Food for thought. Perspectives from Wells Fargo experts on critical topics and issues in the Food & Agribusiness industry.

 

New Farm Bill becomes lawBy Christy Seyfert, Wells Fargo Federal Government Relations Director A new comprehensive Farm Bill known as the "Agricultural Act of 2014" is finally law of the land. One word sums up the 950-page bill: reform. Read more

A new comprehensive Farm Bill known as the "Agricultural Act of 2014" is finally law of the land. One word sums up the 950-page bill: reform. Some policymakers opposed the final agreement because they thought there was either too much or not enough reform, but a majority of the House and Senate determined this new legislation was better than the status quo in the current environment, and the new legislation now bears the president's signature. Below are some highlights that the bill covers - and left out.

Budget savings to reduce the deficit

A far cry from the $73.5 billion in additional funds invested into agricultural policy in the 2002 Farm Bill, the 2014 Farm Bill contributes $16 billion toward deficit reduction, according to a cost estimate prepared by the Congressional Budget Office (CBO). This includes:

  • Approximately $8 billion in savings from changes to the Supplemental Nutrition Assistance Program (food stamps)
  • The repeal or consolidation of more than 100 programs administered by the United States Department of Agriculture (USDA)
  • The consolidation of 23 conservation programs into 13, saving nearly $4 billion due in part to reduced acreage caps in the Conservation Reserve Program

Commodities and crop insurance

The 2014 Farm Bill ushers in a new approach for farm policy. It terminates programs considered "giveaways" to farmers, such as the direct payment program, and places greater emphasis on crop insurance, which requires farmers and ranchers to pay a portion of premium expenses. The bill also provides greater risk management opportunities, allowing for the development of new crop insurance coverage to protect farmer and rancher financial portfolios. Responding to the World Trade Organization (WTO) case brought by Brazil against U.S. cotton, the 2014 Farm Bill radically reforms the cotton program and creates a crop insurance strategy specifically for that commodity. The bill cuts commodity program spending by $14.3 billion and increases crop insurance funding by $5.7 billion, according to the CBO.

Dairy

One of the highest profile debates was over dairy policy. House Speaker John Boehner (R-OH) was backed by dairy processors, who assisted in the sound defeat of dairy supply management during House Farm Bill consideration. House Agriculture Committee Ranking Member Collin Peterson (D-MN) was backed by producers, who helped secure supply management during Senate Farm Bill consideration. In the end, legislators reached a compromise that offers producers a voluntary margin protection program without imposing government-mandated supply controls. Both dairy processors and producers endorsed the conference agreement.

Livestock disaster assistance

Last fall's blizzard in the Dakotas reminded policymakers of the challenges facing livestock producers left unprotected during a lapse of livestock disaster assistance, due to Farm Bill expiration. The 2014 Farm Bill reauthorizes certain livestock indemnity programs beginning with fiscal year 2012.

Specialty crops

The 2014 Farm Bill expands investment in research and development for specialty crops, enhances crop insurance for specialty crops, and funds block grants used by state departments of agriculture to enhance the competitiveness of specialty crops.

Credit

Important to farmers and lenders, the 2014 Farm Bill removes term limits on USDA-guaranteed farm loans.

Export assistance

Recognizing the importance of building commercial export markets for agricultural products, the 2014 Farm Bill reauthorizes the Market Assistance Program and Foreign Market Development Program.

Regulatory relief

Some provisions were included in the bill, while others were left out. The 2014 Farm Bill creates a permanent subcommittee within the Environmental Protection Agency (EPA) Science Advisory Board to conduct peer review of EPA actions that would negatively affect agriculture. The legislation also clarifies that forest roads should not be treated as a point source for pollutants under the Clean Water Act.

The 2014 Farm Bill does not address two contentious issues: a prohibition on USDA implementation of rules related to the Packers and Stockyards Act, and changes to mandatory country of origin labeling (COOL). While advocates of COOL argued that consumers have a right to know the origin of meat and meat products, those seeking changes argued that the requirement is costly and trade-distorting. The COOL issue remains in review at the WTO due to concerns raised by Canada and Mexico.

More information about the new Farm Bill is available on the House Agriculture Committee website and the Senate Agriculture Committee website.

 

Photo of Christy SeyfertChristy Seyfert is Wells Fargo's government relations director representing the interests of Rural Community Insurance Services (RCIS) and Wells Fargo Food and Agribusinesses. Seyfert has spent over 15 years assisting members of the U.S. Senate, the U.S. House of Representatives and private sector clients with agricultural, food and beverage, and finance interests.

