Grains

The coming year is pivotal for agriculture because we will find out if we have entered a stabilization zone or if we begin another leg down, says Terry Barr, senior director, CoBank, Washington, D.C. Barr, along with fellow nationally recognized ag economist David Kohl, highlighted key differences in the current setback in farmland values and the 1980s collapse at the American Society of Farm Managers and Rural Appraisers annual conference. “The impact of energy prices on commodity prices will likely remain benign, with crude oil ranging from $45 to $60 a barrel,” Barr notes. “Meanwhile, world economies are still in transition after what their central banks and governments did to stimulate their economies out of the financial crisis. This means we will have sustainable, moderate growth in demand but not what’s needed for another explosive burst in demand for commodities.” Barr says China was growing at up to 14% annually during the supercycle into 2013, but is growing at a 6% rate now. “If you’re going to drive something powerful in commodities, it will probably come from the supply side rather than demand,” he says. The U.S. economy is on very solid footing and is in one of its longest run-ups in history, Barr notes. “But there is no reason to believe we are on the brink of a recession,” he observes. “The recovery is very extended, but it is very subdued. The U.S. economy is only 14% larger than it was at the last business cycle high. Usually, the economy surges 35% to 50% greater than its previous peak before a recession occurs.” Meanwhile, central banks have added $14 trillion to their balance sheets. The U.S. Federal Reserve added $3.5 trillion alone. “The Federal Reserve is the only central bank raising interest rates,” Barr says. “This is strengthening the U.S. dollar and putting the U.S. in an uncompetitive position. I look for short-term interest rates to move to 2.5% to 3% by late 2019 as a result.” Overall, the next three to five years will still be challenging for agriculture as the world works through the hangovers from the massive stimulus injected into world economies to ward off the financial crisis. “But the long-term outlook is still very positive for agriculture as a resource-challenged world scrambles to feed and clothe its population,” Barr says. “The 1980s was a credit bubble, now we’re in an asset bubble,” notes Kohl, professor emeritus, Virginia Tech. “This recent run-up in farmland values has much more equity and working capital behind it. Marginal land is the first to correct, and we’re seeing those values down as much as 25% in some areas.” Looking ahead, Kohl is watching exports. “They are 20% of ag incomes,” he notes. Impacting that income stream is the value of the U.S. dollar, growth in the U.S. economy and interest rate policies of the Federal Reserve and the central banks of Europe, China and Japan. Any changes in U.S. trade policy could also adversely impact this key source of ag revenue. With the world glut of grains, oilseeds and commodities, Kohl says it will take a surprising change in production to lift commodity prices. “The good news is global economic growth is synchronized. The emerging market economies are moving higher together, but they need to grow at a 7% to 9% annual pace to lift U.S. commodity prices.” Fortunately, the exposure of U.S. agriculture to energy prices has decreased as the U.S. has become a major oil producer. “About $8 to $10 spent on ag inputs is spent on something related to oil,” he notes. “But the U.S. is no longer dependent on crude oil imports and has become a major producer. It use to be $60 to pump U.S. crude oil. Now it is closer to $40 a barrel and will soon be $20 a barrel.” That will help restrain input costs going forward.

Food companies continue to demand cage-free eggs, which has contributed to an overall increase in supplies, but it is the oversupply of conventional table eggs that has worked to depress prices. A new report from CoBank's Knowledge Exchange Division notes that U.S. egg production, pricing and producer profitability have been highly volatile the last two years. However, the report, authored by Trevor Amen, CoBank animal protein economist, says U.S. egg markets are returning to more normal production growth, producer profitability and specialty egg premiums. CoBank is a $124 billion cooperative bank and member of the Farm Credit System. "The avian flu outbreak in 2015 caused egg prices to climb and incentivized egg producers to boost output. Coincidentally, 229 major food companies pledged to use cage-free eggs by 2025 just as egg prices went into freefall," Amen said. "Since then, cage-free production has surged amidst a surplus of inexpensive, conventionally produced eggs." This oversupply has depressed demand for higher priced cage-free eggs, a condition that's expected to last for the next several months as the conventional supply draws down. Meanwhile, total table egg production is expected to return to historical growth patterns as low egg prices encourage producers to pare back production and profitability returns to normal levels. "This will allow the price premium for cage-free eggs to recover to historical averages and help facilitate the transition in the coming years as a reduction in cage-free egg production brings supply into alignment with true demand," Amen said. Cage-free egg production, however, is not without critics. Thirteen states have filed a lawsuit alleging that Massachusetts new voter-approved cage-free law is unfair to their farmers' market access to the state. The law, which goes into effect in 2022, would require all pork, veal, and eggs farmed and sold in Massachusetts come from animals not confined in small cages. Arguing the law violates the U.S. Constitution, which gives Congress the power to regulate interstate commerce, the attorney generals from those 13 states contend the law would force out-of-state farmers to change their production methods if they wanted to sell their meat and eggs in Massachusetts. Regarding food company pledges to market all or a significant portion of their eggs as cage-free, the CoBank report says about 223 million layers, or nearly three quarters of the entire layer flock, would need to meet the criteria. It will cost the industry about $10 billion to fully make the transition to meet the cage-free pledges, with most of that expense coming in the form of remodeling existing layer houses or the construction of new facilities. The current overabundance of conventional eggs makes this investment difficult in the near term, the report says. However, the egg market is expected to strengthen, providing an economic incentive to respond to market forces. Robust egg exports are helping to reduce domestic egg supplies and are anticipated to support wholesale values in 2018. The rebalancing of the market will allow the cage-free transition to be driven by fundamental consumer demand rather than pledges made by retailers and food manufacturers, Amen said. "As a result, large egg producers are taking a more cautious approach to cage-free expansion by focusing on long-term growth potential and market premium expectations," Amen said.

