Ag Outlook by Jim Wiesemeyer at FCS Financial Ag Seminars

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Information about Ag Outlook by Jim Wiesemeyer at FCS Financial Ag Seminars
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Published on March 4, 2014

Author: FCSFinancial

Source: slideshare.net

Description

Jim Wiesemeyer, Informa Economics, Inc, provides an update on the 2014 agriculture year and details the new Farm Bill.

The farm bill, economy and you Jim Wiesemeyer Senior VP, Farm and Trade Policy Informa Economics, Inc.

What’s Wrong With Washington?

How Did We Get Here?

Where Are We Going?

Could Washington Be More Dysfunctional?  Major Issue Differences  Healthcare reform: Rollout termed a “debacle”  Intelligence  Executive snafu: Sense U.S. losing clout orders: Climate change, other issues  Regulations:  Farm Growing backlog at OMB Bill: Finally, but what a chore.  Immigration: Senate yes. House piecemeal. 5

From Dysfunctional to Functional?  Budget: Compromise found on FY 2014, 2015 budgets  FY 2014: $1.1 trillion – Obama signed  FY 2015: Funding agreed, but details to follow  Debt limit hike…Extended into early 2015  Nov. elections: Will put hold on many issues  Tax extenders, tax reform: Later, not sooner  Ethanol and the RFS: Changes 6

Advanced Economies Have Run Massive Deficits and Pushed Debt to Unsustainable Levels Percent (fiscal balance as percent of GDP) Percent (Net government debt as percent of GDP) 0 90 80 -2 70 60 -4 50 40 -6 30 20 -8 10 -10 0 2008 2009 2010 2011 2012 Fiscal Deficit 2013 2014 2008 2009 2010 2011 2012 2013 Net Government Debt 2014

Risks to Global Economic Recovery  Vulnerability of Eurozone banking system (stress tests) and progress on fiscal and banking union.  Emerging market contagion as reduced capital flows and rising current account deficits produce sharp currency fluctuations, reduce growth prospects and expand political uncertainty.  Slowing growth in China and ability to contain shadow banking exposure.  Geo-political risks, particularly in Middle East.  U.S. ability to sustain growth momentum.

A Fragile Global Economy Will Experience Subpar Growth With Significant Vulnerabilities Percent change in annual world growth (purchasing-power parity rates) Rising Middle Economic Policy Class Turmoil Realignment 2004-08 2009-13 2014-18 Avg.=4.5% Avg.=2.9% ??? 6 4 2 0 9 18 14 16 10 12 06 08 India 02 04 China 98 00 94 96 Rest of wor ld 90 92 82 84 78 80 74 76 70 72 Advanced countr ies 86 88 -2

US Economic Outlook Where we’ve been and what lies ahead

Focus On U.S. Economic Prospects • 2014 “Organic Growth” Less Fiscal Drag • Little or No Inflation • Federal Reserve Tapering • Political Pitfalls, but…

U.S. Economic Prospects

Short Term Deficit Relief Means Long Term Revenue and Spending Changes Are Post-2014 D eficit in billion dollars 200 Reagan Percent of GDP G. Bush Clinton G.W. Bush Obama 2 0 0 -200 -2 -400 -4 -2.4% -600 -6% -800 -6 -5.3% Deficit as percent of GDP -8 CBO new estimates -1000 -1200 -1400 Assumptions:  phase-out in Iraq/ Afghanistan -11%  American Taxpayer Relief Act of 2012  Sequestration (modified) -10 -12 -14 22 24 18 20 14 16 10 12 06 08 02 04 98 00 94 96 90 92 86 88 -16 82 84 -1600 Source: Congressional Budget Office (February 2014), BEA and Treasury Department and forecast

Improving Global Economy, Peaking Ethanol and Growing Grain Stocks Trigger Market Transitions A griculture commodity index (2010=100) 150 Rising Economic Policy Global Turmoil Realignment Middle class 2009-13 2014-18 ? 100 50 Old Normal 0 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 Data source: World bank 18

