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Can Dysfunctional Washington Ever Function?
Issues impacting business of agriculture
Jim WiesemeyerSenior VP, Farm & Trade Policy
Informa Economics, Inc.
The 3 Stooges – Circa 2014
GOP Living Close to the Edge
Could Washington Be More Dysfunctional?
4
Obama: Second term woes
Healthcare reform: Rollout termed a “debacle”
Intelligence snafu: A sense that U.S. is losing clout
Executive orders: Climate change, other issues
Regulations: A growing backlog at OMB
Farm Bill: Discord between farm groups, lawmakers, Obama
Foreign policy issues: Egypt – Syria – Iran – North Korea
What’s Wrong With Washington?
How Did We Get Here?
Where Are We Going?
From Dysfunctional to Functional?
8
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… until Feb. 7, 2014
But coming elections will put lots of issues on hold…
9
U.S. Economic Policy Inaction Creates Headwinds for Break-out Economic Growth
2014 elections to impact timing of some policy issues/reform
Risk management and investment strategies cannot deal with policy vacuum. Companies can measure and adjust to risk based on actual policy decisions
Financial sector Financial sector regulatory reform implementation
Energy sector New energy paradigm; Fracking & horizontal drilling technology change fossil and renewable roles
Immigration Piecemeal progress likely in 2014
Health care sector Affordability Care Act, unintended consequences
Regulatory oversight Increasing regulation; Clean air & water, Food safety
Deficit reduction
Changing tax policy and entitlement programs likely on hold until 2015.
Trade Agreements TPA vote; Trans-Pacific (TPP); Trans-Atlantic (TTIP)
The World’s Central Banks May Have Difficulty in Coordinating Policy Actions
U.S. FederalReserve
Bank
Bank ofJapan
EuropeanCentralBank
Bank ofEngland
Advanced Economies Have Run Massive Deficits and Pushed Debt to Unsustainable Levels
2008 2009 2010 2011 2012 2013 2014-10
-8
-6
-4
-2
0
Percent (fiscal balance as percent of GDP)
2008 2009 2010 2011 2012 2013 2014
0
10
20
30
40
50
60
70
80
90
Percent (Net government debt as percent of GDP)
Fiscal Deficit Net Government Debt
13
0
1
2
3
4
5
6
7
8
9
Percent
10-yearTreasuries
FederalFunds Rate
91 92 93 94 95 96 97 98 99 00 01 02 0403 05 06 07 0908 1210 11 13 14 15
Federal Reserve Will Continue To Promote Growth and Employment in 2014-15
Extend near-zero rate guidance to mid-2015. Tapering the $85 bil. per month in purchases. Modified 6.5% target unemployment?; inflation below 2%
Federal Reserve actions:
PolicyRealignment
2014-18???
RisingMiddleClass
2004-08Avg.=4.5%
EconomicTurmoil2009-13
Avg.=2.9%
14
-2
0
2
4
6
Percent change in annual world growth (purchasing-power parity rates)
Advanced countries Rest of world China India
Global Economy Reflects Guarded Optimism As Growth in Advanced Economies Improves
China’s Economic Growth from 2000-2010 Driving Agricultural Demand
15
Magnitude of growth on a per capita basis is phenomenal
16
9.8
11.3
12.7
14.2
9.69.2
10.4
9.3
7.8 7.6 7.3
93-02 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
0.0
2.5
5.0
7.5
10.0
12.5
15.0
Percent growth rate per year
Chinese Growth Likely to Remain Subdued As Advanced Economies Remain Weak
Fiscal stimulus may be needed to stay
above 7%
Focus On
U.S. Economic Prospects
• 2014 “Organic Growth” Less Fiscal Drag
• Little or No Inflation
• Federal Reserve Tapering
• Political Pitfalls, but…
U.S. Economic Prospects
-1600
-1400
-1200
-1000
-800
-600
-400
-200
0
200
Deficit in billion dollars
-16
-14
-12
-10
-8
-6
-4
-2
0
2
-6%-5.3%
-2.4%
Reagan ClintonG. Bush
G.W. Bush
Source: Congressional Budget Office (September, 2013), BEA and Treasury Department and forecast
Deficit aspercentof GDP
Percent of GDP
Obama
-11%
Assumptions: phase-out in Iraq/ Afghanistan American Taxpayer Relief Act of 2012 Sequestration
Short Term Deficit Relief Means Long Term Revenue and Spending Changes Are Post-2014
2013 Deficit estimate
* Currencies weighted by relative market importance to total U.S. trade.
