Ag Outlook by Jim Wiesemeyer at FCS Financial Ag Seminars

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?

5

Major Issue Differences

Healthcare reform: Rollout termed a “debacle”

Intelligence snafu: Sense U.S. losing clout

Executive orders: Climate change, other issues

Regulations: Growing backlog at OMB

Farm Bill: Finally, but what a chore.

Immigration: Senate yes. House piecemeal.

From Dysfunctional to Functional?

6

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

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

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.

Risks to Global Economic Recovery

Policy Realignment

2014-18 ???

Rising Middle Class

2004-08 Avg.=4.5%

Economic Turmoil 2009-13

Avg.=2.9%

9

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

-2

0

2

4

6

Percent change in annual world growth (purchasing-power parity rates)

Advanced countr ies Rest of world China India

A Fragile Global Economy Will Experience Subpar Growth With Significant Vulnerabilities

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

82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22 24

-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 (February 2014), 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 (modified)

Short Term Deficit Relief Means Long Term Revenue and Spending Changes Are Post-2014

CBO new estimates

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

Rising Global

Middle class

Economic Turmoil 2009-13

Policy Realignment

2014-18

Improving Global Economy, Peaking Ethanol and Growing Grain Stocks Trigger Market Transitions

?

15

Farm Income Remained Strong in 2013 But will see major downturn in 2014

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15

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 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

Balance Sheet of Agriculture is Better Prepared for Volatility and Transition

68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

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 2008-2014

Assets …. +40%

Debt ……....+21%

Why Effective Safety Net Needed Ahead

19

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

Farm Bill: Patience and Wisdom…

20

Developing

Countries

Farm Bill Process…Fifth calendar year

Rep. Peterson holds First

Hearing in House on Farm Bill

2010

1

1-year extension of

2008 Farm Bill

Jan 2013

6

Congress

approves

Obama signs

Feb 2014 2008 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 Bill

House 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 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

Nutrition, 764

Crop Insurance, 84

Commodities, 59

Conservation, 62

Trade 3.4 Horticulture 1.1 Energy 0.2 Research 0.1 Misc (NAP) 1.4

Source: CRS using CBO estimates, Oct 10

10 year baseline $973 billion

New Farm Bill – Changes

25

Direct payments: Gone, but…

Transition payment: Cotton only

CCP, ACRE, SURE: Gone

FARMER CHOICE

Area

Revenue

Coverage

Price

Loss

Coverage

ARC

County

Coverage

ARC

Individual

Coverage

Crop

Insurance

Supplemental

Coverage

Option

(if not in ARC)

Stacked

Income

Protection

Plant (STAX)

Program Crops

Title I: Commodities Title XI: Crop Insurance

Upland Cotton

New Farm Bill – Major Provisions

27

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

New Farm Bill - Timing

28

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

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

BASE ACRES

Crop Base acres

2012

Planted acres

2009-2012 avg

Wheat 73.7 55.7

Corn 84.3 90.9

Minor feed grains 23.3 12.0

Soybeans 50.1 76.8

Upland cotton 17.9 11.6

Rice 4.4 3.0

Peanuts 1.5 1.3


30

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.

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


32

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.

New Farm Bill – Pay caps, AGI

33

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

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.


If a farmer goes with ARC, especially in the

Midwest, they will go the county ARC route, and

not the individual option..


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.


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.


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.


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.


Price expectations are key. The lower the price

expectation a farmer has, the more interest they

have in the PLC option.


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.”


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

43

COOL: No change

King amendment: Struck in conference

GIPSA poultry rule: No provision

Farm Bill: Livestock

44

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

Farm Bill: Energy

45

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

Trade Policy Issues

46

• 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)

– Time limited/only on TPP

New Farm Bill - Trade

47

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.

U.S. Agriculture Export Destinations Have Increasing Asian Flavor

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

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 2013

1.Japan 2. Canada 3. EU-27 4. Mexico 5. South Korea 6. Taiwan 7. China 8. Hong Kong 9. Egypt 10. Philippines 11. Turkey 12. Indonesia 13. Russia 14. Dominican Rep. 15. Saudi Arabia Total all exports

9.3 7.5 6.5 6.3 2.5 2.0 1.5 1.2 1.1 0.9 0.7 0.7 0.7 0.5 0.5

50.8

Top 15 Markets 2000 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

Bil. US$ Bil. US$

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

50

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

Outlook:

U.S. Agriculture

51

Chart source: Energy Information Administration)

A 50 percent increase in recoverable global gas supplies??

Implications for geopolitical balances?

New Energy Paradigm is a Global Event

Oil Prices: Absent Geopolitical Turmoil Oil Prices Should Trend Lower in Coming Years

19861987

19881989

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

2006

20072008

20092010

20112012

20132014

2015

$10

$20

$30

$40

$50

$60

$70

$80

$90

$100

$110

$120

$130

$140

Dollars per barrel; spot price West Texas Intermediate

2011 avg.

$95

2012 avg.

$94

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.

2014-15 avg.

$85-95

2013 avg.

$98

Natural Gas Prices Will Reflect Higher Production Potential and Pace of Conversion

19921993

19941995

19961997

19981999

20002001

20022003

20042005

2006

20072008

20092010

20112012

2013

20142015

$0.00

$3.00

$6.00

$9.00

$12.00

$15.00

Dollars per million Btu (Henry Hub)

2012 avg.

$2.75

Questions for natural gas: Economic recovery and shifts in energy use will boost prices. New discoveries will continue to increase future supplies! 2011 avg.

$4.00

2013-14 avg.

$3.75-4.25

2011 avg.

$4.00

* 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 %

Relative Growth Rates and Realigning Monetary Policies Will Impact Value of U.S.

Dollar

Dollar declined by over 25% after

floating in 1973!

A Resource Challenged World Will Continue to Support Commodity Markets in the Future

2000 2030

0

200

400

600

800

1000

Million people

China - 56 mil.

Rest-of-World

375 mil.

431 million

950 million

India - 58 mil.

China - 361 mil.

Rest-of-World

532 mil.

419million

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 (protectionism)

Political decisions (inward?)

It is not a straight line growth

path. Significant volatility will

prevail around growth path.

Chart source: Knowledge Exchange Division, CoBank, ACB (confidential and proprietary)

Crop Supplies and Demand Shifts Are Signaling Transitions for Agricultural Sectors

Export Markets

Export Reliance: Emerging markets Disease (FMD) U.S. $ rebound Rising competition Trade disputes

Feed Costs: Low stocks Rising price volatility Yield/weather issues Ethanol

Low Cattle Inventory, Record Exports and Lower Feed Costs Spur Meat and Dairy Sectors

Outlook for elections

73

2014 Congress

– -- House: GOP likely will retain control

– -- Senate: Key is candidates

2016 President

– -- Democratic candidate

– -- Republican candidate

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?

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)


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)


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

Education

Ag Outlook by Jim Wiesemeyer at FCS Financial Ag Seminars