Farm Income Remained Strong in 2013 But will see major downturn in 2014 Billion dollars 150 125 100 Improving margins in the protein and dairy sectors and large harvests limited declines in 2013. However lower grain & oilseed prices and reduced government payments will push incomes lower in 2014. Further pressures could emerge in 2015 75 Net Farm Cash Income 50 25 Direct government payments* 0 79 81 83 85 87 89 91 93 95 97 99 01 * emergency payments are striped area of government payments) 15 03 05 07 09 11 13 15

Balance Sheet of Agriculture is Better Prepared for Volatility and Transition Billio d llars n o Billio d llars n o Change 1968-1978 Change 1978-1988 Change 1988-1998 Change 1998-2008 3000 Assets ... +179% Assets .. +1.4% Debt ....... +155% Debt ...... +7.5% Assets ... +37% Assets ... +98% Debt ....... +24% Debt ....... +59% 600 2500 500 Change 2008-2014 Assets …. +40% Debt ……....+21% 2000 400 1500 300 Farm assets (left scale) 1000 200 Farm debt (right scale) 500 100 12 14 08 10 04 06 00 02 96 98 92 94 88 90 84 86 80 82 76 78 72 74 0 68 70 0

Why Effective Safety Net Needed Ahead  Potential key market changes ahead: In 2015, 2016…  Higher interest rates: Federal Reserve strategy  Higher U.S. dollar: Impact on exports  Corn ethanol blend wall: Will exports take up slack?  Increased yields: ‘Normal’ weather eventually, and…  Lower prices: How low depends on carryover  Barometers: Watch farm equipment and land values 19

Farm Bill: Patience and Wisdom… Developing Countries 20

Farm Bill Process…Fifth calendar year 2010 Nov 2011 Rep. Peterson holds First Hearing in House on Farm Bill Farm Bill discussions in “Super Committee” 2010 1 2 Jan 2013 July 2012 June 2012 April 2012 1-year extension of 2008 Farm Bill House Ag Committee Markup of 2012 Farm Bill Senate Passage of 2012 Farm Bill Senate Ag Committee Markup of 2012 Farm Bill 6 4 5 May 2013 Senate Cmte Markup of 2013 Farm Bill House Cmte Markup of 2013 Farm Bill 7 June 2013 Senate Passage of 2013 Farm Bill 8 3 July 2013 Sep 2013 Feb 2014 House Passage of 2013 Farm Bill (“Farm Only” Farm Bill) 2008 Farm Bill Extension Expires Congress approves Obama signs 9 Today

Farm Policy Guiding principles…  Farm policy must work for all crops and all regions of the country.  Farm policy must be able to protect against multi-year deep price declines like we saw in the late 1990s.  Do no harm to crop insurance and make improvements where possible.

Farm Policy Agricultural Act of 2014  959 pages… cost of $956 billion  12 Titles  $16.6 billion in budget savings over 10 years; $23 bil. incl. sequester impacts  Commodity title spending -$14 bil./10 years  Nutrition title spending - $8 bil./10 years  Conservation spending - $6 bil./10 years  Crop insurance title: +$5.7 bil./10 years

10 YEAR BASELINE FOR FARM BILL TITLES Crop Insurance, 84 Commodities, 59 Conservation, 62 10 year baseline $973 billion Nutrition, 764 Source: CRS using CBO estimates, Oct 10 Trade 3.4 Horticulture 1.1 Energy 0.2 Research 0.1 Misc (NAP) 1.4

New Farm Bill – Changes  Direct payments: Gone, but…  Transition payment: Cotton only  CCP, ACRE, SURE: Gone 25

FARMER CHOICE Title I: Commodities Title XI: Crop Insurance Program Crops Area Revenue Coverage ARC County Coverage ARC Individual Coverage Price Loss Coverage Crop Insurance Supplemental Coverage Option (if not in ARC) Upland Cotton Stacked Income Protection Plant (STAX)

New Farm Bill – Major Provisions  Ag Risk Coverage (ARC): Individual (65% of base) or county (85% of base)  Price Loss Coverage (PLC): Target/reference prices  Option to reallocate base – 2009-2012  Yield update option – average of 2008-2012  STAX: Cotton program, starts with 2015 crops  Dairy: No supply management. Gross Margin Insurance 27

