Federal Dollars and Developments in Energy Policy
The Federal Reserve met this week and concluded the recession would end later this year. Fed Chairman Ben Bernanke left interest rates alone because he believes the weak economic situation will keep inflation "subdued for some time."
With traders uncertain when the turnaround might occur, Wall Street opened the week with a 200 point drop but reports aided a modest rebound.
One signal of economic recovery was found in personal spending -- which accounts for a large portion of U.S. economic activity. The indicator showed a jump of three-tenths of one percent -- in spite of a forecast decline.
Another gauge the economy could be "bottoming out" was seen in Gross Domestic Product figures. The GDP posted a 5.5 percent decline in the first quarter of 2009 -- much healthier than the anticipated 5.7 percent fall off.
Other factors bolstering the case for recovery were seen in orders for durable goods. The Commerce Department reported an increase of 1.8 percent in the first quarter of 2009 instead of a predicted contraction.
Rural America got some assistance of its own this week both inside and outside the beltway. Farm state lawmakers worked to put more money in farm country by making changes to a landmark environmental bill. And the Obama Administration sent Energy Secretary Steven Chu out to jump-start the heartland with some energy stimulus dollars.
Stimulus dollars landed in America’s heartland this week as the Obama Administration’s top energy official announced millions in new spending. Energy Secretary Steven Chu (CHEW), speaking in Iowa this week, said targeted stimulus funds for energy investments are crucial in both Urban and Rural America.
More than $38 Billion in Energy Department funds stem from the American Recovery and Reinvestment Act signed by President Obama this past February. Secretary Chu emphasized the first round of dollars are a test for a variety of energy companies and subsequent funds will be tied to performance.
Speaking in the nation’s top ethanol-producing state, Chu pledged support for outfitting all cars with E85 capability.
Sec. Steven Chu, Energy Dept.: “If it only costs $100 out of $15,000 wouldn’t it be nice to put in those fuel lines so we can get any ratio we want.”
Shifting the discussion from renewable energy to climate change, Chu laid out a possible scenario for America’s Heartland over the next 50 years.
Sec. Steven Chu, Energy Dept.: “It’s very strange. You’re going to get more flooding in the winter and spring and you’ll have drought conditions in the summer. If there is any reason to wonder why we’re developing wind and why we’re transitioning to biofuels or energy-efficient buildings – this is why.”
Chu’s comments regarding climate change are especially important with the backdrop of landmark cap-and-trade legislation on Capitol Hill.
Farm-state lawmakers, led by House Agriculture Chairman Collin Peterson, reached a crucial agreement this week with Congressional leaders.
Rep. Collin Peterson, D-Minnesota: “And that’s why EPA should not be in charge of our farms.”
Peterson successfully lobbied Democratic leaders to prevent EPA oversight on various agriculture programs. Under the proposed Waxman-Markey climate change bill, USDA would maintain control over “environmentally-friendly” projects in agriculture sectors.
Another key development involves a significant triumph for the ethanol industry. Under a new agreement, the Energy Department, USDA, and EPA would have five years to reach a consensus on the role of biofuels and indirect land use.
But consensus on cap-and-trade rules in the bill is far from certain. Some lawmakers and utility companies suggest the legislation could dramatically inflate energy costs for millions of Americans. The American Farm Bureau Federation remains opposed to a bill it calls “seriously flawed.”
Proponents argue cap-and-trade provisions are the only way to monetize carbon and prevent the future affects of climate change.
Walking Wetlands
Out west, the third year of a devastating drought has farmers in northern California begging for relief. Studies show 35,000 jobs and $830 million in revenue have been lost. Suggestions for solving the problem please no one. Farmers want Endangered Species Act regulations loosened to pump more water, Governor Schwarzenegger wants more surface storage constructed and environmental groups want everything left alone.
Agricultural interests often find themselves at odds with other groups over water rights -- -- especially in the West. Nowhere has the issue been more controversial than in the Klamath River Basin that runs from Southern Oregon into Northern California. But a unique crop rotation system is helping farmers and environmentalists find common ground. Andrew Batt explains.
