090115 The Year In Agriculture: 2008

January 12, 2009

By Lisa Hare, Yankton Press & Dakotan -- One year ago, I wrote a feature on free trade and the agricultural climate in our globalized economy. It was written in January pre-$8 corn; pre-$17 soybeans; pre-$20 wheat. It was before crude oil slipped past $100 a barrel.

Who could have guessed how it all would work out? A short year later, with the U.S. economy in a major recession and the global economy in turmoil, one could reasonably argue that despite record highs in so many commodity markets, very little has "worked out" for U.S. farmers.

MARKETS

In that story from last January, then-president of the National Family Farm Coalition George Naylor warned, "Only the 'deep pockets' will be able to survive the economic storm that will result when prices collapse."

And true to Naylor's foretelling, in the space of less than three months, the record prices realized by most major commodities were cut in half.

"There were a lot of things that were so unprecedented that a year ago, no one could have believed they'd be possible," said Brian Hoops, president of Midwest Market Solutions, Inc. in Yankton.

Hoops attributed the enormous inflows of money from outside investors into the grain markets to the record prices.

"When they pulled that money out, of course the prices dropped," he said.

The World Bank now estimates that global trade will shrink this year by more than 2 percent the first set-back in globalization in more than a quarter-century.

U.S. ag exports hit a record $115 billion in fiscal 2008, but a failure to enact stalled, bilateral free-trade agreements limited further export growth.

Doha Round's failure means countries can impose tariffs that could further shrink global trade volumes by $728 billion to $1.7 trillion, according to a new report by the International Food Policy Research Institute.

"On the whole, we'll have lower prices, because we'll have less speculative money in the market," said Hoops. He added that the upside to that is, marketing should be less frustrating for farmers. "We'll start to respond to more traditional fundamentals rather than watching what crude oil and the U.S. dollar and the stock market are doing," Hoops said.

But, Hoops also added that he believes the farming sector of the U.S. will be impacted by the crunch in the overall economy.

"I think we're going to see more consolidation," he said. "There will be contraction in the farm sector like what we went through in the '80s, and in the hog markets in the '90s."

Hoops predicts agriculture is entering a phase during which some people are going to go out of business.

"Maybe some elevators, some of them family farms," he said.

"Farm prices will continue to contract for a while," he added.

That's not the best news for producers looking ahead to 2009.

With 2008's record prices for corn, soybeans and wheat that reached $8, $17 and $20 per bushel, respectively, farmers saw inputs skyrocket accordingly.

Now, with corn at a two-year low below $3 in early December and beans below $8, farmers are saying they need $4-$4.50 corn and at least $9 for beans to be profitable with this year's higher input costs.

"We're at a very vulnerable position," said Nebraska Farmers Union president John Hansen. "All our production costs that are already set need to be offset by market prices, but the commodity prices have already collapsed."

Another factor which will affect producers in the 2009 growing and marketing seasons is the change in the income safety net provision of the Farm Bill.

"Commodity prices need to equalize with production costs because the income safety net is not there," Hansen said. He added that if the federal deficit continues to worsen, more of those funds intended for the safety net could get funneled into other programs.

In the livestock markets, hog prices have taken a tumble on speculation that export demand for U.S. pork will decline.

USDA data showed U.S. pork shipments in 2009 will fall to 4.1 billion pounds, down 8.9 percent from a November forecast effected in part by Mexico's recent ban on U.S. meat products. It is a response, some speculate, due to its alliance with Canada in opposition to U.S. Country of Origin Labeling mandate.

Cattle prices have slumped for the same reason, adding to that speculation that demand for beef will fall as the recession deepens and U.S. economy continues to tighten.

POLICY

The biggest change in ag policy for the year came with the enactment of the Farm Bill.

Enacted in late June, the 2008 Farm Bill has 15 titles and more than 600 provisions 50 percent more than the 2002 Farm Bill.

Highlights include :

Country-of-Origin-Labeling mandate;

Addition of Emergency Watershed and Emergency Conservation programs;

Expanded Renewable Energy Development Programs.

But many producers and farm organizations were disappointed with the outcome of some of the more contentious provisions of the Farm Bill, such as the competition title and a lower AGI cap for receiving subsidies.

Another landmark case, still in debate, came in March when JBS, the world's largest beef packer , announced its intention to purchase National Beef and the Smithfield Beef group. Those acquisitions would have reduced the U.S. cattle market from five major packers to just three and would have made JBS the largest U.S. beef packer with nearly 35 percent of the cattle slaughter market, followed closely by Tyson and Cargill. The top four packers JBS, Tyson, Cargill and National together slaughter more than 85 percent of U.S. cattle. The cause of these competitive problems is the packers' use of captive supplies, which permits the meatpackers to manipulate prices and drive down compensation to cattle producers.

But on Oct. 20, the U.S. Justice Department and 13 state attorneys general filed a lawsuit with the U.S District Court in Chicago seeking to stop the Brazilian meatpacker's from violating U.S. antitrust laws with its proposed acquisition of National Beef Packing. According to the Justice Department, their antitrust suit was joined by the states of Colorado, Iowa, Kansas, Minnesota, Missouri, Montana, North Dakota, Ohio, Oklahoma, Oregon, South Dakota, Texas and Wyoming.

Then, on Dec. 15, the DOJ and the state attorneys general involved suspended their lawsuit to instead enter into settlement negotiations with JBS.

Cattle producers, along with several farm organizations, are anxiously awaiting resolution on the issue in 2009.

