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.

HOUSE MAY VOTE TOMORROW ON PRESIDENT'S TRADE PROMOTION AUTHORITY

House Republican leaders plan to schedule a vote tomorrow on a Trade Promotion Authority bill. The administration needs a grant of TPA to conclude free trade agreements then submit them to Congress for an up-or-down vote. Leaders yesterday sent the proposed trade legislation to the Rules Committee, a necessary step before bringing the proposals to the floor.

The United States currently is negotiating the Trans-Pacific Partnership (TPP) trade deal with 11 other Pacific Rim nations, a number of whom indicated earlier that unless Congress grants the White House Trade Promotion Authority, there was little chance of concluding the agreement.

TPP supporters view the scheduled TPA vote as a positive development, noting that it would be unlikely that House Speaker John Boehner, R-Ohio, would move the legislation to the floor for a vote unless he was fairly confident of passage. But the speaker has been fooled before by inaccurate whip counts that resulted in embarrassing defeats for legislation that was thought to be a sure thing.

Currently, there are thought to be only 19 or 20 Democrats who plan to vote for TPA, although a handful of others have not committed one way or the other. Republicans currently number 246 in the House, meaning that they theoretically have more than enough votes to pass the measure. However, GOP supporters are believed to number only between 190 and 210. The bill requires 217 ayes for approval, and a close vote is expected.

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HOUSE SPENDING BILL WOULD IMPOSE DEEP CUTS AT EPA

Legislation approved yesterday by a House Appropriations subcommittee would provide 13% less than requested by President Obama for Environmental Protection Agency spending during the upcoming 2016 fiscal year. It also would cut EPA's budget next year by 9% from current levels.

The committee's proposed spending bill also denies the president's request for an increased staffing ceiling at the agency, and instead would reduce the maximum number of full-time EPA positions for the fifth consecutive year.

The biggest cuts would be imposed on EPA's revolving fund programs used to provide low-interest loans to states and municipalities for drinking water and wastewater projects. While some organizations representing water treatment officials are calling the cuts "draconian," others see the action as largely symbolic. For example, one official at the Association of Metropolitan Water Agencies pointed out that the House regularly proposes deep cuts to the revolving funds program only to have the Senate restore those cuts later in the appropriations process. The Senate has yet to introduce an appropriations bill funding EPA for FY 2016.

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WASHINGTON INSIDER: WHAT ABOUT ORGANIC COSTCO?

A couple of basic articles of faith for organic purists are facing new scrutiny now, and both are being pushed hard by reality, observers say.

Earlier this year, an industry-wide organic shock resulted from the reported fight over the "list" of non-organic products approved for certified organic operations. The idea was that there are a few -- very few -- inputs that are essential to producers even if they are not really organic at all. It turns out, however, that this list is very long with hundreds of items. It also appears that some could be replaced by others with better organic credentials, but are kept around because some producers prefer them. These are inconvenient facts that have been quite an embarrassment to the industry.

Now, another modestly unwelcome fact is being reported. Increasingly, it turns out, not all retailers and their suppliers are small and local -- perhaps, even "sustainable." An analysis released this week by the financial firm BMO Capital Markets reported that Costco is projected to sell just over $4 billion in organic products this year, edging out $3.6 billion by Whole Foods to take the national lead. This, in spite of the fact that the Costco image is rather like that of the conventional retailers the industry would like to push into the past.

This is partly because Costco is a strong company, the second biggest retailer in America overall. Walmart is the largest, but its ratio of organic to nonorganic foods is estimated to be much lower than Whole Foods' or Costco's. And Costco, like other "big box" retailers, competes across the board on efficiency and quality -- things it does well. Now it is refining its image of quality to increase the role of organics.

Costco didn't conquer the organic market accidentally, observers note. Expanding its offerings has been part of a calculated effort to capture younger consumers and lure them away from other retailers. The membership-based chain has increased its organic sales by about $1 billion in just six months, and it is telling the press it plans to push even harder in the future.

Now, at least a few organic advocates say this is good news that signifies that U.S. food demands are changing. However, it also indicates that the typically high margin for organic products is attracting large scale competitors who can offer more attractive prices even for their organic products. This is a big deal inasmuch as the organic market increased 12% from 2013 to 2014 and is projected to jump double digits again going into 2015. The increase in sales reflects both strong demand and growing supplies, and may suggest a strong market advantage related to scale and size.

"While the challenges in terms of supply are still out there, they're becoming less formidable, because there are more organic suppliers and producers," Richard Galanti, Costco's vice president and chief financial officer told the press. It also reflects a "normal" industry response to the supply problems that are typically reflected in organics' higher prices.

Organic advocates and investors in organics operations long have long worried about how the industry will change if producers continue to promote "quality" but face competition on margins at the same time. This problem is being faced directly by some fast food firms that are attempting to build sales through "increases in product quality" but find they cannot reliably supply the items promised. These are long and complex supply chains, very much more so for major retailers. How they balance the problem of meeting customers finely-tuned often extravagant product quality expectations while limited to competitive margins remains to be seen, but should be watched closely by producers as market trends continue.

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(GH/CZ)

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