To say that wetlands historically have been underappreciated would be an understatement. Farmers and ranchers have long thought of bogs, marshes and swamps as wasted land. And, that belief has led to the draining of more than 100 million acres, or over 50% of America’s wetlands. Recently, there has been a growing awareness that there is value in wetlands for their ability to filter pollutants, reduce erosion and prevent flooding. However, changing perceptions can be a challenge. Ron Cole, Refuge Manager / Klamath Basin National Wildlife Refuges: “I had one of the farmers tell me that, you know, someday Ron you're going to want potatoes on your National Wildlife Refuge. And I, I said you know that that's interesting um I'm not sure about
that…”Ron Cole manages the Klamath Basin National Wildlife Refuges. He also serves as the project leader for Walking Wetlands, a unique crop rotation program that marries agricultural land with wetlands.
Ron Cole, Refuge Manager / Klamath Basin National Wildlife Refuges: “And I told them I'm not sure about wanting to put potatoes on it but I know someday you're going to want a wetland on your farm. And there was a chuckle and that same individual is now a big proponent of putting wetlands on farm ground and has one on his own farm today and is very proud of it because it's working for his operation.
In the battle over water rights and land use in California and Oregon, the Klamath Water Basin has long been the “Tip of the spear.” In 2001,
agriculture in the basin was pitted against endangered suckerfish and salmon interests, when the federal government denied farmers access to water needed to irrigate fields. 20,000 people gathered in Klamath Falls to protest the decision. The demonstrators formed a bucket brigade, took water from Klamath Lake and dumped it into an irrigation canal. The gesture was symbolic but it drew national attention to the century-old dispute of how water is used in the basin. Prior to the 1900’s, the Klamath Basin was made up of over 180,000 acres of shallow lakes and wetlands, making it one the largest and most important feeding and breeding grounds for waterfowl that migrate along the Pacific Flyway.
Despite the ecosystems intrinsic value, the federal government in 1905 initiated the Klamath Reclamation Project. The goal of the project was to drain wetlands and build canals for irrigation beneath the Lower Klamath and Tule Lake in order to create farmland and encourage homesteading. Three years later, President Theodore Roosevelt recognized the importance of the wetlands and created the nations first waterfowl refuge on the Lower Klamath. Since then, the basin has become a patchwork of reclamation and preservation projects, which have resulted in numerous court battles between agriculturalists and preservationists. Dave Mauser, Wildlife Biologist / Klamath Basin Wildlife Refuge: ”Fighting each other about water, about pesticides, about a host of issues and while you're in those battles and your lawyers are talking to their lawyers you're not negotiating, you're not talking about things that you mutually agree upon.”
Dave Mauser is a Wildlife Biologist
at the Klamath Basin Wildlife Refuges. Since the refuges contain land leased for farming, Mauser along with Refuges Manager Ron Cole developed the idea of draining wetlands to create farmland, and flooding farmland to create wetlands. They felt Walking Wetlands could benefit both farming and wildlife and be the common ground on which both preservationist and agriculturalist could stand. So far the benefits have been greater than anticipated. Marshall Staunton, Tulelake Farmer: “And we had the university come out and do a replicated yield trial in three different spots and we hit the incredible 35 ton yield in one spot, 30 ton yield in another. Typical yield was 25 ton or 500 sacks we call it. And so potatoes, and so we here we had this great big potato crop and a great big grain crop in the two years after wetland…”
Marshall Staunton’s family was the first in the basin to take part in the Walking Wetland program. What they found was not only a 25 percent increase yields, but also a decrease in their use of fertilizer and pesticides.
Prior to the Walking Wetlands program, growing potatoes in the basin without fumigating for nematodes was impossible. But, Staunton found that a former wetland can be farmed without inputs for a few years, and that has allowed him to produce a portion of his crops organically.Marshall Staunton, Tulelake Farmer: “But, if you aren't into organic and you want to go conventional you've got those cost saving and yield.”
With yields up as much as 25%, a reduction in input costs and the ability to command a higher price by marketing organic produce, the cost of leasing land coming out of a wetland rotation is 75-100% higher than other land in the refuge. The benefits realized in the Walking Wetlands program have farmers like Rob Crawford preparing their private lands for wetland rotations. A year ago, this is where Crawford planted his crops. Today the same land is underwater.