New Farm Bill - Timing  Signup: Not before April; to last well into summer  Implementation and education: $100 mil. to FSA $3 mil. earmark for Extension $3 mil. earmark for Universities  Annual signup: Necessary for forms, changes, etc.  If you don’t? You’re in PLC with nothing for 2014  No major payments until Oct. 1, 2015 28

BASE ACRES  Base acres tied to historical production  Cotton base acres become ‘generic’ base acres, non -program  Farmers allowed to update remaining program crop base acres based on 2009-2012s acreage allocation  ARC and PLC payments (largely) calculated on base acres and decoupled from production Crop Wheat Corn Minor feed grains Soybeans Upland cotton Rice Peanuts Base acres 2012 73.7 84.3 23.3 50.1 17.9 4.4 1.5 Planted acres 2009-2012 avg 55.7 90.9 12.0 76.8 11.6 3.0 1.3

New Farm Bill – Major Provisions  Ag Risk Coverage (ARC): Individual (65% of base) or county (85% of base)  County: Paid when actual crop revenue is below the ARC revenue guarantee for a crop year.  County ARC guarantee is 86 percent of county ARC benchmark revenue.   Coverage is capped at 10 percent – coverage is between 76 percent and 86 percent of the county ARC benchmark revenue. County ARC benchmark based on Olympic avg (removing high and low values) of county yields and US crop year average prices for the 5 preceding years. 30

Farm Bill Target Prices Item PLC PROVISIONS Reference/Target Prices Details 85% of base Corn $3.70/bu. Wheat $5.50/bu. Soybeans $8.40/bu. All rice $14/cwt. Japonica Rice $16.01/cwt. Sorghum $3.95/bu. Barley $4.95/bu. Other oilseeds $20.15/ton Peanuts $535/ton

New Farm Bill – Major Provisions  Price Loss Coverage (PLC): Target/reference prices  Paid when greater of average market-year price or loan rate is less than the crop's reference (target) price.  Supplemental Coverage Option available, starting in 2015. 32

New Farm Bill – Pay caps, AGI  Pay cap: $125,000/person, $250,000 married couple  Pay cap: Combined limit for ARC, PLC and MLG/LDP  AGI limit: $900,000 three-year average  Actively engaged: “Punted” to USDA 33

What Farmers Are Saying Corn and soybean growers will likely initially focus on the county Ag Risk Coverage (ARC) option due to an expected big payout at least for the 2014 corn and soybean crop based on most price projections for the 2014 crop year, and especially compared with the triggers for the Price Loss Coverage/target price option.

What Farmers Are Saying If a farmer goes with ARC, especially in the Midwest, they will go the county ARC route, and not the individual option..

What Farmers Are Saying Some wheat growers initially said they would focus on the PLC over ARC, and will look with interest in adding the Supplemental Coverage Option (SCO) with the 2015 crop. SCO is not available if a farmer chooses ARC.

What Farmers Are Saying Corn and soybean growers said SCO was not so attractive to them as they already are at the 80 percent or higher buy-up level via hefty crop insurance subsidies.

What Farmers Are Saying Crop insurance impacts. Farmers said they will be assessing the impact of the new safety net programs on their crop insurance choices for the years ahead.

What Farmers Are Saying Corn and soybean growers with an interest in the SCO option indicated they would likely lower their crop insurance guarantee level in exchange for getting more subsidized SCO coverage if they chose PLC. But that still was not likely enough for them to shift from their initial thinking of going the county ARC route.

What Farmers Are Saying Price expectations are key. The lower the price expectation a farmer has, the more interest they have in the PLC option.

What Farmers Are Saying One farmer noted: "It still appears that going the PLC/SCO route gives the most flexibility and coverage--but it depends on your price outlook and your underlying buy up on crop insurance. If you have 85 percent buy up already, then 86 percent SCO is almost useless. But, if you have 60 percent buy up, then SCO covers an additional 26 percent. In addition, PLC covers down to the loan rate -- a combination with a far greater breadth of coverage. The optimal election depends on the circumstances on your farm and your own risk preference.”

