Cover story: 2008’s weather, economics forming ‘perfect storm’

By Dick Hagen
The Land Staff Writer

July 18, 2008 03:18 am

— With Washington summer heat just beginning and flooded fields continuing to harass many Midwest farming areas, a June visit with two American Farm Bureau Federation economists in their Washington office generated interesting observations.
“Mother Nature just has not cooperated with farmers,” said AFBF Senior Economist Terry Francl.
Asked to speculate on just how many acres of corn and soybeans didn’t get planted based on the U.S. Department of Agriculture’s earlier projections of 86 million acres corn and approximately 74 million acres soybeans, Francl said, “At this point it looks like we’ll be short on both projections and that figure continues to slip daily. But the real question is not what we plant but what we harvest.
“When you go back in years, the harvested acres often drop substantially from the planted acres. In 2002, for example, we only harvested 88 percent of the planted acreage. Obviously it all depends upon what happens with the weather from here on out. If the season is such that we get that average yield up to 155 bushels, we’d be in reasonably good shape.”
And what happens if weather continues to drive yields down, and we only do 150 bushels nationwide?
“That takes carryover down to around only about 600 million bushels and would mean rationing of supplies into all uses, livestock feed, exports and biofuels. Plus, of course, keeping pressure on still higher commodity prices,” Francl said.
Significant losses, yet herd expansion
AFBF Livestock Economist Jim Sartwelle pointed out there have already been significant losses in cattle feeding plus huge losses in the hog complex the first three months of 2008. Poultry companies are also reporting dire situations right now.
“Yet despite this situation, herd sizes have been expanding for the past 18 months,” said Sartwelle. “So it looks to me like they are betting on the ... export markets, which incidentally have kept the hog industry afloat so far. Poultry folks still haven’t recovered from their Avian flu outbreak which severely stunted their Russian and Chinese markets.”
The pork export market has 16 consecutive growth years, Sartwelle said, and he predicted another increase this year. He cautioned that we’re seeing some rather ominous signs in our domestic markets. “There is a bright ray in the beef industry since rationing is getting cow numbers down to around 32 million head, yet the market demands 26.5 billion to 27 billion pounds beef for both domestic needs plus the reopening of markets into Japan and Korea.”
Sartwelle expects the beef industry situation to parallel what’s happening in corn. “Even though fats at 95 cents to $1.05 looks great, your input costs, especially corn, are a heck of a lot higher than last year. Yes, there are some surprising strengths in the futures market right now on the feeder side. But you don’t plug $6 corn into $1.10 to $1.15, 750-pound feeders and make it work against a $98 fed cattle board,” he said.
Sartwelle expressed concern about Francl’s projections on a shorter corn crop, saying $8 to $12 could come off feeder cattle pretty easily.
So is the meat consumer the only winner in this complex? Sartwelle said meats have remained a relative bargain compared to the rest of the food basket. Whole muscle cuts are particularly attractive because strong customer demand is making ground beef the most expensive buy in the meat counter.
He doesn’t see a decrease in total meat consumption but consumers will likely be doing more shifting of choices due to shifting prices at the meat counter. Packer slaughter numbers of hogs continue unabated “so we haven’t hit that processing capacity ceiling because we haven’t seen prices drop off dramatically. That usually happens when there’s simply too many pigs to get them all processed.”
Ethanol’s impact
The Renewable Fuels Act of 2007 called for 9 billion gallons of ethanol to be blended into fuel this year, 15 billion gallons by 2015 and 36 billion by 2022. Francl said Congress may be forced to make cuts to that, depending on what happens to the 2008 crop. He noted the new farm bill cut the blenders credit from 51 cents to 45 cents.
“I point out that despite the media attacks on ethanol, this product is a real bargain for consumers,” Francl said.
He acknowledged that the 5 percent increase in food prices — compared with the usual 2.5 percent rate — is partially due to renewable fuels. “But for every extra dollar that consumers spend on food they are saving $2 to $3 on gasoline. Gasoline prices without ethanol in the total supply line would be 40 to 60 cents a gallon higher.”
According to AFBF data, ethanol in the U.S. gas supply saves consumers at least $50 billion in fuel costs each year.
He said there are many things besides ethanol that are influencing corn prices, with world demand and production being key; the declining value of the U.S. dollar and major funds into the commodity market have become major factors as well.
Francl said ethanol accounts for only about 15 to 20 percent of the increase, but “from a political standpoint it’s the only game in town so the RFA program very likely will get attention.”
Farm bill comments