Rob Crawford, Tulelake
Farmer: “That's the amazing thing to stand here today and to realize it was red wheat, a spring red wheat crop last year and that this spring was the first application of water and just to watch that quick realization of benefit for the wildlife.” Crawford worked with the U.S. Fish and Wildlife Service to build the levees that surround his field. In return for taking his own land out of production, the government allows him to farm within the refuge. And for Crawford that’s a win-win situation.
Rob Crawford, Tulelake Basin Farmer: “People need to get back to the, to understand the value of fertile land and at the same time if you can do something that is beneficial for wildlife and still make your lands more fertile, and economically justify what you're doing… That's a good strategy.”
In addition to it’s agricultural benefits, the Walking Wetland program has had a huge impact on refuges within the basin. While less than 25 percent of the Klamath’s historic wetlands exist today, the Walking Wetlands program has added nearly 4,000 acres of additional wetlands. That in turn, has prompted a 50-75% increase in waterfowl. Because farmers are using less fertilizer and pesticides, water quality has improved benefiting wildlife not only within the basin but downstream as well. And, there is also the benefit of increased revenues from farmers who are willing to pay more for land leased within the refuge. Ron Cole, Refuge Manager / Klamath Basin National Wildlife Refuges: “You know we call it walking wetlands and they were taking some tiny steps to start with but the legs are getting pretty strong and they're moving
pretty fast now and I love it. I like where it's going. I like the stride it's taking.”For “Market to Market” I’m Andrew Batt.
Market Analysis: Alan Brugler, market analyst
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For the week, July wheat lost 21 cents, and the nearby corn contract was down 15 cents.
Concern over the availability of beans as we approach the end of summer pushed the market higher. The July contract gained 22 cents and the nearby meal contract was up $15 per ton.
In the softs, the December cotton contract added to its gains from last week and was up 46 cents.
In livestock, August cattle were up nearly 30 cents. Nearby feeders put on almost 90 cents. And the July lean hog contract lost more than $1.40.
In other markets of interest, the Euro gained 127 basis points against the dollar. Crude oil lost almost 90 cents per barrel. Comex Gold was up $4.80 per ounce. And the Goldman Sachs Commodity Index lost nearly 4 points to close at 451.50.
Pearson:Alan Brugler. Alan welcome back.
Brugler: It's always good to be here Mark.
Pearson: Producing tonight's show in the shadow of a vote in the House of Representatives regard the Waxman Markey Bill and the Climate Change Bill. It's caused a lot of concern out there and behalf of American agriculture on what the economic impact of that bill could be.
Brugler: Yeah, there's a lot of different aspects to that legislation in terms of productions costs, in terms of any trade-outs that you get for sequestering carbon, it has impact on the dollar, I think, because we're spending money for something here in the states that our competitors in other countries are not. And yeah it's very complex and probably will take several years to really work its way through the system entirely.
Pearson: Well, we will see what happens, but in light of that -- in light of what's coming up next week with regards to acreage for wheat corn and soybeans and what the USDA's number is. Been looking forward to that for quite awhile. We'll talk about that a little bit later on the program.
Broadly we're a little bit softer on oil this week and some of our commodities we follow-- gold higher. Take a look world-wide, what do you see right now Alan? Demand wise do we kind of see a cooling this week?
Brugler: Well, I think we saw a little bit of a backing off. The dollar tried to rally early in the week. It didn't really go anywhere for the week as while, but that has been an off setter and opposite, if you will, to a lot of the commodity prices. When it's getting weaker the commodities are tending to get higher and vice versa. That again -- that's tied into the climb of legislation and some of the other government spending programs. But the other question is whether we've gotten ahead on demand. If China has accumulated too much inventory anticipating a recovery in their economy and they're not getting it. If some other countries have maybe forward booked a little too much because prices were going up. So, yeah we kind of backed off a little bit waiting to see what USDA says the grain stocks are on Tuesday morning. That will tell us livestock consumption, ethanol consumption, among others are doing, and then we'll go ahead and look at the acreage and production numbers for 2009.
Pearson: We'll get your guess on those acreage numbers coming up in just a moment.