ENERGY

Crude oil tied more tightly to the ag economy than ever before hit a record high in 2008 when it climbed above $100 a barrel. By year's end, crude contract for February settled at $37 a barrel on the New York Mercantile Exchange.

Though lower fuel costs have given consumers and producers alike some breathing room amidst a choking economy, focus on renewable energy development remains high.

"The renewable energy sections of the new Farm Bill are very farmer- and rural development-friendly," Hansen said.

The 2008 Energy Independence and Security Act set a goal of producing 36 billion gallons of biofuels by 2022 a mandate that was meant to give a big boost to biofuel makers. But a December report from the U.S. Energy Information Administration cast doubt on that goal, saying the nation will probably only be able to produce 30 billion gallons by that deadline.

The woes of corn-based ethanol companies were highlighted by the demise of the once high-flying VeraSun Energy Corp., which declared bankruptcy in October.

"Who would have though that VeraSun one the biggest ethanol companies would file bankruptcy?" Hoops said.

VeraSun billed itself as the world's largest ethanol company, with 14 ethanol plants with a capacity to produce 1.4 billion gallons of ethanol per year about 14 percent of the U.S. ethanol production capacity.

But, like other makers of corn-based ethanol, the company had contended with high corn prices and subsequent razor-thin margins through much of the year, and had amassed about $1.5 billion in debt.

While nearly all makers of corn-based ethanol in 2009 saw their business drop and valuations plummet, companies promising to make ethanol, biodiesel and a host of other liquid fuels from non-food sources like switchgrass, trash and algae raked in the cash.

Whether those "next-generation" biofuel companies will do as well in 2009 is an open question, however. None have so far produced fuel in commercial volumes at prices the market can bear. And whether venture capitalists will continue to have an appetite for investing in order to get them there is another question, given the global economy.

A recent survey by investment firm ThinkEquity indicates that cellulosic ethanol companies will be able to supply only 28.5 million gallons in 2010, short of the government's 100 million gallon goal

President-elect Barack Obama promised during his campaign to push for the country to use 60 billion gallons of "advanced" biofuels by 2030. He pledged to require that all new vehicles sold in the country be "flex-fuel" vehicles, able to use fuel containing mostly biofuel, by the end of his first term. And he called for a national low-carbon fuel standard that could be a boon to the industry.

ENVIRONMENT

A report issued in April by the International Assessment of Agricultural Knowledge, Science and Technology for Development (IAASTD) a report initiated by more than 400 scientists from around the world said the way the world grows its food will have to "change radically to better serve the poor and hungry if the world is to cope with a growing population and climate change while avoiding social breakdown and environmental collapse."

The assessment was considered by 64 governments at an intergovernmental panel in Johannesburg, South Africa, that same month.

The authors' brief was to examine food production systems in place in relation to hunger, poverty, the environment and equity.

Though modern agriculture has brought significant increases in food production, the report claims the benefits have been spread unevenly and have come at an increasingly intolerable price, paid by small-scale farmers, workers, rural communities and the environment.

The authors have assessed evidence across a wide range of knowledge that is rarely brought together. They conclude that continuing with current trends would exhaust our resources and put our future in jeopardy.

What started in 2007 with E. coli bacteria found in fresh spinach, continued into 2008 with melamine-laced gluten, tomatoes with salmonella and thousands of cases of contaminated drinking water resulting from spring flooding.

As stated in the IAASTD report, the way to meet challenges in producing enough food lies in putting in place institutional, economic and legal frameworks that combine productivity with the protection and conservation of natural resources like soils, water, forests, and biodiversity while meeting production needs.

While the year saw an explosion in organic farming and "buy-local" programs, political will still falls far from the tree of environmental protectionism.

California poultry and egg production, as well as a few meat processing facilities, were brought under scrutiny on the basis of humane treatment of animals. But the far-reaching environmental effects of industrialized agriculture such as antibiotic resistance, nitrate poisoning and shrinking ecologies of water and soil life are issues for which no policies exist, though carbon trading, which gained momentum in the U.S. in 2008, is tip- toeing in that direction.

"To argue, as we do, that continuing to focus on production alone will undermine our agricultural capital and leave us with an increasingly degraded and divided planet is to reiterate an old message," said Professor Bob Watson, Director of IAASTD. "But it is a message that has not always had resonance in some parts of the world."

LOOKING AHEAD

As eventful and unpredictable as 2008 was, by all accounts, 2009 promises to be every bit as interesting.

Farmers and ranchers have always been the providers of food and sustenance, and they continue to be, though the nature of that role has grown more complex in recent years.

"Every fiscal and financial problem that is faced by the rest of our society and the international community will eventually percolate to U.S. agriculture," Hansen said.

The New Year dawns on the U.S. in the midst of what some fear may be the second Great Depression for the nation. Though we try to take our lessons from history where we can, our more globalized method of production agriculture sets this era apart from the Dirty Thirties. There are many more interwoven variables to the problems and their solutions.

"We must cooperate now, because no single institution, no single nation, no single region, can tackle this issue alone. The time is now," said IAASTD panel member Professor Judi Wakhungu.

No matter how you slice it, president-elect Obama, newly appointed Secretary of Agriculture Tom Vilsack, and on down to each individual farmer and rancher have a tremendous task and responsibility at hand that only a more wholely inclusive perspective can encompass.

"You name it, every sector is connected," Hansen said.

As U.S. farmers and ranchers embark on 2009's uncharted path, only one thing is certain: It's bound to be very different from 2008.


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