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At The Trough
An awful farm bill faces opposition Jun 1st 2013 | CHICAGO We plough the fields and scatter BRUCE SPRINGSTEEN once sang about “going on the town now looking for easy money”. As easy money goes, it is hard to beat farm subsidies. Handouts for American farmers were a tasty $256 billion between 1995 and 2012. The fattest subsidies went to the richest farmers. According to a study by Tom Coburn, a fiscally conservative senator, these have included Mr Springsteen himself, who leases land to an organic farmer. And Jon Bon Jovi, another rocker, paid property taxes of only $100 on an estate where he raises bees. Taxpayers will be glad to know he is no longer “livin’ on a prayer”. Every five years, Congress mulls a new farm bill. To confuse matters and gin up more votes, the bills typically address two entirely separate problems: the plight of the poor (to whom the federal government gives food stamps) and the unpredictability of farming (which the government seeks to alleviate). Politicians from rural states, which are grotesquely over-represented in the Senate, back farm bills for obvious reasons. Many urban politicians back them, too, not least because some of their constituents depend on food stamps. This time, unusually, the farm bill faces a fight. It will cost around $950 billion over a decade, says the non-partisan Congressional Budget Office (CBO). That’s plenty of potatoes to squabble over. Republicans complain that claiming food stamps has become too easy under President Barack Obama—the number of claimants has risen from 26.3m in 2007 to 47.6m today. They want to trim the programme from $760 billion to around $740 billion over ten years. Democrats retort that the rolls have swollen because the economy is in the doldrums. They insist that food stamps are a vital safety net for the poor and do not want them cut. Oink, oink Handouts to farmers may also be vulnerable. Proponents of the new bill (of which there are two draft versions) boast that it ends “direct payments” to farmers. These are the subsidies paid to producers of wheat, corn, cotton, rice, peanuts, etc, regardless of whether they actually grow these crops—or even plant them. Other plums, such as “counter-cyclical payments” (extra handouts when prices are low) are also to be eliminated. That may sound like a ray of sunshine for taxpayers, but there are clouds looming. Vincent Smith, a professor of farm economics at Montana State University, says the new bill offers a “bait and switch”. Direct payments are the bait, he explains, but they have been replaced by an expanded programme of subsidised crop insurance. The CBO calculates that more than two-thirds of the $50 billion saved by cutting direct payments would be used to boost other farm programmes, such as crop insurance and disaster relief. If crop prices fall, insurance payouts will explode. And crop prices are near historic highs right now. Federal crop insurance is not new; it began in the 1930s. But its cost has already risen from $2 billion in 2001 to $7 billion last year (see chart). It is expensive because taxpayers pay two-thirds of each farmer’s premiums, and most of the claims. During last year’s drought, crop-insurance payouts were a bountiful $17 billion. Uncle Sam shouldered three-quarters of that. Insurance already costs more than direct payments, and there is no limit to how much of it farmers may receive. The bigger the farm, the bigger the trough. (If taxpayers need insurance against misfortune, they must pay for it themselves, of course.) Subsidised crop insurance is also bad for the environment. Craig Cox of EWG, a green pressure group, worries that it spurs farmers to take greater environmental risks, for example by farming on flood plains or steep hills. He fears that a “pumped-up” version will create even more perverse incentives. On May 23rd an amendment sponsored by Mr Coburn, a Republican, and Richard Durbin, a Democrat, passed through the Senate. It reduces by 15% the subsidies for crop-insurance premiums if a farmer makes profits of more than $750,000 a year. Some farms currently receive more than $1m a year in subsidy. Mr Durbin says the amendment will save more than $1.1 billion over ten years—a whopping 1/875th of the total bill. The sugar lobby fought off an attempt to remove Depression-era supports that keep sugar much more expensive in America than in the rest of the world. The industry’s sweetheart was Al Franken, a Democrat from Minnesota and the author of a book called “Lies and the Lying Liars who Tell Them”. He argued that cheap sugar would destroy American jobs. Such as those of Minnesota’s many sugar-beet growers. The bill may face pitchforks in the House of Representatives. John Boehner, the Speaker, fumes that it takes “Soviet-style” dairy supports and makes them worse. A new scheme seeks to protect the margins of milk producers, who are grumbling that the cost of cattle feed has risen. Randy Schnepf of the Congressional Research Service wonders whether this might be because the government also encourages Americans to turn corn into ethanol and burn it in their cars. Mr Boehner’s spokesman says the Speaker would like an open debate on the floor of the House. He expects lawmakers to tussle over crop insurance, dairy supports, food stamps and the food aid that America sends overseas. This last point is important. Congress has traditionally decreed that such aid should be shipped from America, which costs more and ruins farmers in the poor countries that the policy is supposed to help. Mr Obama has urged lawmakers to allow food aid to be bought locally, thus saving more lives. One way of doing this would be via the farm bill, but neither draft allows it. Continue reading