Prior to joining Wells Fargo, Christy worked for Michael Torrey Associates where she coordinated government affairs and assisted in managing the Crop Insurance and Reinsurance Bureau (CIRB), a leading international crop insurance trade association comprised of insurance companies and the reinsurance community. Christy also has worked as Senior Professional Staff of the U.S. Senate Committee on Agriculture, Nutrition, and Forestry and the U.S. House Committee on Agriculture where she developed and negotiated legislation important to the agricultural community, including crop insurance improvements and commodity programs.

Christy comes from a sixth-generation diversified farm family and holds a Bachelor of Science in Agriculture, Food Science from The University of Georgia.

California wine industry updateBy David Berman, Wells Fargo Agribusiness Manager and Consultant California, which produces 90% of the wine made in the U.S., will report another large grape crush when the preliminary estimate is released in February 2014. Read more

California, which produces 90% of the wine made in the U.S., will report another large grape crush when the preliminary estimate is released in February 2014. Industry sources expect the size of the 2013 crush to be close to the record four million tons crushed in 2012. The 2013 numbers would have been higher had wineries had adequate tank space and the ability to accept additional fruit above contracted levels. These numbers are in stark contrast to last year, when tanks were empty following light crops in 2010 and 2011.

California Winegrape Crush

Industry inventory levels are in relatively good balance. The 2013 growing season was warm and early, and many vintners are as excited about the quality of this vintage as they were about the stellar 2012 vintage. The combination of two consecutive years of heavy volume and high quality is rare, and will be welcome news to consumers as these wines are released. Holding high levels of inventory, wineries will have a difficult time raising bottle prices, and consumers should see some good discounts.

While average grower returns will not reach last year's record of nearly $6,000 per acre, 2013 was another strong year for most growers. This was not the year to be playing the spot market, as pricing for non-contracted grapes softened once it became apparent 2013 would be another large crush.

Total California Winegrapes: Acreage and Grower Returns

While grower returns have been on an upswing most of the past decade, there has been minimal planting of new vineyards. The California Department of Food and Agriculture reports that from 2009-2012, an average of 6,749 new vineyard acres were planted annually. This compares to 13,033 new vineyard acres planted annually from 2005–2008, and a "steady state" planting requirement of 18,367 acres annually to replace 459,187 existing bearing acres assuming a 25-year vineyard life.

Reasons for the recent planting slowdown include wineries' reluctance to offer long-term pre-plant grape contracts, higher returns from competing crops such as almonds for growers in the San Joaquin Valley, and irrigation water concerns. However, given the current drought conditions in much of California, the planting decision may shift back to grapevines, which require less water than almonds. However, if the drought worsens, planting of all new trees and vines will be minimal.

Looking into the future, California will need to ramp up new vineyard plantings to retain its share of the growing U.S. wine market. The alternative will be continued growth in wine imports, which now account for nearly 35% of the total U.S. wine market. This is up from 12% in the early 1990s.

Imported Wines Market Share of U.S. Market

All the major wine-producing nations have targeted the lucrative U.S. market for growth. Many global competitors have lower cost structures, and are able to sell wine to the U.S. market at attractive prices. They've also been aided by a stronger U.S. dollar relative to the euro and some other foreign currencies. Fueling the success of wine-producing countries targeting the U.S. market, young millennial wine consumers are demonstrating a greater interest in imported wine brands compared to older consumers.

Faced with increased grape costs compressing margins, many California wineries understand the need to become more cost competitive. Some are increasing their internal "estate" grape supply to better control grape input costs and ensure quality. Making margins at the winery level, producers don't need as high a return at the vineyard level as pure growers, and can better justify the investment in buying or developing new vineyards.

Wineries that are becoming more vertically integrated will be more competitive with global producers. This is particularly the case in Coastal California, which produces many wines priced between $9 and $20 per bottle retail. This segment accounts for 24% of total wine case sales volume as reported in U.S. food stores, with 10% growth reported for the combined category last year.

Table Wine Sales by Price Segment
Source: The Neilsen Co.

Many Coastal California wineries producing at the $9–$20 price point have traditionally relied heavily on purchased fruit from outside growers. Large global wine companies have targeted this growing and lucrative wine segment, and between higher grape costs and increased imports, winery margins have been under pressure. So, California wineries in this market segment not having a significant number of internally produced grapes will be increasingly challenged to compete.

 

Photo of David (Dave) BermanDavid (Dave) Berman, Wells Fargo agribusiness manager for the Agricultural Industries department, manages a team of agricultural consultants that evaluates the $15.8 billion agribusiness processor portfolio. Dave also serves as Wells Fargo's wine industry consultant.