The World Trade Organization's (WTO's) 11th Ministerial Conference in Buenos Aires, Argentina, this week did not result in major outcomes that will guide the future of the global trade body, but did offer a strong statement of support for farmers' access to the best available technology. The meetings brought together all members of the WTO for a biennial session covering the range of topics facing global trade. Ahead of the meetings, the U.S. Grains Council (USGC) and other ag organizations expressed support for actions during the talks that would call for full farmer access to tools and technology, oppose regulatory barriers lacking sufficient scientific justification, and defend against attempts to weaken rules on domestic support for agriculture. On Wednesday, as the meetings concluded, the Council and others expressed support for the leadership of the U.S. Trade Representative (USTR) in opposing new attempts to weaken rules on domestic support for agriculture, specifically by creating loopholes with public stockholding programs for food security purposes. In a statement, Council President and CEO Tom Sleight said avoiding trade-distorting policies is critical to a well-functioning global trade system and achieving food security. "Without resolving the trade-distorting impacts of these policies, it is impossible to support addressing reforms in overall domestic supports," he said. "We have to establish the right trade architecture now if we are to be successful." To help farmers achieve this bounty, the Council and others strongly support their access to the best available innovations, including seed, crop protection and data technologies. At the Ministerial, ministers from 17 countries emphasized the importance of this access and opposed regulatory barriers lacking sufficient scientific justification in a first-of-its-kind joint statement. The signatories took a step forward in calling out countries that undermine farmer choice through regulatory barriers not scientifically justified. The countries signing on also said they remain committed to expanding knowledge and capacity for developing countries in pesticide maximum residue levels (MRLs). The Council and major U.S. organizations in the corn, soybean, sorghum, barley, wheat and rice industries welcomed this move, as did U.S. Department of Agriculture (USDA) Secretary Sonny Perdue and others. The leaders of MAIZALL held side meetings in Buenos Aires including a board meeting. While there, they participated in WTO sessions to urge cooperation on regulatory issues in the Western Hemisphere and emerging opportunities for partnership on the African continent. The group also got a briefing on the status of pesticide policies in the European Union and the threat to trade posed by applying hazard criteria to the setting of MRLs. The members represented in Buenos Aires committed to collaboration on trade issues related to crop protection products and agreed to support the joint statement on MRLs signed the next day. The Council and the National Corn Growers Association (NCGA) are the U.S. members of this strategic partnership, which also includes ABRAMHILO and MAIZAR, the major corn producer organizations in Brazil and Argentina. “As producers, we all rely on access to technology to sustainably produce and export our harvests," said Floyd Gaibler, USGC director of trade policy and biotechnology, on behalf of MAIZALL at an event related to the farmer access statement. "These tools are science-based and most are size neutral and should be accessible to all farmers large and small if we are to meet the challenges of global food security and eliminating poverty. However, we can meet these challenges only if we remove the regulatory barriers that are disrupting trade in food and agricultural products."