70
80
90
100
110
120
130
140
150
Indexes of major currencies/US$ (March 1973=100)
80 82 84 86 88 90 92 94 96 98 00 02 04 06 0874 76 78 10 12 14
From 2002 to 2011 ………....... -39 %From August 2011 bottom
to October 2013 ..… +11 %
Weak U.S. Dollar in 2002 to 2011 Boosted Commodities; Continued Volatility in 2014
Dollar declined by over 25% after
floating in 1973!
21
Farm Income Remained Strong in 2013 With Better Balance Among Sectors
78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
0
25
50
75
100
125
150
Billion dollars
Net Farm Cash Income
Direct government payments*
* emergency payments are striped area of government payments)
Improving margins in the protein and dairy sectors limited income declines in 2013. Net cash income was
second highest on record in 2013. However lower grain and oilseed prices could push incomes lower in 2014.
Balance Sheet of Agriculture is Better Prepared for Volatility and Transition
0
500
1000
1500
2000
2500
3000
Billion dollars
0
100
200
300
400
500
600
Billion dollars
Change 1968-1978
Assets ... +179%Debt ....... +155%
Change 1978-1988
Assets .. +1.4%Debt ...... +7.5%
Change 1988-1998
Assets ... +37%Debt ....... +24%
Farm assets(left scale)
Farm debt(right scale)
Change 1998-2008
Assets ... +98%Debt ....... +59%
Change 2008-2013Assets …. +41%Debt ……....+19%
23
Pork and Broiler Sectors Riding Wave of Reduced Beef Supplies Lower Feed Costs
0
5
10
15
20
25
30
35
40
Billion pounds
Beef
Pork
Broilers -0.75 -4 to -6%
- 0.25 +1 to +3%
Change in 2013 2014 +2.0 +3 to +5%
Beef
Pork
Broilers
2010 2011 2012 2013 2014 1.3% 0.7% 0.2% 0.3 0 to +1
Percent change in total meat output
24
0
100
200
300
400
500
Million metric tons of wheat & coarse grains
0
8
16
24
32
40
Stocks-to-use percentage
World stocks Stock/use
A Recovery in Global Grain Stocks Will Require Two Years of Large Harvests
One good harvest will not remove volatility
0
250
500
750
1000
1250
1500
Million metric tons of wheat and coarse grains
+20%
+5%
Global Grain Markets Have Relied on Non-U.S. Production; Creating More Competition
Since 2007 U.S. grain production has been near or below the 2007/08 level but may be 5% above in 2013/14. Harvested area down 6 million acres.
Since 2007 non-U.S. grain production has been volatile but above the 2007/08 level every year and is 20% above in 2013/14! Harvested area up 23 million acres
U.S. grain output
Non-U.S. grain output
26
90 92 94 96 98 00 02 04 06 08 10 12
0
10
20
30
40
50
60
70
Million metric tons of soybeans
WorldMajor ExportersChina
(Major exporters are Argentina, Brazil, Paraguay and U.S.)
