Washington Insider -- Thursday

By DTN's Washington Insider

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

California's Congressional Delegation Still Looking for Drought Assistance

Members of California's congressional delegation are continuing to meet with their colleagues to find a way to provide drought relief assistance to the state. The drought, the state's worst in decades, already is affecting farmers and could affect people and businesses in much of California. A state agency has begun issuing orders to water agencies, farms, cities and others to curtail water withdrawals.

A major impediment to developing legislation that would be acceptable to both chambers involves whether and how to modify regulatory decisions issued under authority of the Endangered Species Act. Two federal government agencies have required more releases of water from reservoirs and reduced pumping of water out of rivers to help fish survive. Both House and Senate Republicans object that without that requirement, the state would have been able to store more water is reservoirs, thus becoming better prepared to meet the challenges posed by the current drought.

The congressional discussions therefore are expected to focus not only on possible ad hoc programs to deal with those currently suffering from the drought, but also on long-term projects that are needed to develop a more robust infrastructure for storing water in the state.

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Two More Senators Call on USDA to Speed Implementation of New Farm Bill

More members of Congress this week joined in urging USDA to move more quickly to implement provisions of the 2014 farm bill that was signed into law four months ago. In a letter to Agriculture Secretary Tom Vilsack, Montana's two Democratic senators, Jon Tester and John Walsh, focused their attention on two new crop insurance programs that they say will help farmers manage risks associated with producing wheat and barley crops in 2015.

Tester and Walsh want Vilsack to move forward with the Crop Margin Coverage Pilot Program and the Malt Barley Endorsement. The initiatives would support farmers growing spring wheat and barley, which the senators say are two of the most important crops in Montana.

Observers note that some of those who now are complaining about what they see as a slow pace at USDA were warned during the farm bill debate that the complexity being designed into new provisions likely would produce the result they now criticize.

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Washington Insider: Sector Shifts For Organic Foods

Organic food sales — products that qualify for USDA's organic certification — have grown rapidly and steadily for nearly two decades, although they still account for very modest shares of total foods. Like other movement-driven demands, organic consumers have been generally willing to pay more for these products — a fact that has attracted growing investment in the retail sector where high-flying organic-grocery stocks have translated into attractive returns. For example, Whole Foods has reported an average return of 34% a year for stockholders over the past five years, including dividends, versus 18% for the broader Standard & Poor's 500 Index of U.S. shares.

However, that trend appears to be facing some pressure now. Whole Foods' stock has fallen 26% year-to-date — a trend that is affecting other retailers as well. Sprouts Farmers Market is down 22% this year; Fresh Market, down 15%; and Natural Grocers by Vitamin Cottage, down 48%. Market reports have taken to cautioning potential investors to look carefully for bargains, even as they say they believe valuations remain rich and as growth rates have slowed.

For example, Whole Foods lowered its fiscal 2014 earnings guidance three times between November and May and has fallen short of Wall Street's earnings estimates in its past two quarters. It blames the weakness on growing retail competition and says it will focus on pricing.

Analysts, meanwhile, say the company still has substantial margins and expect it to be more aggressive on prices, but they are concerned about how much that will cut into near-term growth. Wall Street expects the company to increase earnings per share just 4% in its fiscal 2014 versus 17% last year.

Shares of Whole Foods are softening, but are still not seen as cheap. They recently sold for 25.5 times projected earnings for the next four quarters, versus a 10-year average of 30.4 times. That makes the company 166% as expensive as the S&P 500, versus a 10-year average of 257%. Whether the reduced premium for the stock proves to be a good deal depends on how quickly Whole Foods can return to robust growth, experts say.

Wall Street observers still say they expect earnings growth to bounce back to 13 percent next year. But analysts have lowered their price targets on the stock from an average of $63 at the end of last year to just under $46. Shares recently changed hands at $42.50.

A damper on the market nowadays is the fact that supply seems to be growing faster than demand retail competition for organic grocers grows. The top organic chains are expected to add 141 stores this year, bringing their total to 1,379, up from 963 four years ago. However, the most significant area of retail growth has come from more traditional grocers and mass merchants like Wal-Mart Stores which also are seen adding new floor space for organic foods.

Investors have been willing to pay rich premiums for organic-grocery shares in the belief that the group has many years of fast growth ahead. Fresh Market goes for 21 times forward earnings; Natural Grocers, 31 times; and Sprouts, 40 times. Analysts project that the store count for the top organic chains will nearly double by 2020, topping 2,500 — projections that are fueling concerns that the sector is building more selling space for organics than customers need.

In that regard, the Nutrition Business Journal pegs consumer spending growth for natural and organic foods at 9.6% annually between 2011 and 2020, but square footage for those goods could grow an average pace of 11.5%. That suggests rising competition for organic grocers — a boon for organic shoppers, but not necessarily for shareholders. And, it could change pricing strategies and weaken the sector's capacity to charge premium prices.

In general, market experts suggest the future will mean a more competitive organics sector with more competition at both retail and production levels — as larger scale operations become more important. However, even as growth of organic and natural specialty retailers slow, the sector is continuing to attract increasing shares of consumer dollars, a trend that producers should watch carefully as it develops, Washington Insider believes.

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