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All Eyes on Washington

December 4, 2009
 
 


Factors influencing agriculture are broad and far-reaching as we move into the second decade of the century. With a transformational government in Washington and economic turmoil at home and abroad, key factors influencing U.S. agriculture in the next year are greatly intertwined.

Top Producer has identified five key policy-related areas to watch in 2010 and offers perspective on how the scenarios may play out.



Climate Change

> High on the list of Obama administration initiatives is climate change legislation. Already passed through the House of Representatives, the bill's future is less certain in the Senate.

"There are about 24 fence-sitters in the Senate and what the analysis shows could go a long way in determining what is done," says Jim Wiesemeyer of Informa Economics. "As far as agriculture, we're going to test Ag Secretary Vilsack's mantra that this is going to be neutral to very positive.

"Right now, that is based on lots of questions—it's like an algebraic equation—because you don't know what the credit offsets will be or what agricultural practices will count for credit. Looking at the Environmental Protection Agency (EPA) analysis on corn and soybean prices for the years ahead, a lot of the uptick in prices is based on millions of acres of pretty good crop ground going into pasture and forestation. Sure, you can get pretty prices, but at what cost?"



Economic Recovery

> A key factor driving exports is the relatively cheap dollar in relation to foreign currencies. However, China's quick economic resurgence may result in a temporary backlash.

China's monetary policy may change as a way to stave off inflation and that could limit demand for U.S. soybeans, says Paul Liu, president of Ceroilfood, a Chinese grocery manufacturer. Despite the fact that China's soybean crush is anticipated to increase by 2 million metric tons next year, it already anticipates lower imports.

"The GDP is growing at 8.9%," Liu says. "The government may get concerned about inflation and increase interest rates, and that will impact demand."  

If that materializes, it could lead the government to limit imports of agricultural products and tap into the country's grain reserves to keep food prices lower.

While the low dollar value has and looks to continue to sustain agricultural exports, this may not be all good, says Texas AgriLife economist Danny Klinefelter. Continued dollar devaluation could scare U.S. Treasury investors into looking for stable investments elsewhere.

Jim Wiesemeyer of Informa Economics sees this as a key factor in the Obama administration's success in the coming year. "If you keep going down, you're eventually in a hole. There has to be some glimmer of stability for the dollar. That will be a gut check for the administration, probably sometime early in 2010.

"President Obama will give the January State of the Union address and the markets will watch his priorities and tone," he says. "The budget deficit will at least have to be acknowledged because if it isn't, the currency
traders are going to lose even more faith."



Energy

> "I fear food-based biofuels will become the stepchild of the green movement—wreaking havoc with our demand," says 2009 Top Producer of the Year Lon Frahm of Colby, Kan.

He's likely correct, Wiesemeyer says. The EPA deadline for raising the ethanol blend rate was Dec. 1. Regardless of the outcome, which at press time most experts believed would be a raise to 12% from the original 10%, the issue won't go away.

"Regardless of the EPA decision, the issue is not resolved. If proponents get 12%, they will come right back and call for 15%, so they'll have to do the process all over again," Wiesemeyer says. "If they don't get an increase and EPA says it needs more research, they'll come back when the studies are completed. I'm not going to rule that out. Even the administration proponents of a higher blend could come back and say we'll have these studies completed in the summer of 2010 and that's when we'll push it."

Any decision to raise the blend rate, he believes, will be met in court.



Policy

> The new year brings new life to the Obama administration and it will be the first indication of how hard they will push their agenda. Two items are key. First, the 2010 budget was rushed and didn't reflect the administration's full agenda. Second, Democratic seats are vulnerable and Wiesemeyer, like many Washington insiders, believes "it's not a question of if, but a question of when Republicans take control of the Senate." It likely won't happen in the 2010 elections because there are relatively few open Democratic seats. In 2012 and 2014, however, there are twice as many seats open on their side of aisle.

"It may be the 2011 budget, but he'll have to show spending and the budget deficit for the next five to 10 years. The markets will then know whether it's just talk or if they at least show a path to narrowing these incredible deficits of almost a trillion dollars per year."

Does the deficit pose a threat to farm programs? "Ag funding will come into play relative to where we'll see where Obama, the Office of Management and Budget (OMB) and USDA come in on agriculture," he says. "Notice USDA is third. It will literally be shades of prior decades where OMB had more clout. Will USDA be more transformational in funding like the rest of the administration? He's a transformation President. That doesn't mean it's good or bad, but things will change…a lot. If we don't have status quo, where's it going to go? Especially with a $1.4 trillion annual deficit, sooner or later agriculture is going to have to cut."



Interest Rates

> As the owner of most of the 16,000 acres he farms, interest rates are the No. 1 issue Lon Frahm is watching.

"I'm convinced low interest rates are the only thing supporting land prices right now. As soon as rates increase, the absentee investors will find fixed-rate investments [T-bills, CDs, etc.] more attractive. At the same time, the amount of debt farmers can service will fall. I could see land falling 20% or more when rates return to more historic levels."

Klinefelter says interest rates are as low as they can get, considering Fed funds are at 0%. "The Fed could end up between a rock and a hard place, needing to raise interest rates to curb inflation and at the same time not wanting to stall economic growth. While interest rates are likely to increase, they probably will not go up significantly in 2010."



Top Producer, December 2009

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FEATURED IN: Top Producer - DECEMBER 2009
RELATED TOPICS: Policy, Consumer Demands, Economy

 
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