Senators Wrangle Over Climate Change
The Commerce Department announced Friday the U.S. trade deficit narrowed to $26 billion in May. That’s down nearly 10 percent from April and the lowest level since November of 1999.
Exports of goods and services rose to $123 billion in May, reflecting increased sales of soybeans, corn and other farm products, along with higher exports of industrial machinery, generators and computers.
U.S. Imports fell, marking their 10th consecutive monthly decline. Pressured by a weak domestic economy, May imports were 35 percent below their all-time high set last July.
Much of the decline was attributed to a 3 percent drop in petroleum imports due, in part, to higher prices. The average price of an imported barrel of crude oil rose nearly $5 from April.
Oil prices, of course, have moved sharply higher since May, and while crude trended lower this week, there is considerable uncertainty in rural America over higher input costs. Of more immediate concern for farmers, however, are implications of climate change legislation being crafted in Washington.
Members of the Senate Finance Committee wrangled over climate change legislation this week on Capitol Hill. Focusing on implications of the House-passed cap-and-trade measure, lawmakers questioned panelists on the future trade role of India and China.
Sen. Charles Grassley, R – Iowa: “If we do something that is inconsistent with the rules of WTO we could open ourselves up to trade sanctions worse than we’ve seen and then we would have hurt our manufacturers twice.”
Gary Horlick, International Trade Lawyer: “You could easily imagine India saying we’re going to require permits for all U.S. exports until your per capita emissions are the same as ours. But that’s not going to happen for a long time. The best way to avoid this is an international agreement. We react negatively when other countries do it to us. I’ve spent too much of the last ten years fighting border measures against U.S. livestock exports.”
Senator Jim Bunning, a Kentucky Republican, expressed strong concern that China may gain a global economic foothold as a result of cap-and-trade legislation.
Sen. Jim Bunning, R-Kentucky: “We have some industries in Kentucky that are being injured seriously by not having the enforcement in China.”
Sen. John Kerry: “I couldn’t agree with you more. We are all concerned. If you have a global agreement with 160 nations and China or India were to sit out then we would have a global renegade. At that point we can set up a mechanism in the WTO to enforce that, right?”
Gary Horlick, International Trade Lawyer: “I think in practical terms you’re going to need a China and an India. And they are going to do it for their own motives. And I’m not an expert in this but I believe they run out of water before we do…that’s a crude way of putting it.”
While many Senators and panelists in Washington agreed that a successful global agreement would hinge on India and China, the G8 summit in Rome was a setback for the Obama Administration.
The G8 nations released a group statement saying the world's major economies would reduce 80 percent of heat-trapping carbon emissions by 2050. But the release made no firm targets and was blasted by the U.N. Secretary-General as “not sufficient enough.”
Back in Washington, Senate Democratic leaders pledged to push back climate change proceedings until early September.
Urban Sprawl
Increasingly though, Golden State farmers and ranchers trying to protect their land and remain profitable are enrolling acreage in a program called the Williamson Act.
The law was designed to protect agriculture and open spaces from urban encroachment. It allows landowners to enter into 10-year contracts with local governments. The arrangement allows rural property to be taxed at agricultural rates rather than at higher urban development rates. The state of California, in turn, reimburses the counties for the lost tax revenue.
But California’s 26.3 billion deficit now threatens the future of the program. And as Andrew Batt explains, landowners, developers and academics continue to weigh the pros and cons of urban sprawl.
Edward Thompson, Director, California Chapter, American Farmland Trust: “We are paving over 50,000 acres of some of the best farmland on this planet in California every year, and we're doing it in the most inefficient way possible. We are paving an acre for every eight new people.”Ed Thompson directs the California Chapter of the American Farmland Trust and co-authored a paper titled “Paving Paradise: A New Prospective on California Farmland Conversion. According to the report, of all land urbanized in California between 1990 and 2004, over 326,000 acres or 61 % was farmland.
