeans on the market further hampered prices. For the week, the July contract lost $1.45 and the nearby meal contract was down nearly $65 per ton.
In the softs, cotton moved higher again this week as the December contract posted a gain of $1.61.
In the dairy market – and we’ll be keeping an eye on this for you – Class III Milk futures closed Friday on the Chicago Mercantile Exchange at exactly 10.00 per hundredweight.
In livestock, August cattle were up nearly $3.00. Nearby feeders gained $1.68. And the August lean hog contract gained $3.52.
In other markets of interest, the Euro gained 190 basis points against the dollar. Crude oil declined $3.16 per barrel. Comex Gold was up $25 per ounce. And the Goldman Sachs Commodity Index lost 20 points to close at 416-even.
Pfitzenmaier: Thanks, Mark.
Pearson: What about this Chinese dumping of soybeans? What's happening there? They were buying up every bean they could get this spring.
Pfitzenmaier: Well, I think psychologically it causes a little dip the middle of this week. I don't think it's that big a deal. They're going to continue to buy, they are buying from us so it obviously kind of made everybody a little nervous but I don't really think it's that big a deal in the long run.
Pearson: Earlier in the show we were talking about crude oil prices and where we were last year, $4.11 the national average price, we're down over 40% from those levels today, a lot of concern in June that that wasn't going to be the case. We saw those prices spike up, the fed's statistics showed us the impact of that. What is ahead for crude oil? Are we just a wash in oil now?
Pfitzenmaier: Yeah, that's why you've seen the big carrying charges in that oil futures market is that there is plenty of oil around, it's all in storage, it's all out floating around with everybody selling that carrying charge so that's why the up side is fairly limited until that gets worked through and it doesn't seem like that's going to happen for a while. So, we're probably in a trading range in the mid 50s to $70 on the top side and we're going to bounce around in there for quite some time it looks like to me. That drop in crude oil obviously impacts us because it has driven ethanol prices a little bit lower so it's kind of a double edged sword from an agricultural standpoint.
Pearson: That's right, now they're kind of trading with the energy sectors so that is a problem. But on the flip side, Tomm, as you look at this market in export potential which is so critical the dollar at this point, are we starting to see some signals which way it's going to start to go?
Pfitzenmaier: Well, I think we're still in a slide here which is good for us. I guess eventually at some point it's going to stabilize but I haven't seen any signs that that's started to happen yet.
Pearson: So, you see it continuing to weaken going forward?
Pfitzenmaier: Yes.
Pearson: Let's talk about this wheat market, a little bit better this week. The last time you were on you were talking about there's plenty of wheat out there. So, if we got some up moves probably a good chance maybe to make some sales but maybe pull your horns in for the time being. Still feel that way?
Pfitzenmaier: We sold off into the harvest. The harvest is about 80% to 85% wrapped up and that generally signals the end of sort of the decline, summer decline in wheat prices so I'd expect things are going to recover from here, not a lot, we're trading in the mid-5's and we could bang on $5.90, $6.10, somewhere up in there and that would be the place I'd look at to make sales. I wouldn't get in a big hurry down in here. I think you'll see some recovery.
Pearson: So, sit tight if you've got wheat sales to make. Let's talk about corn. You mentioned ethanol, obviously softer energy prices, it looks like continually lowered livestock and poultry and dairy numbers as far as that goes for demand for corn and it looks like a fairly decent crop out there.
Pfitzenmaier: Good crop, feed demand is the big problem. We're exporting a fairly good amount. Margins on ethanol have improved obviously with corn going down and ethanol prices dropping but not that much. So, yeah, the problem is we've got a big crop coming out there. The USDA chose not to make any adjustments in yield on their last report which is a bit of a surprise to most people. There's estimates bouncing around here as high as 170 bushel per acre. There's some huge numbers kind of bouncing around here. If we even get 158 to 160 bushel yield it's going to be depressing on December corn futures no question about it.
Pearson: What kind of price can we expect if we do run into this where we come up with a billion and three quarters or 1.9 billion bushel carryout? What kind of a price can we expect in that kind of a scenario?
Pfitzenmaier: I think you're going to have futures sub $3, probably take out those winter lows back at $2.71 temporarily anyway. So, I think there is probably 50 cents down from where we closed on Friday under that particular scenario. I guess I'd lose some of my bearish enthusiasm as you start to get under $3. If you were short and had some hedges on it that's probably the point where I'd start to maybe climb off of those a little bit.
Pearson: And, again, when it comes to making sales what are your thoughts on corn?