The Challenge of Feeding 9 Billion People
By Greg Page May 29, 2013 11:00 PM America’s breadbasket, on the heels of last year’s severe drought, abounds with predictions of record corn and soybean harvests. The juxtaposition of the hope for this growing season against the reality of last year should give us reason to consider the lessons learned in 2012. With grain stocks low, farmers have responded to higher prices and planted more. Although rising commodity prices are often viewed only as harbingers of inflation, they also motivate farmers to produce more. “The cure for high prices,” as the commodities-market adage goes, “is high prices.” In late March, the U.S. Agriculture Department predicted farmers would plant the most corn since 1936 — about 97 million acres — and 77 million acres with soybeans, although estimates may fall because of the slow pace of spring planting. All that acreage is predicted to deliver a record 14 billion bushels of corn and a near-record of more than 3 billion bushels of soybeans. The forecasts are predicated on a return to normal yields and moderate weather during the growing season. We have been here before. Last year, from January through the first week of June, the price of the most important food crops fell 20 percent in anticipation of bountiful harvests. Then the rains stopped. By August, corn and soybean prices in the U.S. reached record highs in anticipation of what proved to be the smallest corn and soybean harvests in six and nine years, respectively. Summer Drought Many consequences of last summer’s drought are still affecting agriculture and the economy. Cattle ranchers responded to increases in feed prices by thinning herds. By the start of this year, the U.S. cattle herd was the smallest since 1952. Packers now have insufficient animals to process. As a result, feed lots and packing plants have been idled, some closed for good. The herd reduction kept beef prices low temporarily, but prices have now begun to rise. An Agriculture Department report shows that prices for poultry, other meats, eggs and dairy also have increased since September 2012, while food prices in other categories have been little changed. Food prices aren’t the drought’s only impact. With corn in short supply, 20 of the country’s 211 ethanol plants halted production. Meanwhile, low water levels on the Mississippi River made shipping corn, soybeans and other commodities by barge more expensive in late 2012 as traffic was restricted to one lane in some areas, and barges couldn’t be loaded to capacity. If we are going to ensure that the 9 billion people on the planet by 2050 have access to safe, affordable and nutritious food — and that we can produce that food in an environmentally responsible way — we should learn some important lessons from the drought of 2012. Here are four to consider. First, free trade is essential and makes food more affordable. Despite the severity of last year’s drought, world food production contracted by only 1.4 percent from a year earlier. A dry Iowa alone doesn’t create a world shortage. We will produce the most food, the most efficiently, if farmers plant the crops best suited for their regional growing conditions, and if we trade the surpluses with one another. Food must be able to move from times and places of surplus to times and places of deficit. Net Exporter The U.S. benefited from this last year. Historically the world’s largest net corn exporter, the U.S. will import even more corn during the 2012-2013 crop year than China , according to Agriculture Department forecasts. Imported corn prevented last year’s herd thinning from being more pronounced than it was. Drought-related food-price increases are being mitigated today partly because U.S. beef, pork and poultry producers used corn from Latin America to feed their animals. In an increasingly interconnected world, export bans, trade-distorting tariffs and inconsistent import standards hinder the free flow of food, worsen local shortages and contribute to price increases. There are more than 1,300 tariff-rate quotas in agriculture and food products filed with the World Trade Organization, including more than 100 in the European Union on important foodstuffs such as animal protein, rice and dairy products. All of them harm consumers. The second lesson is that markets are better than mandates at allocating food supplies. Commodity prices elevated by low supplies told farmers everywhere — not just in the U.S. — to plant more crops. But in times of tight supply, a mandated diversion of a crucial crop, such as corn, into biofuel production creates unintended consequences for food and feed affordability in poorer countries. I believe biofuels have a role to play, but we need policies to be more responsive to supply and demand. A third lesson is that we must embrace technologies that help farmers to grow more from less. Food production must increase at least 70 percent, by some estimates, in the next four decades to meet population growth. Optimally we should achieve that increase without bringing sensitive lands into production, by reducing greenhouse-gas emissions, and by using less water and fewer chemicals. This is possible only if we gain society’s permission to use sound, proven science — including genetically engineered crops — to produce food. But the most important lesson from the drought of 2012 is this: Our world can’t take food production for granted. Producing food will always be subject to all the uncertainties and unpredictability of the weather. We won’t have a food-secure world if we compound the inherent risks with poor policy. (Greg Page is chairman and chief executive officer of Cargill Inc. The opinions expressed are his own.) To contact the writer of this article: Cargill_Incorporated@cargill.com To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net Continue reading