Edward Thompson, Director, California Chapter, American Farmland Trust: “If we keep doing what we're doing we're going to loose another 2 million acres of some of the best land on earth by the year 2050. If we were simply to increase that 8 people per acre and double that figure then we save, you know, over a half million acres, uh, just in the next generation. It's really simple to do but it takes the political will to make it happen.”
Currently, the world’s population is estimated at more than 6.7 billion people, which is more than double what it was in 1965. What concerns people like Thompson are AFT estimates that by 2050 farmers and ranchers will need to produce more food for more people on 13 percent less land. However, not everyone agrees.
Professor John Hart, University of Minnesota: “…and I think there's some political pressure groups that are trying to impose their ideas on society, and the American Farmland Trust is pushing a particular agenda and they're trying to encourage people to do what they think they should be doing.”
Professor John Hart teaches geography at the University of Minnesota and has authored several books on agriculture as well as a paper titled Specialty Cropland in California. According to Hart technological advances have allowed farmers to produce more on less land and that urban encroachment simply shifts the geographic location of farms.
Professor John Hart, University of Minnesota: “Urban sprawl for many farmers is the best thing that could happen. Most farmers notoriously are land rich and cash poor. Most farmers live poor die rich because their capital is tied up in the land. And city people have a lot more capital available than farmers do, and so city people, the developer can buy out the farmer for a lot more than he could make on his land, and that gives him a nest egg to go someplace else.”
Los Angeles is home to nearly 18 million people and covers close to 34,000 square miles in five different counties. Despite being located in the middle of a desert, the “City of Angels” has a long history of businesses and residential homes replacing orchards and dairies. In Los Angeles County, the city of Dairy Valley actually got its name from the over 400 dairies in the area. In 1956, cows outnumbered the 3,400 residents by nearly 30 to 1, and at one time more milk was produced in Dairy Valley than anywhere else in the nation. But, as more and more people moved to Dairy Valley, pastureland became too valuable to farm, and in 1963, residents voted to allow large-scale residential development of agricultural land.
Four years later the city of Dairy Valley changed its name to Cerritos. In 2008 the population was 52,300 people… and no cows. .
Willem DeBoer, Tulare, California: “Now with all the urban encroachment and the traffic and you know the people, the general public, you know they don't want to be too close to dairies and flies.” (Anything else for this sync?)
Willem DeBoer’s grandfather was a dairy farmer in Dairy Valley. When the herds moved further out to the Chino Valley, his mom and dad began a dairy operation in the city of Ontario. The dairy he grew up on is now for sale because urban sprawl has pushed the most of the cows out of the Chino Valley and 200 miles further north to Tulare County.
With over 300 operations, Tulare County ranks first nationally in dairy production. It’s also where Willem DeBoer has been milking cows since 1992
Willem DeBoer, Tulare, California: “I think at the time land was $3,500 an acre up here versus land down there was probably selling for 50,000 an acre or so back in those days. So, you know, plus you could acquire a lot more land which is just better to handle your nutrient, you know, management along with your farming, grow some feed for the cows and just have a little more room than what we had in Southern California.”
When he lived in Ontario, DeBoer had to truck manure 200 miles for disposal and haul feed in for his cows. In Tulare County he’s able to reduce costs by applying manure on his own land to fertilize crops that feed his cows. The operation's 3,000 cows are milked 24/7 and produce over 50,000 gallons of milk daily.
Willem DeBoer, Tulare, California: “You know the American consumer, I think, wants cheap food and you know that trickles all the way down to us and we have to produce it as cheaply as possible.”
It is exactly that, the economics of food production, which causes farmers to leapfrog urban sprawl for greener pastures. Urbanization often brings tougher environmental regulations, new neighbors who often complain about noise and odors associated with farming, and not surprisingly -- rapidly appreciating farmland values.
Between 2000 and 2006, Ontario land values skyrocketed from $50,000 per acre to $100,000 to more than $500,000 dollars an acre. Many of the dairies that are still in the area are there solely because of the California Land Conservation Act of 1965, which allows farmers to sign 10-year contracts so their acreage is taxed as agricultural land rather than at true market value.