What Farmers Are Saying The farmer adde: "If instead you want 10 percent protection around the average, then ARC fits the bill. That's a luxury that folks with 85 percent buy up can afford. But, even then, a grower should think long term for this reason – two years ago, the harvest price on corn was $7.50/bu. On 1,000 acres at 180 bu/ac at 85 percent coverage...that was a liability of $1.1475 million! With prices at $4.50/bu, that liability falls to $688,500! The insured value dropped $460,000 or 40 percent! That 10 percent limitation on ARC starts to look pretty limiting."

New Farm Bill – Not in bill  COOL: No change  King amendment: Struck in conference  GIPSA poultry rule: No provision 43

Farm Bill: Livestock  Supplemental Ag Disaster Assistance Program funded permanently  Includes a Livestock Indemnity Program for livestock losses from adverse weather - USDA will reimburse farm animal losses at 75% of value if disease, weather or predators cause big herd losses. Program will extend to all livestock  Livestock Forage Program for losses from drought or fire 44

Farm Bill: Energy  Reauthorizes energy programs through FY 2018  Increases direct spending by $879 million through FY 2023  Includes: Biorefinery Assistance Program, Rural Energy for America Program and the Biomass Crop Assistance Program  Prohibits subsidies for ethanol blending pumps 45

Trade Policy Issues • Trans-Pacific Partnership (TPP) – Obama wants negotiations to conclude in 2013 - 12 countries: focus on Asia/Latin America - 40% of global GDP - 33% of world trade • Trans-Atlantic Trade and Investment Partnership (TTIP) – EU/US – 50% of global GDP – 33% of world trade – Negotiations to continue for years • Trade Promotion Authority (TPA) 46 – Time limited/only on TPP

New Farm Bill - Trade  Under Secretary for Trade and Foreign Agricultural Affairs: Report required within 180 days, implementation one year beyond that – Last update was 1978 when ag trade was $29 bil. In 2012 was $136 billion. 47

U.S. Agriculture Export Destinations Have Increasing Asian Flavor Top 15 Markets 2013 1.China 2. Canada 3. Mexico 4. Japan 5. EU-27 6. South Korea 7. Hong Kong 8. Taiwan 9. Indonesia 10. Philippines 11. Turkey 12. Viet Nam 13. Egypt 14. Venezuela 15. Thailand Total all exports Bil. US$ 23.5 21.4 17.9 12.4 11.5 5.2 3.6 3.2 2.6 2.4 2.2 2.1 1.7 1.6 1.4 140.9 Top 15 Markets 2000 Bil. US$ 9.3 1.Japan 7.5 2. Canada 6.5 3. EU-27 6.3 4. Mexico 2.5 5. South Korea 2.0 6. Taiwan 1.5 7. China 1.2 8. Hong Kong 1.1 9. Egypt 0.9 10. Philippines 0.7 11. Turkey 0.7 12. Indonesia 0.7 13. Russia 14. Dominican Rep. 0.5 0.5 15. Saudi Arabia 50.8 Total all exports Asian markets account for 43% of U.S. exports and occupy 9 of top 15 market destinations. China is #1 market with Thailand, Philippines and Viet Nam growing rapidly Export share of 2013 U.S. production Wheat ………. 55% Corn ………… 12% Soybeans ….. 46% Broilers ……... 20%  Beef …………. 10%  Pork …….…… 22%  All meat ….......18%  Dairy (skim) …16%

The Next Farm Bill  Lessons from 2014 Farm Bill: Mistakes, Successes  What works, doesn’t: Budget savings – Prices - Economy  WTO challenges? If farm bill costs surge, prices decline…  Future budget deficits: Crop insurance savings  Who controls Congress, Committees: Players important  Who controls White House: Proposals and key officials  USDA: Implementation and who leads after 2016 elections 50

Outlook: U.S. Agriculture 51

New Energy Paradigm is a Global Event A 50 percent increase in recoverable global gas supplies?? Implications for geopolitical balances? Chart source: Energy Information Administration)

