FarmPolicy.com

Ag Economy (Credit, Prices, Production Issues), and Mandelson Moves to Cabinet

Announcement: Purdue economists to discuss financial crisis, implications- “Uncertainty reigns supreme in financial markets as Congress considers legislation to stabilize the banking industry and Wall Street. Purdue University economists will discuss how the financial crisis developed, what it means and where markets go from here during a panel discussion from noon to 1 p.m. [Eastern Time] Monday (Oct. 6) in the Pfendler Hall Deans Auditorium on Purdue’s West Lafayette campus.

The event can be viewed online by logging onto mms://video.dis.purdue.edu/agcomm Online viewers will need Windows Media Player installed on their computers to watch the video.

Economy- General Background

Greg Hitt and Deborah Solomon reported on Saturday that, “President George W. Bush signed into law an unprecedented $700 billion plan to rescue the U.S. financial system, one of the largest-ever government interventions in the nation’s economy — and almost certainly not the last.

“The Treasury Department is expected to move quickly to start buying distressed assets from struggling financial institutions, although any impact might not be felt for some weeks. Many details — such as who will administer the program and how — are still to be worked out.

“That lingering uncertainty cast a pall over stock and bond markets. Credit markets remained stressed as lenders continued to worry about getting repaid. The three-month Libor rate, a measure of the rate that banks charge to lend to one another, rose to 4.33% Friday from 4.21% the day before.”

The Journal writers noted that, “Passage of the bill came amid new evidence from the labor market that the U.S. is tilting further toward recession. Companies shed 159,000 workers in September, the fastest pace in more than five years, the Labor Department reported.”

Peter A. McKay, also writing in Saturday’s Journal, added that, “The Dow ended the day down 1.5% at 10325.38, its lowest close since October 2005 and capping its worst week in more than six years. The 817.75-point, or 7.3%, decline was the biggest weekly point drop since the terrorist attacks of 2001 and the biggest percentage decline since July 2002.”

And Martin Feldstein indicated in an editorial from Saturday’s Journal that, “A successful plan to stabilize the U.S. economy and prevent a deep global recession must do more than buy back impaired debt from financial institutions. It must address the fundamental cause of the crisis: the downward spiral of house prices that devastates household wealth and destroys the capital of financial institutions that hold mortgages and mortgage-backed securities.

“The recently enacted financial rescue plan does nothing to stop this spiral. Credit will not flow and liquidity will not return to the banking system until financial institutions have confidence in the solvency and liquidity of other banks.

“Because of the 20% fall in the price of homes since the bursting of the house-price bubble, there are now some 10 million homes with mortgages that exceed the value of the house. Residential mortgages are generally ‘no recourse’ loans, meaning that if the homeowner stops making payments, the creditor can take the property but cannot take other assets or attach income. Individuals with loan-to-value ratios greater than 100% therefore have an incentive to default even if they can afford their monthly payments, and to rent an apartment or other house until house prices stop declining. When individuals default and creditors foreclose, the property is added to the stock of unsold homes. That depresses prices further, increasing the number and magnitude of negative equity houses.”

However, in a separate editorial published in Saturday’s Journal, Bill Wyckoff, president of a bank in southeast Kansas, noted that, “Here in the heart of Kansas, the sky isn’t falling and Chicken Little isn’t running around without a head. Community banks like mine are still making loans and serving the needs of customers.”

Ag Economy

Reuters writer Charles Abbott reported on Friday that, “Tighter credit could throw a wrench in the booming U.S. farm sector, although there is no sign of distress from the turmoil on Wall Street, Agriculture Secretary Ed Schafer said on Wednesday.

“By many measurements, the farm sector is strong. Net farm income, a gauge of profitability, is forecast for a record $95.7 billion this year, up 10 percent from 2007.

“Land values are rising [graph, U.S. - graph, state by state], farm exports are setting records and the debt-to-asset for the sector is 9 percent, down from 11.3 percent in 2004.”

Mr. Abbott added that, “‘We could see tight credit markets having an effect on agricultural production,’ Schafer said during an impromptu session with reporters.

“‘It’s something we’re watching. It’s something we’re concerned about. There is nothing out there that says it’s going to happen.’”

In a related item, Julie Harker reported on Friday at Brownfield that, “Loans to farmers for spring planting should not be too difficult to come by, according to Cornell University ag economist Brent Gloy. The effects of the $700 billion dollar bailout package passed by Congress today and signed by President Bush are not yet known.

“But, Gloy tells USDA news [MP3] that those farmers who are not highly leveraged should come out okay. But he says ag bankers WILL be more tight-fisted going into next year, ‘Because, there’s a lot of risk out there and nobody wants to get caught having too much risk. So, I think they’re going to scrutinize your loan package a little bit more closely, maybe, than they have in the past.’”

And later in his Reuters article, Charles Abbott explained that, “During a telephone news conference, [the leader of the National Farmers Union, Tom Buis] said USDA ought to set a strong benchmark for the new Average Crop Revenue Election program, a revenue-protection plan that will be offered for 2009 crops.