Last month, (June 15, 2009) legislative budget writers recommended that California suspend for one month reimbursements to counties for lost tax revenues due to the California Land Conservation Act.
The move would cut $34.7 million in state spending. Previously, Governor Schwarzenegger had recommended “terminating” the program in hopes of shoring up California’s cavernous $26.3 billion deficit.
Edward Thompson, California Director American Farmland Trust: “Increasingly ah the expectation that we can max out on the value of farmland by selling it for development is becoming an untenable, unsocialable ah unrealistic idea. What are we going to do to feed ourselves."
A world with more people and less food is a sobering prospect and often is cited in the debate over urban sprawl. But, according to USDA’s Economic Research Service, urban use today comprises only 3 percent of the total land area of the contiguous states, and despite what may seem to be an alarming trend in farmland loss, the United States has an abundance of agricultural lands. USDA goes on to say, there is little evidence to suggest that conversion of farmland to other uses poses any long-term threat to productive capacity.
Professor John Hart, University of Minnesota: “ Land is not really needed at the moment. We're producing all the vegetables we can eat. So, we don't have the problem of uh, a shortage of food. The problem of American Agriculture has always been overproduction.”
For Market to Market, I’m Andrew Batt.
Market Analysis: John Roach, Senior Market Analyst
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For the week, July wheat lost 8 cents, while the nearby corn contract moved fractionally lower.
The combination of higher domestic soybean supply estimates combined with predictions of record global production hammered soybean prices. For the week, the July contract lost $1.15 and the nearby meal contract was down nearly $39.00 per ton.
In the softs, cotton spent another week in positive territory as the December contract posted a gain of $1.53.
In livestock, August cattle were down $1.40. Nearby feeders lost 53 cents. And the July lean hog contract gained 18 cents. .
In other markets of interest, the Euro lost 75 basis points against the dollar. Crude oil declined $6.84 per barrel. Comex Gold was down $18.50 per ounce. And the Goldman Sachs Commodity Index lost more than 35 points to close at 400.25.
Roach: Thanks, Mark.
Pearson: Seems to be a lot of things -- supply and demand estimate came out from the USDA and it was given its due but it seems like there are so many other factors impacting agricultural prices these days, crude oil, global demand, global recession, interest rates, all these other factors out there, the value of the dollar, that are playing an equal role in terms of values instead of just our normal supply and demand interest that we normally see. What is your take right now on this global economic situation?
Roach: Well, we have certainly had for a period of months now, going back almost a year, markets that have been drug around by economic events happening, banks going broke, investment companies being closed down, tremendous government borrowing, incentive programs, there's just been lots and lots of things and it has put all of our markets really around the world into a bit of a tizzy and they all seem to be moving somewhat parallel and they seem to be almost schizophrenic. We had people talking not long ago about green chutes starting to grow and things starting to get better. Something happened, they really quit growing. The news has not gotten better. The trade deficit is probably the best news we've had in a while but the news has just not gotten better. The employment situation in the last report was maybe a little bit better but it included the 4th of July so we don't know for sure how meaningful that is. So, the real bottom line is the uncertainty in the U.S. and world economy has all of our markets focused in that direction.
Pearson: Cap and trade legislation passed the House of Representatives, fairly negative for agriculture, could increase the cost of growing an acre of corn in the Corn Belt $75 to $100, almost feel like there's been a lot of air has come out since that and now as we just heard and earlier in the show the Senate looking at passing a similar bill.