Let's talk first about of course our regular line up of commodities and the first one we always talk about is what's happening in wheat and again what's happening in the United States may not reflect what's happening globally where apparently there's plenty of it.
Brugler: Basically we're going to see a smaller world wheat crop than a year ago but the production at this point is still estimated to be larger than global consumption. So, you're building stocks. Typically when you're building stocks world-wide price is under pressure and that's being expressed by competition. U.S. is having a hard time exporting as much wheat as we would like to. We've got a fairly large surplus from last year around 670 million bushels we think, and that's --- but we're running into problems selling that against the Ukraine and Russia and actually a number of other destinations. So, that translates into an inability to really get prices up here. Now what's happened in the last couple weeks is we've actually been going down because we're in the middle of harvest. We've got elevators buying grain from the farmers straight out of the field having to hedge that in the futures to protect their own margins, and we haven't had speculate of buying wheat to offset that we've had in say soybeans.
Pearson: Have we had the decline basis in the wheat areas as harvest rolled through?
Brugler: Well, we're seeing some unusual patterns in basis we have for awhile there was a congressional committee report on that this week regarding the index fund and their role in that, but it's certainly not a very attractive basis in most places. The fact that we've got some unevenness in the types of wheat that are out there and the quality of it is going to affect the basis as much as anything. If you've got high protein, good quality wheat, you're going to get a basis premium for it.
Pearson: Alright then let's talk about this issue when it comes to wheat and that is in terms of making sales for those people maybe haven't done so and we've had this pull back. What's your attitude? Get it in the bin and then price it later?
Brugler: Yeah our general strategy is to try and price at least half of that cash wheat for harvest delivery-- forward price it for harvest delivery. So, we avoid these kinds of holes. Yeah, I think if you've got that done, you've got some cash in the bank you can afford to store the rest, and look for some kind or rebound out of these crop reports on Tuesday or the July crop report.
Pearson: We also want to talk about corn market. What do you see happening there? Of course that corn acreage number you're estimate there would be?
Brugler: I'm an 84.8 million which is just slightly below the March intentions. We're picking up that there's some additional acreage that was planted in Western Corn Belt versus March intentions, and that's kind of canceling out what we assume is a loss of acreage east of the Mississippi.
Pearson: Alright we'll see how that portends. If that is indeed the number what kind of market could we actually expect?
Brugler: Well, I think if that's the number that's not friendly to the market. We discounted -- in the last couple weeks we've discounted a bigger number than we're talking about. You were hearing a lot of 82 million/ 83 million acre figures. I think that we've gravitated towards a larger number. Certainly if you've got something at 86 or 87 million would be bearish for the market.
Pearson: Absolutely. So, what's your strategy? Obviously we've got this report and you don't want to make a lot of predictions before we do that. Price-wise you've been doing some selling all the way along.
Brugler: We try and forward contract in three buckets, if you will, for the year and we've got the first one done. The second one we're kind of waiting on a post report reaction or some kind of a weather scare before we do it, but we do buy put options ahead of major reports or some kind of combination of options to protect ourselves. Particularly when prices are at profitable production levels which they still are at this point.
Pearson: Alright so you're roughly half-priced on corn you'd say?
Brugler: Basically between corn contracts we're 80% covered.
Pearson: Alright, so you're anticipating prices to go down for the balance of the year?
Brugler: Well, we're saying we probably have got one more shot here and if that doesn't develop we're probably going to grind on down into harvest lows.
Pearson: Pretty much a normal fall harvest this year is your guess at this stage?
Brugler: We're setting up for that but again we have a lot of uncertainties about acreage and about yield for that matter.
Pearson: That's right. It ain't over until it's over.
Brugler: Flexible marketing is still the key.
Pearson: Alright, flexible marketing for soybeans? What's your acreage guess, Al? I hate to put you on the spot like this a couple days before a report, but you know you put your numbers together. What are you seeing for beans?