“USDA’s decision will make ‘a tremendous difference’ in the value of the new safety net, he said.

“‘We could be paying massive amounts of dollars that the taxpayers weren’t expecting us to do,’ said Schafer. ‘We’re trying to find the right balance.’

“A University of Missouri think tank says $1 billion a year in potential payments hinge on whether USDA bases the benchmark on average crop prices in 2006 and 2007 or the average of record-high 2008 and 2009 prices [see page 13 of this report].”

The Reuters article also pointed out that, “In some cases, corn futures prices at the Chicago Board of Trade this week were close to the ACRE benchmark, if 2007 and 2008 prices are used. The revenue program offers a revenue guarantee of the two-year U.S. average price for a crop multiplied by 90 percent of a state’s yield.”

For more on futures prices, AP writer Stevenson Jacobs reported on Friday that, “Commodities prices fell broadly Friday as investors worried that an economic downturn would further depress demand for energy and raw materials despite approval of a $700 billion financial bailout.”

The AP article stated that, “November soybeans [graph] declined 12 cents to settle at $9.92 a bushel, while December wheat [graph] rose 4.25 cents to settle at $6.4025 a bushel. December corn [graph] traded flat to settle at $4.54 a bushel.”

In addition to issues associated with market prices and the federal farm safety net, downward trending futures prices will also cause producers to evaluate breakeven levels of profitability, particularly in a production environment were costs are rising.

Dan Piller reported in Saturday’s Des Moines Register that, “[C]orn prices have done a graceful dive from $8 per bushel to $6 per bushel by early September and then falling 16 percent last week to $4.55 per bushel for the December contract on the Chicago Board of Trade, the lowest price in 10 months. Iowa elevator cash prices dipped below $4 per bushel at several locations last week, and the state cash average was $4.12 per bushel.

“Those numbers are ominously close to farmers’ break-even costs, driven higher this year by rising prices for diesel, fertilizer and rents.” (More data on farm production expenditures is available here.)

The Register article noted that, “[Soybean] prices have dropped from near $16 per bushel during the summer to just more than $10 per bushel for the November contract on the Chicago Board of Trade. The Iowa Soybean Association said that with current input costs, soybean producers need at least $10 per bushel to profit.”

For more information regarding costs of production, see this USDA Economic Research Service (ERS) spreadsheet (Excel File), which according to ERS, “The forecasts are developed as a part of the USDA Baseline projections to help develop projected net returns for major field crops. These long-term baseline projections provide a starting point for discussion of alternative outcomes for the agricultural sector under expected or proposed future policies. Cost-of-production is only forecast at the national level and would differ considerably among regions, individual farmers, and by size of operation.”

And in a related item regarding production costs, Jason R. Henderson of the Federal Reserve Bank of Kansas City, penned a recent article entitled, “Are Energy Prices Threatening the Farm Boom?”

In part, Dr. Henderson’s paper included this graphical depiction of breakeven costs for corn, soybeans and wheat.

Dr. Henderson pointed out that, “Rising production costs have led to some deterioration in farm credit conditions in the second quarter. After improving over the past two years, farm loan repayment rates dropped sharply in the second quarter, according the Federal Reserve Bank of Kansas City’s agricultural credit survey. Moreover, agricultural bankers also reported the number of loan renewals or extensions on operating loans increased modestly in the second quarter. Agricultural bankers expect loan repayment rates and the number of renewals and extensions to hold steady in the third quarter.

“Increased credit demand will boost farm lending opportunities and also increase the funding requirements of farm-related lenders. Agricultural bankers indicated that farm loan demand increased sharply in the second quarter with further increases expected in coming months. As the demand for farm loans increased, agricultural bankers also reported a decline in funds available for farm loans. If loan demand increases further, as expected, agricultural banks may turn increasingly to funding sources beyond bank deposits to meet credit demand.”

Meanwhile, the Federal Reserve Bank of Chicago hosted a forum last week entitled, “Agricultural Markets and Food Price Inflation.”

One of the presenters at last week’s forum was Gary Schnitkey, a professor at the University of Illinois at Urbana-Champaign.

As part of his presentation, “Farmer Responses to Higher Corn and Soybean Costs,” Dr. Schnitkey included this slide, which depicted non-land costs for Central Illinois corn and soybean producers; as well as this slide, which presented per acre changes in costs from 2008 to 2009.

Lauren Krugel [the Canadian Free Press] reported on Friday at The London Free Press Online that, “Farmers have also been seeing tremendous swings in their overhead costs, [Ron Bonnett of the Canadian Federation of Agriculture] said.

“‘Fuel prices alone — one day they’re up, one day they’re down. Fertilizer prices have been fluctuating greatly over the last few weeks. That all contributes to making it extremely difficult to plan and pencil out a reasonable profit.’

“Another major ‘wild card’ will be the availability of credit, though Bonnett said the sector has been faring well on that front so far.”