Federal police in Brazil served 14 search warrants on Dec. 11 associated with an ongoing bribery investigation involving the world's largest meatpacker JBS SA. Police shared with Reuters the warrants were served after JBS executives testified in a plea deal and suggested 160 million reais ($49 million) in bribes had been paid to speed up the release of tax credits to the meat packer. A statement from JBS claims the tax credits were "legitimately due to the company." The targets of the warrants are not affiliated with JBS or its parent company J&F. According to police a lawyer who died in 2016, along with an unnamed federal revenue service auditor, a businessman and an accountant are being investigated. Warrants were served in the following cities in the state of Sao Paulo: Caraguatatuba, Campos do Jordo, Cotia and Lins. It is alleged the tax credit scheme could actually be worth 2 billion reais ($600 million). The case is connected to brothers Wesley and Joesley Batista's admitting to authorities they bribed 1,900 politicians in Brazil which led a plea deal meeting in May. Following the plea deal the brothers were allegedly for arrested insider trading prior to the meeting. The bothers deny any insider trading occurred but they are accused of making currency trades that earned $44 million. Wesley was replaced by his father Jose Batista Sobrinho as the chief executive officer of JBS, the company Jose founded and bears his name with its initials. Both brothers resigned from the JBS board of directors and are currently in jail. Despite all of the recent bad news in Brazil, JBS want to list the U.S. subsidiary with an initial public offering for JBS Foods International BV. There are also plans to sell the company's Five Rivers Cattle Feeding LLC, the largest cattle feeder in the U.S. with a capacity near 1 million head.

Investors remain on alert over the threat of NAFTA talks failing even as negotiators meet this week in Washington and seek minor victories on less contentious issues. The latest meetings to revamp the North American Free Trade Agreement will run through Friday, largely out of the spotlight. Cabinet-level officials won’t attend for the second time since negotiations began in August, and the Trump administration is preoccupied with efforts to push through tax cuts by year-end and avoid a government shutdown. The distractions in Washington haven’t eased pressure on President Donald Trump to preserve the trade deal, which governs more than $1 trillion in annual commerce. Senators who support NAFTA warned the president last week of the economic risks of following through on his threat of withdrawal. Goldman Sachs Group Inc. said it expects Trump will ultimately announce his intention to exit from the accord and that fresh tensions will probably emerge at the next full negotiating round in January. “While we expect the rising odds of tax reform to put less pressure on the trade agenda, we do not expect passage of tax reform will raise the odds of a successful NAFTA renegotiation,” Goldman Sachs said in a note to clients. “And so a withdrawal announcement looks more likely than not, even if tax reform is enacted soon.” Currency Markets The move would cause a disruption in currency markets, driving down the peso against the dollar, even if it doesn’t immediately cut back trade, it said. Bouts of weakness in the peso this year have reflected uncertainty over NAFTA’s future. Trump is seeking all the support he can get in the Senate and House to reconcile tax bills and score his first major legislative victory, meaning he’s wooing lawmakers who’ve begun to speak out in favor of keeping NAFTA. The last round of NAFTA talks ended with U.S. Trade Representative Robert Lighthizer warning that Mexico and Canada need to make concessions, as the only acceptable deal will shift trade flows in the U.S.’s favor. Many of the U.S. proposals “are so clearly non-starters for our NAFTA partners that it doesn’t seem like they’re moving forward that much,” said Douglas Holtz-Eakin, president of the American Action Forum and a former chief economist of the Council of Economic Advisers under George W. Bush. Research published by the forum this month found a NAFTA withdrawal would jeopardize 14 million U.S. jobs and cost consumers at least $7 billion. Divisive Subjects Observers expect the Washington round to yield progress on issues such as telecommunications, while making no or slower advances on divisive subjects like U.S. proposals on increasing the local content requirements for vehicles, adding a five-year termination clause and dismantling Canada’s protected dairy sector. The negotiators will spend among the most time discussing rules of origin, which govern content requirements for goods to qualify for duty-free benefits. They’ll also hold sessions on digital trade and state-owned enterprises, among other topics, according to an agenda of the talks. Thorny issues like agriculture and dispute settlement don’t appear on the schedule. The clock is running down to secure a deal by March, to avoid running into the campaign for Mexico’s presidential election in July and the potential lapse of the U.S. administration’s fast-track negotiating authority. Any nation can announce its intent to withdraw from the accord with six months’ notice, although the U.S. Congress has authority over aspects of tariffs and trade. ‘Toxic Issues’ “We’re going to look at Nafta very seriously,” Trump told reporters on Dec. 5. “Not easy to have an election coming up. We’ll see how that plays.” Canadian Prime Minister Justin Trudeau struck a mostly upbeat tone last week when asked about the NAFTA talks during a trip to China, where Canada failed to reach a deal to launch bilateral negotiations. If NAFTA negotiations end without a deal, Canada would be receptive to considering one-on-one talks with the U.S. on trade, said Trudeau. Also last week, Canada’s chief negotiator Steve Verheul described two tracks, one with progress being made and another where Canada and Mexico are rejecting “extreme” U.S. proposals. “We will not accept U.S. proposals that would fundamentally weaken the benefits of NAFTA for Canada and undermine the competitiveness of the North American market,” Verheul said. The Mexican peso may drop to at least 20 pesos per U.S. dollar if negotiations deteriorate, while the Canadian dollar may slump to C$1.35, Goldman said. “The fact remains that the sides are far apart on issues where we struggle to see an obvious middle ground.”

