Difficult recovery seen

by Jay Sjerven
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WASHINGTON — Joseph W. Glauber became the U.S. Department of Agriculture’s chief economist in 2007 after serving 15 years as deputy chief economist under his predecessor, Keith Collins. During his first several months as chief economist, Dr. Glauber has advised the Secretary of Agriculture and Congress during one of the most tumultuous periods in U.S. agricultural history marked by surging crop and food prices in 2008 and a global recession in the current year. Food Business News visited with Dr. Glauber in his Washington office in mid-June to hear his observations on a range of topics, including the ailing livestock and dairy sectors, a rebounding ethanol industry, agricultural trade, continued price volatility and controversial new farm programs.

In assessing trends in agriculture, Dr. Glauber said it was clear the meat, poultry and dairy sectors have suffered the most in recent months.

"These sectors faced feed prices that were never higher as crop prices rose to record levels last year," he said. "Then with the collapse in the global economy, demand for more income-sensitive commodities such as meat and dairy was adversely affected. In difficult times, people tend to eat at home more often and switch to lower-priced cuts of meat. The recent rise in grain and oilseed prices has further squeezed margins. Hog and dairy producers have been hardest hit, but the whole meat sector has been affected."

The U.S. Department of Agriculture forecast U.S. beef and pork production to decline in both 2009 and 2010 compared with 2008. In the case of beef, production was estimated at 26,663 million lbs in 2008 and was forecast at 26,565 million lbs in 2009 and 26,092 million lbs in 2010. Pork production was estimated at 23,367 million lbs in 2008 and was projected at 22,766 million lbs in 2009 and at 22,365 million lbs in 2010.

U.S. per capita consumption of beef in 2008 was estimated at 62.8 lbs with the forecast for 2009 up to 63.1 lbs but then down to 61.5 lbs in 2010. Per capita consumption of pork in 2008 was estimated at 49.5 lbs with the projection for 2009 declining to 49.1 lbs and the forecast for 2010 down to 46.9 lbs.

Dr. Glauber pointed out the hog sector, in addition to enduring high feed prices and the recessionary pressures, faced setbacks tied to the H1N1 virus and its mischaracterization as "swine flu."

Beef cattle and pig and hog producers have been reducing herd sizes in response to high feed prices and narrow margins. The quarterly Hogs and Pigs report issued by the U.S.D.A. on June 26 indicated the June 1 hog and pig inventory was 66.1 million head, down 2% from 2008. Looking ahead, the report indicated producers intend to have 2.97 million sows farrow in June-August, down 3% from the same span in 2008 and down 5% from 2007.

On the beef side, the U.S.D.A. indicated cattle and calves on feed for slaughter on June 1 totaled 10.4 million head, down 4% from 2008. Placements in feedlots in May 2009 totaled 1.64 million head, down 14% from 2008. It was the smallest placement for the month of May since 1996.

"We should see more liquidation over the next six months, with some recovery expected toward the end of the year," Dr. Glauber said.

Broiler and turkey production was expected to recover more quickly than beef and pork production, Dr. Glauber said. Broiler production in 2008 was estimated at 36,511 million lbs and was projected to decline to 35,040 million lbs in 2009 and then rise to 35,541 million lbs in 2010. Turkey production was estimated at 6,165 million lbs in 2008 and was forecast to bottom at 5,714 million lbs in 2009 and then rise to 5,828 million lbs in 2010. The U.S.D.A. projected U.S. per capita consumption of broilers at 83.5 lbs in 2008, 80.6 lbs in 2009 and 81 lbs in 2010. Per capita consumption of turkeys was estimated at 17.6 lbs in 2008 and was projected at 16.9 lbs in 2009 and 17.1 lbs in 2010.

U.S. milk production was estimated at 190 billion lbs in 2008 and was forecast at 187.5 million lbs in 2009 and at 186.4 million lbs in 2010 as dairy farmers also reduced herd size.

Recovery of the meat and dairy sector may be slow and was tied not only to feed prices but the health of the economy as a whole, Dr. Glauber said.

"Hopefully, the overall economy has seen the worst, and we’ll begin to see a recovery, however slow, toward the end of this year," he said.

Grain and oilseed producers saw prices for their crops plunge from last year’s record levels, but they have fared better than the livestock producers, with corn producers seeing continued strong demand from the ethanol sector and soybean producers benefiting from heavy demand for soybeans and protein meal from China that tempered the effect of a flat U.S. market for soybean products, Dr. Glauber said. U.S. wheat producers faced increased competition in world export markets, but domestic demand for wheat and wheat products remained mostly steady.

While down from last year’s records, U.S. farm prices are likely to remain historically high at least for the next few years, Dr. Glauber said.

"Many of the drivers that we saw behind last year’s high prices are still here, including strong demand for corn due to ethanol and strong demand for protein in China," he said. "These factors will keep prices high relative to historical levels.  Over time, productivity gains through higher crop yields should help moderate prices as stocks levels recover. In the short term, stocks levels continue to be tight and volatility remains high."

Food price inflation in the United States has diminished from what was seen in 2008 when underlying commodity prices surged to record levels, but it, too, was expected to remain historically high, at least over the near term, Dr. Glauber said.