Brugler: We're officially at 77.8 million acres which will be at 1.8 million acre increase from the March intentions. If anything I suspect it's higher than that, but I'm also not sure if USDA will pick up the full acreage in this report because again this was done as of June 1, the survey, and there were a good 20 million acres unplanted at that point. So, producers can still change their mix a little bit and in fact we know that some of the Eastern Corn Belt corn got planted after that date. It was fairly questionable before that. The wild card is really the unplanted acres or unplanned acres from the March report. We know that there were 7.5 million acres that we planted last year that was not in the March intentions at all. And while we think 3 or 4 million that's probably not going to be planted that still leaves you some extra ground there and prices have been high enough to make that attractive. We think that if you can get the winter weed off there's going to be some extra double crop versus what the March intentions were showing and certainly there's some areas in the Western Corn Belt that with such great planting conditions back in May probably got under some kind of crop.
Pearson: Alright so having said that, same strategy for beans? You got your three buckets on beans or how do you do that?
Brugler: Well, yeah the new crop we're following the three buckets. The old crop we still have about 10% left even though it's at twelve bucks or -- and that's unhedged. It's our gambling stocks and the market has been acting like it's having a hard time finding those last few bushels. We've got some of them, we know where they are, and we're waiting to see if they'll come and get them.
Pearson: Alright, real quick cotton market -- what's your take there? It's so export dependent, weather issues, and of course acreage is going to be a factor there too.
Brugler: Yeah, we've got an acreage report there. The export markets actually are doing fairly well at the moment. If you look at the total export commitments versus the USDA's estimate for the year, we're right on track to meet it or maybe even beat it a little bit. Domestic use is still pretty bad. We had a census report on Thursday annualized use is about 3.4 million bails. That's a pretty low number. We were at 4.4 or better last year, but the key again is that we think the acreage is down. We think that exports are going to pick up in 2010 if the economy is really going to turn around, and to me it feels like it is.
Pearson: Alright, let's hope it's true because next sector is the livestock sector which has been extremely dependent. The supply side has been in order at least for fed cattle based on the numbers that we're seeing, but the demand side just evaporated. What's your take now on fed cattle?
Brugler: Well, we've still got some challenges. The -- we actually got a little bit of an increase in ready numbers of cattle that's ready to come out of the feed lot in June and extending into July further than it normally would. So, the packers have had to deal with a little more beef than they usually would for this particular time window. But as you point out the biggest problem is consumers are still shying away from the steakhouses to a degree and the fine dining restaurants. That's hurting the choice beef price and the prime ribs and so forth. That lowers the average value of a pen of steers when you don't have that choice price up there. So, the market is trying to work through this inventory, get into some tighter numbers in late July and August and we're trying to hold that 80 dollar mark on the cash.
Pearson: Do you think that will hold?
Brugler: So far.
Pearson: Ok, let's talk about quickly on the calf market. What would you tell a cow/calf producer out there this year putting bulls in?
Brugler: Well, we've got great pasture conditions. Carry the calves and feeders you've got out there and not going to get the for sales that we've had couple of years ago when it was really dry. I think you're very dependant on the beef market improving before you're going to be able to get much for those feeders and of course it would be nice if the corn price would come down from the feeders perspective.
Pearson: Absolutely and maybe improve that ratio so we'd see those calf markets shrinking.
I want to talk about the hog market. Hogs and pig report Friday afternoon, what was your take on that?
Brugler: Fairly neutral report. 98% of a year ago numbers so we are seeing some downsizing in the hog herd. That was close to trade guess. We actually reduced the breeding herd a little further than the average guess. Average guess was 97.6 and we were at 97.3. That's a positive. That means we're downsizing. We're getting rid of some of the sows and gilts that we clearly don't need. The report still did show tremendous productivity. The pigs per littler still very high. Basically we need fewer sows and we can still get the same rural hogs.
Pearson: Some people are blaming that virus vaccine for this excess pig problem and of course we added some weight there this winter shouldn't help us out much despite these high corn price.
Real quick here you're outlook for hog prices?
Brugler: Basically we don't have a bottom yet. We think that the key here would be getting a little improvement in the export market or getting into some lighter numbers. Summer weights tend to go down a little bit in the summer that might help us, but at this point we still can't really call it a bottom.
Pearson: So, with that we'll continue to watch and see what happens with the hog market. Alan Brugler as usual we appreciate your insight.