U.S. pork exports remained ahead of last year's record volume pace, and beef exports are poised to break $7 billion this year for only the second time, according to October export results released by USDA and compiled by the U.S. Meat Export Federation (USMEF). October pork exports were the largest since May, totaling 211,592 metric tons (mt), up 5% from a year ago, valued at $565.4 million, up 8%. Through the first 10 months of the year, pork exports increased 8% in volume (2.005 million mt) and 10% in value ($5.28 billion) from the same period last year. Exports accounted for 25.4% of total pork production in October (steady with last year) and 21.6% for muscle cuts only (up slightly from a year ago). For January through October, these ratios increased about one percentage point from a year ago, to 26.4% of total production and 22% for muscle cuts. October export value averaged $51.41 per head slaughtered, up 9% from a year ago and the highest since July. Through the first 10 months of the year, per-head export value was $52.64, up 7%. Pork Exports Rebound to Mexico, Japan Following a modest slowdown in September, pork exports to leading volume market Mexico regained momentum at 69,529 mt, up 7% from a year ago, valued at $129.8 million (up 13%). Through October, exports to Mexico are well-positioned for a sixth consecutive annual volume record at 655,527 mt (up 14%) valued at $1.24 billion (up 17%). Mexico is an especially important destination for U.S. hams, and consumption growth in Mexico has been critically supportive of ham prices in this time of record U.S. pork production, explained USMEF President and CEO Dan Halstrom. "Although ham prices are currently below last year's level, they have been up an average of 2 percent in 2017 and predictions of ham prices plummeting have not come true," he said. "Strong demand in Mexico is absolutely a key reason for this. USMEF has focused on expanding per-capita pork consumption in Mexico, which is up by about one-third in the past 10 years. This has helped make Mexico an even more critical and more reliable trading partner for the U.S. pork industry.” Exports to leading value market Japan also trended upward in October, increasing 5% from a year ago in both volume (32,475 mt) and value ($134.5 million). January-October exports to Japan were 322,422 mt (up 1%) valued at $1.33 billion (up 3%). This included 176,609 mt of chilled pork valued at $834 million, down 2% in volume but 2% higher in value than a year ago. Record Month for South America Led by Colombia and Chile, October pork exports to South America reached a record 12,624 mt (up 31% from a year ago) valued at $32.3 million (up 29%). Through October, exports to South America were 78% ahead of last year's pace in both volume (85,175 mt) and value ($218.8 million), already surpassing the previous records set in 2014. Export volumes to Colombia and Chile have also exceeded previous highs reached in 2014 and 2013, respectively. Other January-October Results for U.S. Pork Exports Having gained further momentum in October, exports to South Korea have already exceeded their full-year 2016 totals in both volume (136,041 mt) and value ($372.7 million). Compared to the first 10 months of last year, exports were up 27% and 30%, respectively. Led by mainstay markets Honduras and Guatemala, exports to Central America are on a record pace, totaling 56,906 mt (up 7% year-over-year) valued at $138.4 million (up 9%). Exports also increased substantially to El Salvador and Nicaragua, and edged slightly higher to Costa Rica. Exports are also on a record pace to the Dominican Republic – up 26% year-over-year in volume (26,476 mt) and 32% in value ($60.6 million). Despite trending lower in October, pork exports to the ASEAN region were still 16% ahead of last year's pace in volume (39,910 mt) and 31% higher in value ($109.2 million), led by strong performances in the Philippines, Singapore and Vietnam. October exports to China/Hong Kong were below last year's volume but steady in value, reflecting the upward trajectory of China's domestic pork production. Through October, exports to the region dropped 8% from a year ago in volume (413,032 mt) but were just 1% lower in value ($872.8 million) as continued strong demand for variety meat largely offset the slowdown in muscle cut exports. Complete January-October export results for U.S. pork, beef, and lamb are available from USMEF's statistics web page. Monthly charts for U.S. pork and beef exports are also available online.