Oil Prices: Absent Geopolitical Turmoil Oil Prices Should Trend Lower in Coming Years Dollars per barrel; spot price West Texas Intermediate $140 $130 $120 $110 $100 $90 $80 $70 $60 Issues for oil:  Risk premium for Middle East, particularly Iran, may ease!  U.S. dollar movements are a factor.  OPEC making limited adjustments  Lower global growth expectations is mitigating factor. 2012 avg. $94 2013 avg. $98 2011 avg. $95 2014-15 avg. $85-95 $50 $40 $30 $20 19 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 19 91 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 20 01 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 20 11 1 20 2 1 20 3 1 20 4 15 $10

Natural Gas Prices Will Reflect Higher Production Potential and Pace of Conversion Dollars per m illion Btu (Henry Hub) $15.00 Questions for natural gas:  Economic recovery and shifts in energy use will boost prices.  New discoveries will continue to increase future supplies! $12.00 $9.00 2011 avg. $4.00 2011 avg. $4.00 2012 avg. $2.75 $6.00 $3.00 2013-14 avg. $3.75-4.25 19 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 9 20 9 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 0 20 8 0 20 9 1 20 0 1 20 1 1 20 2 1 20 3 14 20 15 $0.00

Relative Growth Rates and Realigning Monetary Policies Will Impact Value of U.S. Dollar Indexes of m ajor cur r encies/US$ (Mar ch 1973=100) 150 140 130 From 2002 to 2011 ………....... -39 % From August 2011 bottom to October 2013 ..… +11 % Dollar declined by over 25% after floating in 1973! 120 110 100 90 80 70 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 * Currencies weighted by relative market importance to total U.S. trade. 04 06 08 10 12 14

A Resource Challenged World Will Continue to Support Commodity Markets in the Future Mi l l i o n p eo p l e 1000 China and India will account for 70% of increase in the middle class from 2000-2030. Their “ability to pay” will set global market prices.  Income growth  Market access 950 million 800 600 Rest-of-World 532 mil. (protectionism) 431 million  Political decisions (inward?) Rest-of-World 375 mil. China - 361 mil. It is not a straight line growth path. Significant volatility will prevail around growth path. China - 56 mil. India - 58 mil. 400 200 0 2000 419 million 2030

Crop Supplies and Demand Shifts Are Signaling Transitions for Agricultural Sectors Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Low Cattle Inventory, Record Exports and Lower Feed Costs Spur Meat and Dairy Sectors Feed Costs: Export Reliance: Low stocks Rising price volatility Yield/weather issues Ethanol Emerging markets Disease (FMD) U.S. $ rebound Rising competition Trade disputes Export Markets

Outlook for elections  2014 Congress – -- House: GOP likely will retain control – -- Senate: Key is candidates  2016 President – -- Democratic candidate – -- Republican candidate 73

2014: The House Today: 234 Republicans, 201 Democrats (Democrats need +17 seats to win control) Cook Outlook: Minimal Net Change

2014: The Senate Today: 55 Democrats (including 2 Independents caucusing with Democrats), 45 Republicans Cook Outlook: GOP gain of 4-6 seats. Senate control in 2015?

Democrats Must Defend 7 Seats in States Romney Won:  Retirements in MT (Baucus), SD (Johnson), WV (Rockefeller)  Incumbents: Begich (AK), Pryor (AR), Landrieu (LA), Hagan (NC) Source: Cook Political Report.

Kentucky: Grand-Daddy of them All  Also watch primaries in SC (Graham), GA (Open), KS (Roberts), MS (Cochran) Source: Cook Political Report.

2016: Presidential Contest Begins Early

Total Makeover: Only a New Nominee in 2016 Can Resurrect the GOP Nationally:  The “Can Wins” (Christie, Bush, Rubio)  The “Can’t Wins” (Cruz, Paul, Santorum)  The “Maybes” (Walker, Ryan, Thune) Source: Cook Political Report.

On Democratic Side, Will She or Won’t She?  For all of Republicans’ current problems, remember: Democrats may be lacking in “new blood” come 2016.  If not Hillary or Joe Biden, who? Cuomo, O’Malley, Warner, Hickenlooper, Gillibrand, or…Warren?

On Election Night 2016, Watch… 2012: Obama 19,712 Romney 19,369

QUESTIONS www.iemonitor.com 82

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