***

With respect to the EU and current financial challenges, Carter Dougherty, Nelson Schwartz and Floyd Norris reported in today’s New York Times that, “European nations scrambled on Sunday night to prevent a growing credit crisis from bringing down major banks and alarming savers as troubles in financial markets spread around the world, accelerating economic downturns on three continents.

“The German government moved to guarantee all private savings accounts in the country on Sunday, hoping to reassure depositors who had grown nervous as efforts to bail out a large German lender and a major European financial company failed.

“Late Sunday, it was disclosed that new bailouts had been arranged for both of those companies, Hypo Real Estate, the German lender, and Fortis, a large banking and insurance company based in Belgium but active across much of the Continent.”

The article added that, “In Europe, meanwhile, the crisis appears to be the most serious one to face the Continent since a common currency, the euro, was created in 1999. Jean Pisani-Ferry, director of the Bruegel research group in Brussels, said Europe confronted ‘our first real financial crisis, and it’s not just any crisis. It’s a big one.’”

Marcus Walker, Sabrina Cohen, Dana Cimilluca and David Gauthier-Villars reported in today’s Wall Street Journal that, “Though European governments have tried to seem united in their quest for solutions to the credit crunch, divisions are rife. Last week, Ireland was criticized by several European Union governments when it decided to unilaterally guarantee all deposits held in the country’s six largest financial institutions. The British Bankers Association called Ireland’s moves anticompetitive, and the Central Bank and Financial Services Authority of Ireland said it has seen an increase in deposit inflows since the measures were passed last week.

“Yet, so far, proposals for unified rules for coping with the crisis — such as a multibillion-euro banking bailout fund like the U.S.’s $700 billion plan — have been abandoned for fear they would be impossible to govern.”

Mandelson Moves to Cabinet Position

Sarah Lyall and Alan Cowell reported in Saturday’s New York Times that, “Britain’s beleaguered prime minister, Gordon Brown, reshuffled part of his cabinet on Friday, stunning many political analysts by rehabilitating his onetime nemesis, Peter Mandelson, who resigned twice in scandalous circumstances from the previous government of Tony Blair.

“Mr. Mandelson is currently the European Union’s trade commissioner. He was expected to re-enter the British government as the minister for business, the BBC reported. The European Commission in Brussels declined to comment. Speaking outside 10 Downing Street, Mr. Mandelson told reporters that he was ‘very proud to have been invited to serve’ in Mr. Brown’s government.

“The move by 10 Downing Street was doubly surprising because of Mr. Mandelson’s record in government and the political allegiances that got him there.”

The Times added that, “During his time as trade commissioner, Mr. Mandelson was closely involved in the collapsed Doha Round of world trade negotiations. But, the BBC said, he had been asked to return to the cabinet to sharpen its economic focus in times of global financial crisis.”

Alan Beattie reported in Saturday’s Financial Times that, “Peter Mandelson came to the European Commission hoping to advance the cause of open trade. He promised to remake EU trade policy and, as he put it early on in a landmark speech, ‘put trade at the service of the development’. But his four-year tenure was marked by a series of running battles with recalcitrant EU member states and negotiating partners.

“Mr Mandelson’s successor, Baroness Ashton, leader of the UK House of Lords, inherits a difficult legacy, with the so-called ‘Doha round’ of trade talks in limbo and a new Commission to be appointed next year. Joe Guinan, trade analyst at the German Marshall Fund think-tank in Brussels, says: ‘Whoever takes over risks starting off as a lame duck, never mind ending up as one.’

“Of Mr Mandelson, Mr Guinan says: ‘There was a lot of ambition there, but it is hard to point at many achievements.’”

Alan Beattie went on to explain in his FT article that, “Even before he had taken over, Mr Mandelson suggested that the Commission should ‘pick some early fights’ with member states over their desire to protect favoured national companies. He certainly got his wish. During his first year he became embroiled in an infamous battle over Chinese clothing imports – christened the ‘bra wars’.

“Eventually resolved with a messy compromise, the bra wars set an early pattern – Mr Mandelson caught in the crossfire between a more protectionist group of largely southern European member states, often including France, and a more free-trading northern European faction, including the UK and the Nordics.”

The FT article indicated that, “Mr Guinan says that any trade commissioner would have struggled in such a situation.

“But, he adds: ‘To be fair, he has been unlucky, but has also exacerbated the bad luck with a style that rubs people up the wrong way.’ Mr Mandelson fell out early on with Robert Zoellick, then his counterpart at the US trade representative’s office. And though relations were much better with Rob Portman, Mr Zoellick’s successor, Mr Mandelson has often blamed problems in the Doha round of trade talks on the intransigence of Susan Schwab, who took over from Mr Portman.

“Yesterday the US returned Mr Mandelson’s criticism of its decision to replace Mr Portman.

“One US official said: ‘By removing the EU commissioner at this time, it drastically reduces any hope for a Doha deal this year.’”

Keith Good

 Email This Post Posted by Keith Good • October, 6, 2008 • 5:23 am