“Many good things are in this bill,” Francl said of the freshly passed farm bill. “On the commodity title I would point out that prices are at such a level that the price support program is not a factor. So we’ll see payout on commodity price supports drop some $8 billion to $12 billion from what it was just a couple years ago. Conservation issues got improved and expanded cutting some new ground for agriculture. Often unreported is the fact that in this $300 billion program, some 73 percent of it goes for food and nutrition programs.”
Sartwelle, a Texas cow man with a few years at the AFBF offices, just four blocks from the Capitol, predicted that this will be the last farm bill “that looks like this one.” He said that future redistricting around the country will look unfavorably toward agriculture because the elected officials won’t have an agricultural background, but there’s still hope to be found in today’s youth.
“When I go to the Hill to testify on behalf of agriculture and rural America,” Sartwelle said, “I’m always pleased with how many ‘aggie kids’ are working in the offices of U.S. senators and representatives, even though the number of farmers and ranchers sitting in Congress keeps declining. So if there is a ray of sunshine I would say it is farm kids doing summer interns, and even full-time jobs here in D.C. We need to keep faces here who understand agriculture.”
CAFOs, tariffs and finding balance
Sartwelle expressed frustration with the government’s handling of the Confined Animal Feeding Operation issue.
“It’s (CAFO) been sitting with Environmental Protection Agency for decades it seems. Congress won’t step in and take the simple step of saying that animal waste is not toxic waste and is not super-fund regulated. ... If you’re sitting around and waiting for common sense to prevail out of the blue you might be disappointed.
“I see the ag community more and more trying to educate and influence what happens on the Hill. Grassroot work at the county and state level is what makes things happen around here.”
Francl is very much against dropping the 54-cent tariff on imported ethanol, despite crude oil prices pressing upward.
“That tariff is there to protect the 51-cent subsidy (45 cents in the new farm bill taking affect Sept. 30) currently being paid on ethanol production. Take off that tariff and you’d be subsidizing the Brazilian sugar cane growers. As long as we have that blenders credit, we’ll need the tariff otherwise those dollars flow right out of the country,” Francl said.
How long will it take worldwide for crop production to stabilize and more accurately reflect true supply-demand fundamentals?
Francl said it took five to 10 years to develop today’s situation but there hasn‘t been a price response until the past couple of years on the crop side. Farmers, both in the United States and elsewhere, are good at responding to price increases and will adjust their production accordingly, weather permitting.
“But it will take two to three years for things to get back into a normal long-term balance,” he said. “Yes, Congress could do some things on the corn side to reduce consumption for ethanol; perhaps some adjustments on inputs into biodiesel as well. But we still need the energy regardless of what’s happening in some of these other areas.”
Global factors
Francl acknowledged that there is room for more crop production in many countries, even in the United States with large amounts of hay and pasture land. “Brazil still has huge areas for agricultural development, without getting into the rain forest areas. We are told upwards of 150 million to 200 million more acres could be available. So it’s not a matter of running out of land.”
China, once a major exporter of pork products, is directing virtually all of its hog industry to feeding its own people today. That situation is unlikely to change soon.
Sartwelle said that because of the “blue ear” disease, they no longer are exporting pork products but because of their rapidly growing economy, “China remains the ‘star at the top of the Christmas tree’ that the U.S. pork industry hopes to capitalize on. I don’t see China consciously trying to be a pork exporter in the immediate future.”
He also noted that U.S. corn-fed beef is, was and always will be the “niche” product in the world compared with grass-fed beef out of Argentina, Brazil and elsewhere. “And this is why I think the U.S. cattleman will always have a comparative advantage over cattle feeders in other parts of the world. It also explains why the huge Brazilian beef processor is now trying to buy major beef processors in America.”
Sartwelle and Francl agreed that world agriculture is changing more rapidly than ever before and U.S. agriculture will continue to be the pace setter for innovation, but weather issues and the world energy crisis has created new dynamics that seriously challenge farmers around the world.
“It’s exciting, it’s intriguing and it’s also spooky,” Francl said.
(Editor’s note: After this story was submitted, the USDA dropped corn yield projections for the 2008 U.S. corn crop 5 bushels per acre to a projected yield of 148.9 bushels. Export numbers were also reduced and the stocks-to-use ratio dropped 5.4 percent.)

Copyright © 1999-2008 cnhi, inc.