Stocks of World’s Major Soybean Exporters Have Risen Sharply
USDA January Supply and Demand2011/12 2012/13 2013/14
7.246.22
12.50
394
14.50
88.3
7.776.89
14.40
468
14.90
72.5
6.60 - 7.004.10 – 4.70
11.75 – 13.25
415 - 445
15.30 – 16.30
72 - 77
WheatCornSoybeans
Soymeal
Rice
Cotton
--------------- dollars per bushel ---------------
--------------- dollars per cwt ---------------
--------------- cents per pound ---------------
Smaller Than Expected 2013 Crops Limit Price Declines But Pressures Remain in 2014/15
--------------- dollars per short ton ---------------
2014/15
Significant Acreage Realignments Likely in 2014: Prices, Weather and Farm Programs
Corn
Soybeans
Wheat
Upland Cotton
7 other crops*
Hay harvested
All crops acreage
CRP
Double cropping
Prevented planting
Total acreage
-4 to -2
+4 to +6
+1 to +2
0 to +1
0 to +1
+1 to +2
+4 to +5
-1 to -2
0 to +1
-2 to -3
-2 to -1
Change13 to 14
----------------- million acres -----------------
* Barley, oats, sorghum, rice, sunflowers, peanuts and canola
88.2
77.4
53.6
10.8
19.6
59.9
314.8
31.3
2.8
6.9
350.1
2010
91.9
75.0
54.4
14.4
17.1
57.6
314.8
31.1
5.0
11.0
349.5
2011
97.2
77.2
55.7
12.3
20.6
56.3
324.3
29.5
5.9
1.3
349.2
2012
92.0
82.0
57.5
11.0
20.0
57.0
324.5
25.3
6.0
2.0
345.8
2014
95.4
76.5
56.5
10.3
20.3
56.6
320.0
26.9
6.0
4.0
345.0
2013
Data source: World bank
0
50
100
150
Agriculture commodity index (2010=100)
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 18
Old Normal
Tran
sition
2004
-200
8
Tran
sition
RisingGlobal
Middle class
EconomicTurmoil2009-13
PolicyRealignment
2014-18
Improving Global Economy, Peaking Ethanol and Growing Grain Stocks Trigger Market Transitions
?
Why Effective Safety Net Needed Ahead
30
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 the slack?
Increased yields: ‘Normal’ weather eventually, and…
Lower prices: How low depends on carryover buildups
Barometers: Watch farm equipment and land values
Farm Bill: Patience and Wisdom…
31
Developing Countries
Will We Ever Get a Farm Bill?
Farm Bill Process2014 Farm Bill DetailsPath Forward
Farm Bill Process…Fifth calendar year
Rep. Peterson holds FirstHearing in House on Farm Bill
2010
1
1-year extension of 2008 Farm Bill
Jan 2013
6
Dairy and other commodities revert to 1949 Permanent Law
Jan 20142008 Farm Bill Extension Expires
Sep 2013
Farm Bill discussions in “Super Committee”
Nov 2011
2
Senate Ag Committee Markup of
2012 Farm Bill
April 2012
3
Senate Passage of 2012 Farm Bill
June 2012
4
Senate Cmte Markup of 2013 Farm BillHouse Cmte Markup of 2013 Farm Bill
May 2013
7
Senate Passage of 2013 Farm Bill
June 2013
8
House Passage of 2013 Farm Bill (“Farm Only” Farm Bill)
July 2013
9
Today
2010
House Ag Committee Markup of
2012 Farm Bill
July 2012
5
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 Bill Conference ProvisionsItem
Duration
Direct Payments
Basis for Payments
Chance to reallocate bases
Cotton base acres
Conservation compliance/crop insurance
Expected Outcome
Crops years 2014-2018
Eliminated
Base acres -- Yield update option
One time option – 2009-12 plantings
Generic base - Annual option to plant other crops on cotton base acres and qualify for safety net provisions (ARC or PLC) for that crop, but not STAX for those acres
Yes – But no AGI test, or cap on crop insurance payouts
Farm Bill Conference ProvisionsItem
Revenue or Price Loss Coverage (ARC) (PLC)
Marketing Loan Eligibility ARC PROVISIONS Payment band or range
Payments
Payment Factor
Expected Outcome
One time choice – ARC or PLC
Yes for both ARC, PLC
86% to 76%
5-year rolling Olympic avg. revenue – Yield/Price plug
85% - County level65% - Farm level
Farm Bill Conference ProvisionsItemPLC PROVISIONS
Payment Factor
Reference/Target Prices
Expected Outcome
85% of base
Corn $3.70/bu.