Since joining Wells Fargo in 1989, Dave has worked in the Agricultural Industries Department, and for a time served as a relationship manager handling large agricultural commercial banking relationships in the Fresno, California region. Prior to joining Wells Fargo, Dave worked for Travelers Insurance Company in Fresno as an agricultural real estate loan representative. Dave graduated from the University of California, Davis with both his bachelor's and master's degrees in agricultural economics, and holds a Certified General Real Estate Appraiser license in the State of California.

Corn and soybean crop acreage and options
for 2014
By Michael Swanson, Wells Fargo Chief Agricultural Economist The outlook for corn and soybean planting in 2014 differs significantly from a year ago with corn acres down. Read more

The outlook for corn and soybean planting in 2014 differs significantly from a year ago with corn acres down. After a drought-reduced yield in 2012, farmers were motivated by strong futures prices to plant additional corn acres, and the market anticipated more than 98 million acres of corn to be planted. However, an excessively wet spring prevented the planting of as many as 3 million acres. Farmers managed to plant 95.4 million acres and produce 13.9 billion bushels of corn. This record production forced corn prices down from $6.89 a bushel in 2012/2013 to approximately $4.50 a bushel in 2013/2014. Given the higher input costs and cash rents, many farmers won't produce a profit on $4.50 a bushel corn. This has set off a search for alternatives; the current consensus is that Chinese demand for soybeans will yield the solution. However, history has shown that soybeans and corn will trade at a breakeven parity no matter what the market thinks. Producers need to lock in their premiums, and buyers should anticipate the softening of soybeans relative to corn.

U.S.Million of Acres Planted

Some of the early guesses coming out of the farmer surveys point to an all-time record for soybean plantings at 84 million acres. This level of planting would certainly "steal" acreage from corn. What would trend-line yields and normalized plant-to-harvest ratios suggest for this scenario?

Soybeans/Corn

How unusual would it be to see soybean acres climb to 84 million? Would the expected outcome significantly change the balance in the market? As always, it helps to look at history to say whether this would be a statistically unusual development. The last six years of the ethanol boom have reset many producer and user perceptions of what constitutes normal. In 2007, corn acres planted jumped to a modern record of 93.5 million from the previous year's 78.3 million. Since that shift, the market has come to expect that corn will always lead the price model. In reality, the corn and soybean price ratio always balances the market via the expected margin.

Corn to Soybean planted acreage

Prior to the ethanol shock of 2007, corn acreage always received an average seven percentage point planting advantage over soybeans. This additional acreage helps offset the great acreage loss in production. Normally only 91% of corn acreage planted is harvested. In comparison, over the last 15 years, 98.6% of soybean acreage planted has been harvested. From 2007 to 2013, the corn acreage jumped to a 22% average advantage over soybeans. If the current guesses are right, 90 million acres of corn and 84 million acres of soybeans would push the ratio back to the previous 7% differential. It also leaves the total planting in these two lead crops at 174 million acres. While it seems unbalanced relative to recent planting ratios, it certainly would be in line with the traditional balance.

The reason this balance holds is that the market always evens out the opportunity between corn and soybeans with a price ratio of 2.3 in terms of soybean to corn per bushel. Over a multi-year period, the 2.3 price ratio in favor of soybeans exactly accounts for yield and cost differences. At any point in time, the market can offer a significantly different ratio based on perceived supply and demand outlooks. However, producers and buyers who fail to lock in those perceptions find them being reversed as the market goes back to the long-term ratio.

Using USDA cash prices and yields for Indiana and Purdue variable cost per acre, the table below shows the implied net margin per acre for corn and soybeans since 2005. Clearly in any given year, yields and prices can favor one or the other crop.

Indiana Corn/Soybean rotation

In 2005, the market rewarded soybeans with a 2.9 price ratio over corn. In 2011 and 2012, it penalized soybeans with a 2.0 ratio, but the nine year average was the historical 2.3 price ratio.

Commodity values

The following table takes the difference in variable cost into account to look at implied net margin per acre.

Commodity value: Indiana

Between prices and yields, the ability to predict the margin winner becomes less conclusive. Soybeans were big winners in 2005, 2009, and 2012. They tied corn in 2008, and they lost to corn in 2006, 2007, 2010, 2011, and 2013. The market doesn’t give producers or buyers any easy wins. The average margin ratio was a push with the 2.3 price ratio over the last nine years.