Pfitzenmaier: A rally back up in that $3.45, $3.50 if some crazy unexpected thing happens maybe $3.75, I doubt we can get to that point but $3.40 to $3.45, just under $3.50 you'd have to be a seller again. That will lock you in $3 plus cash corn.
Pearson: Do you think we're going to have a normal year in terms of the harvest low this year, fairly normal as opposed to some of these contraseasonal moves in the past?
Pfitzenmaier: I wouldn't be a bit surprised to see that August report, we come in with a big yield, that August report we tank the market, that could be it and then we start to pump premium in as everybody gets concerned about early frost and how late the crop is and all that. So, I think that low could come in the next 30 days or so would be my expectation.
Pearson: What about on soybeans? Where are you on the soybean crop?
Pfitzenmaier: Well, the soybean market, as you talked about earlier, we lost quite a bit this week but they had a lot of premium pumped into that soybean complex and I think there's a lot of air to come out of it yet. I think you could see that November bean contract sub $8, we're up well over $9 by the end of the week this week so there's a lot of down side potential there too. Again, the USDA did not adjust the yield there on beans and probably that would be appropriate to bump that a little bit. The crop condition rating on corn and beans have been hanging in there really well so far and I'd expect that Monday they're probably going to be good again. So, at some point you're going to have to make some yield adjustments.
Pearson: Let's talk about the livestock sector. This has all been good news. The National Cattlemen's annual summer meeting out in Denver there were a lot of smiling faces out there, even with the tough pricing we've had on fed cattle now they're starting to see some improvement in margins with these weaker corn and meal prices, fairly upbeat. Price wise though for fed cattle we've had a nice move this week, we've had a nice bump off the low. What do you see ahead?
Pfitzenmaier: Well, you've had a nice bump, we can't hardly get $83 on the cash market and they're trading October cattle up at 91, 92, there's a lot of premium built in this and you have to assume that everybody is going to run out and buy meat the next 60 days to bump that up. You're being presented with an opportunity here. When you get to 92 cents you don't run out and buy cattle and not hedge them. There is an opportunity being presented and you have to take advantage of it. That's a huge premium for a market where the demand has been poor, there's no signs of that demand particularly improving, maybe packer margins are going to improve and they're going to be allowed to make a little more money but to the producer I don't see any big jumps coming here in the future which is another bad sign because producers sit and look and they say, well, the futures are going to get higher, why would I sell my cattle now when there's all this big premium coming and then all of a sudden by the time you get there the premium disappears on you. So, sell that premium when the premium is available to you and don't just sit around waiting for it to hopefully be there.
Pearson: So, you'd sell that October cattle contract.
Pfitzenmaier: At least buy yourself a put. You can buy a put at $88, a 90 cent put that allows you to get some kind of a floor locked in there in case it does fall and corrects back down and follows the cash down instead of the cash following the futures higher.
Pearson: Last time you were on you said we've got our supply, it's all a matter of demand picking up and it looks like that's going to be the case. But, again, the general economy has to strengthen. Do you see that in the fourth quarter?
Pfitzenmaier: No, the general economy isn't going to improve until 2010 sometime. You're not going to see hardly any improvement in 2009. So, you don't have that going for you when you're talking about trying to market livestock. There's problems here, the market is trying to be optimistic, you've had a $6, $7 rally in cattle here, take advantage of it.
Pearson: What do you see in the hog market?
Pfitzenmaier: Hog market same thing we've rallied $6, $6.50 off the lows, a lot of times hogs move $10 so if you get another $2 or $3 on that, again, there's a lot of pork, your reports earlier show we've got cows are going to get dumped on the market, there's a lot of meat still to get moved, maybe some liquidation yet to be done in sows which is going to keep plenty of pork on the market. So, we've had a nice rally here, maybe you'll get a little more but, again, take advantage of it. You're still trading -- the cash index is down at $56, $57, $58 and you're trading futures well above that. Take advantage of it.
Pearson: Real quick, Tomm, cover some feed needs here?
Pfitzenmaier: Not here but in the next 30 days if we break it pretty hard there's going to be a chance.
Pearson: Very good, Tomm Pfitzenmaier, thank you so much. That will wrap up this edition of Market to Market. We want to make sure you get more information from Tomm on where these markets could be headed so visit the Market Plus page at our Web site. You'll find streaming video of our program and you can download audio podcasts of this Market Analysis and Market Plus, our extra segment, absolutely free at our Web site. Be sure to join us again next week when we'll examine efforts to preserve Pennsylvania barns. Until then, thanks for watching. I'm Mark Pearson. Have a great week.
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