Housing Bubble II: But This Time It’s Different
MONDAY, MARCH 18, 2013 AT 6:00PM We have seen it for several years now: foreclosure sales—there were 5 million since the peak of the housing bubble—have become the hunting grounds for investors with two goals: hanging on to these homes until the Fed’s flood of money drives up their value; and defraying the expenses of ownership by renting them out. And funds have a third goal: collecting management fees. Thousands of smaller investors have piled into the game. And so have the giants. Blackstone Group LP, the world’s largest private equity firm, plowed over $3.5 billion into the housing market, according to Bloomberg , to gobble up 20,000 vacant and foreclosed single-family homes. It just fattened up a credit line to $2.1 billion to do more of the same. Colony Capital LLC, which already owns 7,000, is putting $2.2 billion to work. Last year, institutional investors made up 19% of all sales in Las Vegas, 21% in Charlotte, 23% in Phoenix, and 30% in Miami. It had an impact. In the latest Case-Shiller report—a three-month moving average for October, November, and December—home values soared 9.9% in Atlanta, a bigger jump than even during the peak of the housing bubble . Las Vegas popped 12.9%, and Phoenix 23%. It’s getting hotter. In February, compared to prior year, asking prices jumped 14% in Atlanta, 18% in Las Vegas, and 25% Phoenix. Seen from another point of view: in January, the median price of a single-family home in Phoenix skyrocketed 35%. “We recognized that prices were moving faster than people expected,” explained Devin Peterson, a Blackstone real estate associate, to Bloomberg. Despite that, they’re still “finding opportunities to buy.” They might not be able to rent them out very quickly, but they’d rather not be “missing out on a few points in home price appreciation.” The race to buy is on. The next housing bubble is inflating. And that’s great. Money—which the Fed hands to its cronies at the frenetic pace of $85 billion a month—magically finds places to go and drives up values, and transactions take place, and paper gets shuffled around, and homes change hands as banks get out from under them, and fees and commissions change hands too. It inflates GDP, which is what everyone wants. And Chairman Bernanke can contort his arm slapping himself on the back. Trying to rent these places is another story. Housing is zero-sum: when you move into a new place, you move out of the old place at the same time. So it becomes available. And someone else goes through the same process. Only household formation solves the problem of vacant homes—but that takes years or decades. Best of all, these formerly foreclosed homes have now been pulled off the for-sale inventory list. Hence the “tight” inventory. And they’ve been transferred to the for-rent inventory list where they don’t bother anyone. Except the owners. Colony Capital, for example, with its 7,000 homes, has an occupancy rate of 53%. Suddenly, the market for single-family rental homes—unlike apartments, which cater to different people—has turned into an elbow-to-elbow affair. The pressure on rents is huge. Year-over-year, rents edged up only 0.5% in Atlanta and dropped 1.7% in Las Vegas. For Phoenix, Bloomberg cited Fletcher Wilcox, a real estate analyst at Grand Canyon Title Agency: median rent per square foot rose 3% year-over-year in February 2011, and 1.5% in February 2012. But in February 2013, it fell 3%. This tendency was confirmed by others. On the west side of Phoenix, where investors have concentrated their purchases of single-family homes, rents dropped by $100 a month last year—a stunning 10%!—according to James Breitenstein, CEO of Landsmith which has dumped most of its Phoenix properties. He is seeing similar pressures in Las Vegas and Atlanta. “There’s a whole bunch of rental supply that’s coming on that used to be sitting empty in bank portfolios,” he said. Timing couldn’t be worse. Occupancy rates of single-family rental homes are already low— 53% for Colony Capital. But investors are buying ever more properties and flood the rental market with them. Just when the stream of people who’ve gotten kicked out of their foreclosed homes is tapering off. With rising costs and declining revenues, the rental part of the business model collapses. As the Fed’s money is trying to find a place to go, prices may continue to rise. But with the economics to support these prices—namely rental revenues—giving way, the remaining reason to buy would be a singular hope : economically unsustainable price appreciation. The definition of a bubble. At some point, not being able to make money on rentals, investors will try to bail out. Then, the process of a Fed-inspired housing bubble blowing up starts all over again. Dallas Fed President Richard Fisher often warned about the nefarious effects of this flood of money. But he was shuffled off to “an out-of-the-way ballroom” at the CPAC, where Republicans struggled with the future, and drew barely two dozen people; yet he had a pungent message. Read…. The Fed’s Token Voice Of Reason: Megabanks Undermine Americans’ Faith In Democracy Continue reading