Roach: Well, in addition to having the other situations around the world that we just talked about we also have Congress that has decided we're going to make all the changes we've always wanted to make and so they're moving forward on a host of legislation, the cap and trade, of course, is one that is very important to agriculture but it is also important to consumers and to businesses in the United States and it's a scary situation. We don't know how much of a negative impact that might have but the equity markets have all been under pressure really since the House passed the legislation. So, the concerns continue to mount. And on the other side -- we are trading fundamentals too, we shouldn't forget that -- the fundamentals, the bullishness of the fundamentals peaked a month ago and what happened was the South American crop, the soybean crop in South America, in Brazil and Argentina together, is down 27 million tons from what the government thought it was going to be last September. That's right at 1 billion bushels worth of soybeans that were lost in South America. That is a third of the U.S. crop. So, that ignited a bull move in soybeans this past spring, it actually started back in December, we rallied strong into January on soybeans, slid when the economy looked sour and came back powerful given the spring when the South American crop really started finding out just how small it was. So, there is a big weather bull market but it ran its course. At the same time the dollar was collapsing and thought that it might collapse for a long period of time there, people even talking about maybe the U.S. government would lose its AAA rating, we maybe go to a different currency and people looked at that and saw substantially lower dollar values out of the future but it quit going down, the dollar has turned sideways. So, that has stopped. Then we had the U.S. crop which we couldn't get planted and we knew that we were going to have to reduce the corn acres because we couldn't get it in the ground and we knew it was going to be off to a later start than normal and we knew we were going to lose yields and everything else but surprise, surprise, U.S. producers got their work done, planted even more corn acres than people figured. We thought after the March estimate we were going to be down 7.5 million acres on all the major crops, turned out we aren't down nearly that many million acres. So, all of the bullish fundamental things came to the marketplace and then were satisfied. So, we have been trading fundamentals as well as the outside market factors. But right at the moment the fundamentals are sour and the outside market factors are sour. So, we really have both coming to the marketplace at the same time and that is what has let the market come down as low as it has over the last month.
Pearson: I want to throw one more in here before we get to our individual stocks, our individual crops and that was crude oil which was also rallying up but now it has slid back and now we're a wash in crude oil around the world.
Roach: Exactly, and people are thinking that we're going to have lower crude prices when just a few weeks ago they were thinking it would be much higher. So, we've had a lot of things that have had a sea change, if you look at it that way. And so as we look forward what do we have to look forward to? We have a U.S. crop that is getting better, we have a South American crop they're going to plant here in future weeks and the size of that crop is going to be big again providing that they have the right kind of weather. They have changed government structure in Argentina so that's going to be conducive to more planting. So, we have bigger supplies coming at us and an improving crop in this country. So, that is what the market is dealing with. The thing that I think is important here is that we may have already bled most of that negative into the price. We've already, all these things I have described, this is not new news to anybody, I'm giving you some history here and we have everything rated about as good as we can rate it for this time of year. So, we do have room, if weather changes, for markets to have to put some weather premium back in.
Pearson: Let's get down to some specifics real quick here, your take on the wheat market right now?
Roach: The wheat market has probably been bled out the most. The wheat market never had a tight supply, it had a bull market because we had money that flowed into the marketplace and it flowed into wheat as well. But the open interest in wheat or I should say the size of the funds, they got up about 20,000 contracts long, that's about as long as they ever get and they are now short about 18,000 contracts. So, they have gone from long to short and that is about as short as they ever get. So, we think the wheat market is down at a bottoming stage here and deserves to spend some time recovering.
Pearson: Not a place to make sales at all.
Roach: Not at all, no.
Pearson: Let's talk about the corn market and your take there. Obviously the WASDE report pretty substantial carryout if we hit our numbers in 2009.
Roach: We even increase the carryover for the existing crop that's in the bin right now, took it up to a 1.770 billion and that's a big number too so we've got a lot of corn to carry into the new year and so that's going to hold somewhat of a lid in the corn market and now as we look on forward we were worried about demand and so that is going to give us big supplies for this next year and most people think that the number you saw on the report today is actually a small number. Most people are already picking the yield estimates for the governments at 153.5, they have taken the yield estimates up to 157, 158, 159. So, people are already dialing in bigger numbers and expecting bigger numbers on next month's report.
Pearson: If you get into those bigger numbers you're getting closer to that 2 billion bushel carryout number. What does that equate to price, John?