Wheat $5.50/bu.
Soybeans$8.40/bu.
All rice $14/cwt.
Japonica Rice $16.15/cwt.
Sorghum $3.95/bu.
Barley $4.95/bu.
Other oilseeds$20.15/ton
Peanuts $535/ton
Farm Bill Conference Provisions
Item
SUPPLEMENTAL COVERAGE OPTION (SCO) Availability Coverage Premium Subsidy
Expected Outcome
Begins with 2015 crop yearARC = No | PLC = Yes
Up to 86%
65%
Farm Bill Conference ProvisionsItem
STACKED INCOME PROTECTION PROGRAM – STAX
Availability
Coverage band
Reference Prices
Premium Subsidy
Payment Limit
Transition Payment
Expected Outcome
Cotton only
Begins with 2015 crop year
Not less than 10%, nor more than 30% of expected county revenue in increments of 5%
None
80%
None
Yes, for 2014 crop year and 2015 for counties where STAX is unavailable
Farm Bill Conference ProvisionsItem
CROP SUBSIDY PROVISIONS
Payment limit
Adjusted Gross Income Actively engaged
Expected Outcome
$105,000
*Currently 40K Direct 65K CCP
$950,000 3-yr. avg. limit
Focus on multiple growers who qualify for management only option. Goal: rational reform, but get at abusers
Farm Bill Conference ProvisionsItemConservation Reserve Program (CRP)
Conservation Stewardship Program (CSP)
Environmental Quality Incentives Program (EQIP)
Expected OutcomeAcreage cap lowered to 24 mil. by FY 2018. CRP acres, 1.6 mil. ac. fewer than now. Will include carve out for grasslands as Grassland Reserve Program eliminated
Max acres cut to around 10.3 mil. ac., or 2.4 mil. fewer than enrolled in recent years
Continued, carve out for wildlife habitat – Appropriations bill cut
Farm Bill Conference Provisions
Item
Country-of-origin labeling
Budget savings
Expected Outcome
Under discussion – could be voted on
$25-$30 billion/10 years, inclusive of sequestration impacts
Farm Bill Conference ProvisionsItem
DAIRY POLICY
USDA Secretary authority
Blended indemnification payment
Expected Outcome
No supply management language.
Authority to annually adjust premium paid by plus or minus 5%
Gross margin insurance indemnification would be blended payment when a producer exceeds historical (base) production – full payment on historical prod., lower payout on production exceeding base.
Will We Ever Get a New Farm Bill?
44
Process: Senate – House
The vote: Dems push to include unemployment aid extension
Another farm bill extension? Last resort, but…
Outlook for elections
45
2014 Congress
– -- House: GOP likely will retain control
– -- Senate: Key is candidates
2016 President
– -- Democratic candidate
– -- Republican candidate
What Will the 2014 Election Be About?
Answer: We Don’t Know Yet
2014: The House
Today: 234 Republicans, 201 Democrats (Democrats need +17 seats to win control)
Cook Outlook: Minimal Net Change
Terrain: House Democrats Would Need to Win GOP-Leaning Territory to Get to 218 Seats
Few Realistic Republican Targets: There are only 5 GOP members left from Democratic-leaning seats
After 2012 Gains, More Democrats Exposed: There are 18 Democrats left in GOP-leaning seats.
Source: Cook Political Report.
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 is a Toss Up.
Retirements in MT (Baucus), SD (Johnson), WV (Rockefeller)
Democrats Must Defend 7 Seats in States Romney Won:
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
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