Since the beginning of December 2013, Chicago Board of Trade futures have been offering a soybean to corn price ratio of 2.52. This does not represent a historically large premium, but it is still a relatively strong incentive for soybeans over corn. This advantage has been augmented by the relative slow decline in fertilizer costs compared to the decline in corn prices. If producers lock in the stronger soybean prices and avoid additional fertilizer purchases, they could create an advantage in implied per-acre margin in soybeans’ favor. The problem is that most, if not all, producers refuse to aggressively presell their crop. Even with modern crop insurance, many producers don’t like to sell more than 25 to 50% of their crop prior to harvest. They might make acreage allocation based on the futures market and stories being told, but they don’t lock in those advantages.

After the market has shifted the acreage based on incentives at planting, it starts to take away that premium based on the expected change. This leaves many of the producers chasing the market with little benefit from making a significant shift in planting. Many producers have learned the hard way that making big acreage shifts leaves them vulnerable to these post planting declines in premiums for one crop over the other. This repeated pattern of price shifts is one reason that producers stay in their rotations regardless of the premium offered in the futures market.

Unless the market premium for soybeans widens significantly, planting inertia and fear of getting caught with the wrong crop will make it hard for farmers to plant the forecasted 84 million acres.

 

Photo of Katie BrokawMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist, forecasts key agricultural commodities such as wheat, soybeans, corn, and cotton, along with livestock sectors such as cattle, dairy, and hogs.

Michael received undergraduate degrees in economics and business administration from the University of St. Thomas and both his master's and doctorate degrees in agricultural and applied economics from the University of Minnesota.

California drought conditions increase agribusiness challengesBy Andrew Broaddus, Wells Fargo Agribusiness Consultant Although California's classic Mediterranean climate (wet, cool winters and warm, dry summers) usually fosters high agricultural productivity, there are periodic multi-year droughts. Read more

Although California's classic Mediterranean climate (wet, cool winters and warm, dry summers) usually fosters high agricultural productivity, there are periodic multi-year droughts. It appears that 2013-2014 is one of them.

As of mid-February 2014, some key reservoirs in California were at extremely low levels. Lake Shasta, the primary water source for the Sacramento River and the Federal Central Valley Water project, was at 37% of capacity and 53% of historic average water storage for that date. Lake Oroville, the primary source for the State Water Project, was at 38% of capacity and 57% of historic average.

Current reservoir conditions
Daily updated information available at California Data Exchange Center - Reservoirs.

These numbers follow the three typically wettest months of November, December, and January in Northern California, but unfortunately November and December of 2013, and January 2014 were abnormally dry with little rain or snow. The second snowpack survey by the California Department of Water Resources completed on January 30 showed statewide snowpack at 12% of normal. In the chart below, an 8-station index of rain gauges in Northern California shows rainfall through February 6, 2014 of 4.5 inches, one of the lowest reports on record. Precipitation during the 2nd week of February resulted in a spike in the rainfall numbers, which hopefully will be more than temporary.

Northern Sierra Precipitation January 9 2014

Could California get nearly a full year's worth of rain and snow later in the season? It's not likely, but it's possible. Through February 1991, the state was experiencing one of the driest years on record until "Miracle March" saw nearly 100% of normal annual precipitation in one month.

Even with a return to wet conditions in February and March, water supplies could still be reduced this summer. For the moment, early indications from both federal and state water agencies suggest severely reduced water supplies for the coming crop year. The state water agency has recently indicated little or no water will be available. Although it has not made an official announcement, the federal water agency has indicated that a 0% initial allocation is possible for the parts of the San Joaquin Valley it serves. Reducing the water allocation means that, even using purchased and well water as supplements, production costs will increase as crop acreage is reduced.

Areas not served by water districts also have significant water supply concerns. Because individual land owners may control well water supplies, continued water drilling in most parts of California has significantly increased the use of ground water. And, since 2012-2013 was also a very dry year, there have been extended heavy draws on well water. Heavy well draws over long periods of time coupled with a lack of ground water recharge from precipitation could result in wells in all parts of the state that produce less water than normal, or even go completely dry. Drilling new wells may be an option, but many drilling companies are working on backlogs extending as long as 18 months for new well installation. One major wine grape region, the Paso Robles area of the Central Coast, has already experienced well water supply issues, and has declared a water emergency for that area. The governor of California declared a drought state of emergency for all of California on January 17, and some cities, counties, and water districts are calling for either mandatory or voluntary conservation measures.

Dealing with drought conditions is part of California's agricultural heritage. Increased water efficiency gained through technological advances, diversified cropping plans, and an active market for water transfers usually puts available water to the best and most productive use. Successful agribusiness managers know that managing water supplies is just one of the many challenges of running an agribusiness in California.