Roach: Well, I think it's already there. The 2 billion number is already being talked about, people are already trading it and we've already had the big wash out of the market. It's possible we can take prices down a little bit more but we don't think that there is a huge erosion here over the near term. We still have to raise this crop and once you dial in and you figure that the crop is raised that's about as much damage as you can do and you can always have a change in weather and have the crop not be as good as some people think.
Pearson: No sales on corn?
Roach: No sales on corn here either.
Pearson: Let's talk about soybeans, again, some big numbers in the USDA report and, again, a lot of acres planted and these beans seem to be coming out even some of these late planted beans.
Roach: It's amazing how the crop is recovering out there in the field, the crop ratings are just surprisingly good. We still have, though, the tightest supply of old crop soybeans. We did lose a billion bushels in South America. We are tight in the United States at 100 million bushel carryover, about as tight as it's been here in recent history. Most people think it could be a little tighter than that. The government is also giving us some very conservative usage numbers for next year. They are taking China's demand actually down one million tons so we think that we're getting the most conservative point of view right now in the bean market and, again, we're not wanting to sell anything here because we think we can have some recovery.
Pearson: Real quick over on the livestock side. I'm heading out to the National Cattleman's Beef Association big summer meeting that's coming up next week out in Denver and we've been waiting for this recovery in the beef business. What is your take, John? Obviously the issue of the consumer increasing savings and spending less that means fewer restaurant business.
Roach: Well, that's what we've been involved with. Our hope is that we actually start to see some economic positive news come when we start people back to their old routines a little bit as time goes on. The government in their report today forecasts higher prices as we move through the end of the year and on into the first quarter of next year. So, higher prices for next year compared to this past year. We're in a seasonal upward timeframe. We think cattle prices can move some higher.
Pearson: 2010 will we be able to work through most of these global problems that we have, financials maybe even add more demand to a fairly small cow herd?
Roach: Well, I'd like to say that we can work through all of this, the economic problems here between now and the end of the year but the fact of the matter is we just don't know, we don't know. This has been a very unusual turn of events that we've had over the period of the last two years and we just don't know when things are going to get turned around and start to move into better situations. My bet is we will, my bet is that we're looking at the worst now, we may have to deal with that here for another couple of months but then before we move through the year end we'll start to see better news and that will translate itself into better beef demand.
Pearson: We'll look forward to that. Let's talk about hogs where we've had a lot of challenges. Obviously the H1N1 thing was just a freak, had a huge impact on price and had a big impact on our ability to move product around the world and we seem like we still get some echoes, we still see occasionally the misnamed swine flu. H1N1, get that behind us, reduce these farrowings, are you getting a sense that's happening?
Roach: Here's the key, we have to reduce the production. We're producing too much pork for the level of demand that we have. Our overseas markets have struggled, their economic issues have been difficult but we're starting to see some of it come back. We saw the pork cutout actually gain here over the last week in about as good a fashion as it has for some time. We think the pork market will move higher as we move through this next 30 days. And so we look for an opportunity here to get some strength and to be able to hedge in some hogs because we're concerned we go into a tough time again in the fourth quarter.
Pearson: Okay, get through the fourth quarter of 2009, 2010 will we start to see this recovery for the entire meat sector?
Roach: I think so, I think so. I think we're looking at some of the worst situations right now as far as the economic outlook. I think we'll look at better attitudes as we get through the end of this year.
Pearson: Flip side for a livestock producer, we took almost $40 off soybean meal this week, corn prices are down, should we be locking in here?
Roach: Buying some but it's not really a time to be buying big quantities of anything. We still have very tight supplies of old crop beans and we have farmers who just don't want to sell corn at these prices. Basis levels have moved 50 cents in some areas so we're slow buyers.
Pearson: Very good, John Roach, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from John on where these markets just may be headed visit the Market Plus page at our Web site where you'll find streaming video of our program and you can download audio podcasts of our Market Analysis and our Market Plus segments absolutely free at our Web site. And, of course, join us again next week when we'll learn how some rural counties offer residents a place to leave their financial legacies in hopes of keeping wealth in their local communities. Until then, thanks for watching. I'm Mark Pearson. Have a great week.
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