"We’ve seen food price inflation come down rapidly over the past six months," he noted. "The latest figures for May from the Bureau of Labor Statistics show that food prices increased only 2.7% over year-earlier levels. Last year’s food price inflation was 5.5%, the largest increase since 1990. For 2009, we are forecasting food price inflation in the 3% to 4% range."

That compares with the more typical 2% to 3% in recent years.

Several international and domestic critics blamed the U.S. government’s support to the ethanol industry for contributing to the surge in world food prices last year and for discouraging the production of food crops in favor of crops that may be used to produce biofuels.

"There is no question the biofuel policy has shifted land use in favor of corn production," Dr. Glauber said. "Over time, because of expected productivity gains, the impact on markets will be less than what we saw during the last year.

"In the ramp up under the 2007 energy act to producing the mandated 15 billion gallons of corn-based ethanol, 2007, 2008 and 2009 all saw big increases in the renewable fuel standard. Those increases get progressively less over time and ultimately go to zero, which allows corn yields and productivity to catch up, and as a consequence, we may see a leveling or even a slight decline in acreage planted to corn. So over the long run, the inflationary fears some attached to this initiative should be considerably lessened."

Dr. Glauber said the recent rise in energy prices with crude oil trading around $70 a barrel has buoyed what was a struggling ethanol sector. Improved margins have enabled ethanol plants to at least begin covering their variable costs again.

"I think we’ll see a return to health in that industry," Dr. Glauber said. At the same time, he did not foresee a return to the "boom" years for the industry.

"I think the markets have adjusted and the rapid growth of capacity that we saw initially has certainly slowed for a number of reasons, with the principal one being we are approaching the 15-billion-gallon mark and so the interest increasingly will turn to the cellulosic ethanol side, and there, investors will demand to see long-run potential for profits before they act," he said.

The prosperity of the farm and food sectors depends in good measure on export markets.

"U.S. agricultural exports are expected to fall to $96 billion in fiscal year 2009, down from last year’s record $115.5 billion," Dr. Glauber said. "Despite the large drop, this still would be the second-highest year on record. Imports are projected at $81 billion, up from $79.3 billion in fiscal year 2008. Some of the drop in exports may be blamed on the global economy, but much of the decline is due to the fact that prices for many commodities have declined from the record levels of last year."

Dr. Glauber said perceptions the Obama administration was not fully engaged in pursing international and bilateral free trade agreements to give a boost to U.S. agricultural exports were unfounded. He asserted the newly installed U.S. Trade Representative Ron Kirk was pursuing an active trade agenda. Dr. Glauber himself is the chief U.S. negotiator on agriculture in the Doha process under the World Trade Organization.

Crop prices, while down from last year, remained high enough to preclude heavy federal outlays through standard farm income support programs, principally the direct and countercyclical payment program (D.C.P.), Dr. Glauber said. Federal farm program payments were projected at around $9 billion this year, with most of that amount reflecting direct payments that must be made to producers of program crops annually regardless of what they plant from year to year or market prices.

Dr. Glauber said current forecasts of the cost of federal farm support were based on data gathered last November and published in February. Updates to these forecasts will be prepared this month.

"Given prices are higher than what we were looking at last November, I would expect outlays for countercyclical payments and marketing assistance loans, which we were forecasting at some $3.4 billion based on November numbers, will likely be less," he said. "But, the flip side is we don’t yet know what impact the new programs in the current farm bill, particularly the Acreage Crop Revenue Election program (ACRE), will have on outlays."

ACRE was created in the 2008 farm act and aims to protect producers from wide drops in revenue as opposed to responding simply to low crop prices as in the D.C.P. program. Producers have the option of remaining in the D.C.P. program or electing to participate in ACRE for the term of the farm act, or through 2012.

Critics of ACRE pointed out the program may result in large federal outlays to producers even in years when crop prices are high, whereas no countercyclical payments would be made under the D.C.P. program when the market price is above the target price set in the farm act for a particular crop.

"ACRE might result in budget outlays, yes, there is no question about that," Dr. Glauber said. "When we do our analyses, we don’t just look at what we expect yields will be, we look at a variety of potential yields and prices, and given those analyses, there is a possibility we might have significant outlays under ACRE. Conventional wisdom is demand for ACRE will be higher among wheat and feed grain and soybean producers, and lower among rice and cotton producers."

Dr. Glauber pointed out ACRE provided no guarantee of payments each year. There was the possibility in some years when farm revenues increase or do not decline the required amount, there would be no payments made under ACRE. In that event, the producer not only would have no income from the ACRE program but he would receive only 80% of the direct payment to which he would have been entitled had he remained in the D.C.P. program. Additionally, he would not receive any countercyclical payments that might apply to a crop in a given year.

Dr. Glauber acknowledged that ACRE payments during a year marked by a wide drop in revenue compared with the previous two years (the formula for determining payments compares the current year’s revenue with the average of the previous two years) might be substantial and offset even the lack of ACRE payments later during the five-year term of the program.

"Producers will look at their own situations and make a decision," he said. The deadline for ACRE enrollment is Aug. 14.

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