 

Photo of Andrew (Andy) BroaddusAndrew (Andy) Broaddus, Wells Fargo Agribusiness Consultant, works with farming, livestock, and first stage food processing companies throughout California, Arizona and the Pacific Northwest.

Andy is a graduate of the University of California at Davis and holds a degree in Agricultural Economics. Andy has spent his entire life surrounded by agriculture, having been raised on a family ranch in Mendocino County, California that produced sheep, timber, pears, and prunes. Andy now resides in Davis, California.

Wells Fargo insightsWeekly Economic Podcasts and Monthly Economic Outlook. Read more

Weekly Economic Podcasts
Listen to our weekly audio podcast on the latest economic news and its potential impact on your business.

Monthly Wells Fargo Economic Outlook
Read our commentary and view forecast tables on U.S. and international economic conditions, including projections for the financial markets.

Food and Agribusiness Outlook for the Protein Sectors
View and listen to a replay of Wells Fargo's recent webinar entitled "Outlook for the protein sectors – 2014 and beyond" presented by a panel of four Wells Fargo agricultural consultants.

Monthly Wells Fargo WASDE Report Perspectives
Gain Wells Fargo's perspective on the February USDA World Agricultural Supply and Demand Estimates (WASDE) report for corn, soybeans, and wheat.

Washington update Review a brief summary of recent U.S. government legislative activity and events that have impact on the Food and Agribusiness industry. Read more

Budget

Enactment of the government spending measure in mid-January meant that another government shutdown was averted, but it has shifted focus back to another budget challenge: raising the debt ceiling. Treasury Secretary Lew wrote House Speaker Boehner on January 22 requesting an increase in the debt limit in February.

Drought

USDA recently posted its map of counties receiving a Secretarial disaster designation for the 2014 crop year, with most receiving the designation due to drought.

Trade

In mid-January, the Senate Finance Committee held a hearing regarding trade negotiating authority.

Biofuels

The National Biodiesel Board held its annual meeting in late January and National Biodiesel Board CEO Joe Jobe's annual address highlighted the benefits of renewable energy as well as biofuels challenges.

USDA Agricultural Outlook Forum

Featuring a theme of "The Changing Face of Agriculture", USDA's annual Agricultural Outlook Forum will be held in Arlington, VA February 20-21, 2014 and focus on the future of agriculture.

Wells Fargo Webinar: Planting Intentions and Grain MarketsMarch 27, 2014
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The USDA’s annual “Prospective Plantings Report” always moves the markets. One week in advance of the report’s release, Wells Fargo Agribusiness consultants will discuss the crop dynamics that will shape the 2014 USDA report.  This strategic webinar discussion will help to make sense of the environment that will generate the USDA’s acreage report, and help to keep the market in perspective in a volatile situation.

Key topics to be discussed by the expert panel include:

  • Midwest break-even costing for both soybeans and corn - Cash rents and inputs make $4.50 a bushel corn marginally profitable. What is separating the profitable from the loss generating operators
  • Right behind cash rents, seed and fertilizer are the two largest input costs. These markets’ fluctuations will have a significant impact on acreage decisions.
  • Buyers’ views of the upcoming crop year - Big crops are a welcome development for grain handlers, but they are always working on the spreads which matter to the farmers.

When: March 27, 2014
2:00 - 3:15 p.m. ET

Moderator:
Michael Swanson, Wells Fargo Chief Agricultural Economist

Panelists:
Ted Tice, Wells Fargo Agribusiness Consultant
Lon Swanson, Wells Fargo Agribusiness Consultant
Tim Luginsland, Wells Fargo Agribusiness Consultant

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2014 American Pistachio Growers Annual ConferenceFebruary 17-19, 2014
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Sponsored by the American Pistachio Growers, the annual conference is a gathering of pistachio growers and processors featuring educational sessions on nutrition research, government affairs and pistachio marketing activities along with entertainment and opportunities for networking.

When: February 17-19, 2014

Where: Coronado, CA

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Wells Fargo is a Platinum Sponsor of the conference.

Wells Fargo’s Food and Agribusiness Group and Insurance Group will be exhibiting at this conference. Visit us at booth #11 during exhibit hours.

Annual National Pork Industry Forum March 6-8, 2014
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Members of the National Pork Board along with Pork Checkoff staff leadership will hear directly from the 156 forum delegates appointed by U.S. Secretary of Agriculture Tom Vilsack. Each year the Pork Act Delegates confer, vote on resolutions and advisements, and provide valuable direction on the important issues facing pork producers and the industry. This year's delegates include 152 pork producers and four pork importers.

When: March 6-8, 2014

Where: Kansas, City, MO

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