Washington Insider-- Tuesday

Farm Market Pressure

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

U.S. & Brazil Ink Deals on Beef Trade

Brazil and the U.S. reached agreement last week on beef trade which will facilitate exports of fresh and frozen Brazilian beef to the U.S., and in an announcement made Aug. 1 by USDA, U.S. beef will also be returning to Brazil.

The deal was signed as the two countries completed the IX Consultative Committee on Agriculture (CCA) meetings. Brazilian Ag Minister Blairo Maggi is to exchange equivalence letters today (Aug. 1) in Brazil at the Planalto Palace.

"The veterinary services were fully evaluated the recognition of official control of both inspection systems," Maggi said in a statement. Both the Brazilian ministry and USDA may indicate the list of establishments for export, he noted, adding "only those establishments that meet all specified requirements on the agreed certification shall be appointed by the U.S. and Brazilian official services."

Further, Maggi said the expectation is that shipments would start in the next 90 days after administrative procedures are completed.

Reports have indicated the quota for imports of Brazilian beef will be up to 64,800 metric tons per year, though other reports have indicated it would be 64,000 metric tons.

Meanwhile, Australia is keeping a close watch on the situation. However, officials there have downplayed the potential impact the reopening could have on Australia which has found a market in the U.S. for its beef exports.

"Given the depreciated value of the Brazilian real, the option for Brazil paying the out of quota import duty of 24.6% and still being competitive in the US market will be watched closely," Australian Meat Industry Council national processing director Steve Martyn said. "While this is the next and important stepping stone for Brazil, the practicalities of accessing the US market still has a few more hurdles."

The details on trade could be key, Martyn said, noting "while Brazil has the capability to supply grass-fed beef, it is not the sort of quality that Australia can supply."

As for U.S. beef heading to Brazil, USDA said agreement has reached agreement with Brazil's Ministry of Agriculture, Livestock and Food Supply to allow access for US beef and beef products to the Brazilian market for the first time since 2003. Brazil's action reflects the United States' negligible risk classification for bovine spongiform encephalopathy (BSE) by the World Organization for Animal Health (OIE) and aligns Brazil's regulations to the OIE's scientific international animal health guidelines.

"The Brazilian market offers excellent long-term potential for US beef exporters. The United States looks forward to providing Brazil's 200-million-plus consumers, and growing middle class, with high-quality American beef and beef products," USDA Secretary Tom Vilsack said.

According to the Global Trade Atlas, U.S. beef exports to Brazil totaled 312 metric tons in 2003, valued at about $475,000. This was down from 552 metric tons in 2002, valued at $1.2 million.

The peak year for U.S. exports to Brazil appears to be 1998, when the U.S. shipped 6,947 metric tons valued at $17.4 million (also per the Global Trade Atlas).

Both countries will immediately begin updating their administrative procedures in order to allow trade to resume. US companies will need to complete Brazil's regular facilities registration process.

Japan to Halt Imports of Some U.S. White Wheat After GMO Find

Japan will now halt imports of U.S. western white wheat and feed wheat from the U.S. Pacific Coast after 22 plants of an unapproved genetically-modified crops developed by Monsanto Co. were found in an unplanted field in Washington state, according to a report from Bloomberg.

By taking the step, Tetsuo Ushikusa, director at the grain trade and operation division of Japan's Agriculture Ministry, told the news service it should prevent contaminated supplies from entering Japan , as western white wheat is produced in U.S. Pacific states. However, imports of other types of wheat, and feed wheat from the U.S. Gulf will continue, he said.

The restrictions will stay in place until the Japanese government sets up a system to test for the GMO wheat variety, Ushikusa said, but offered no indication on how long such an effort would take. Japan will lift the restriction once the government establishes a system to test for the engineered variety, Ushikusa said, without giving a time frame. The U.S. is the largest wheat supplier to Japan, representing almost 60% of wheat purchased by the Asian nation, according to ministry data.

A USDA spokesperson confirmed the Japanese actions, saying until the country can set up testing of incoming shipments, it has suspended future purchases of western white wheat for food use, and purchases from the U.S. West Coast but not Gulf of western white wheat for feed use, and it will suspend distribution of all previously purchased US wheat until testing is set up.

This is the first suspension of U.S. wheat since 2013 when GMO wheat was found in Oregon, a situation which resulted in a two-month halt of imports of western white wheat. "We hope it will take less time to resume imports this time," Ushikusa said. "We will get the testing method for the modified wheat from Monsanto."

Monsanto has said it has a test to sample wheat and determine if the GMO variety is present.

The engineered crop found in Washington is resistant to Monsanto-produced herbicide Roundup, the USDA's Animal & Plant Health Inspection Service said Friday.

South Korea, another key customer for western white wheat, said it was not going to halt imports but would test supplies coming in to make sure no GMO wheat is present. "We plan to strictly inspect imports of U.S. wheat and flour and clear customs only for the wheat products that are confirmed not to have any genetically modified wheat," said an official at the food ministry.

Domestic Japanese millers hold wheat stockpiles equivalent to about 2.3 months of consumption, Ushikusa said.

Japanese data indicates the country imported 775,000 tonnes of western white wheat in the year ended March 2015, mainly to produce cakes and confectionery, with an additional 2.1 million tonnes from the U.S. in the year for production of bread and noodles, according to the ministry data.

Washington Insider: Farm Market Pressure

The role of prices in agriculture is often difficult to explain and always requires caution. And, since production efficiency and costs vary enormously across the sector, it is important to note that one producer's struggle may be another's bonanza.

Still, commodity prices that average well below those in recent years attract attention, and the Minneapolis Star Tribune ran a front page story this week that characterized the coming harvest as a "day of reckoning" because Minnesota farms likely will produce a record or near-record amount of corn and soybeans this year. This glut could create "bigger losses in crop farming and lead to financing difficulties and strains between bankers and farmers."

The article notes that "despite [weak markets] bankers around the region refinanced farmers' debt and lines of credit on favorable terms." However, it sees a looming "credit crunch" and "a decisive turn in the farm economy."

"One bad year, you can overlook that," the paper quotes Brent Gloy, an agricultural economist at Purdue University. "When it starts to be multiple years, the stakes get higher." The problem, the Star-Tribune says, is lagging demand for corn and growing production in the United States, China, Brazil and Argentina—as well as export markets depressed by a strong U.S. dollar.

The article cites comments by lenders that see total farm lending by Minnesota-based banks as "plateauing" since 2014, after growing by 45 percent over the previous three years. This is partly because costs have dropped slightly, but mostly because farmers have grown more cautious recently, the Tribune thinks.

It also notes that one measure of the tension between farmers and lenders in Minnesota is activity in the Farmer-Lender Mediation program. When a Minnesota farmer defaults on a farm loan, notice is sent to the University of Minnesota Extension. In the current fiscal year that began last October, Minnesota lenders have sent 2,493 such notices, the highest number through July since 2010 and a 20% increase over last year.

Then, the article leaves the world of dollars and cents and pursues what farmers "hope for," and that is a drought somewhere else. The best hope for profitability in 2016 is a severe drought elsewhere. "The more severe and widespread the drought, so long as it doesn't hit Minnesota farmers, the better it will be for Minnesota farmers." The article says that happened in 2012, and "Minnesota farmers, who produced huge yields unaffected by drought, reaped big profits."

"Farmers start off the year hoping for drought somewhere far away," Purdue Prof Gloy said, but "as the summer goes by and prices stay low, they're ready to accept bad weather closer to home. Maybe a neighboring state."

Then, he adds as if there is no connection, "The biggest culprit in all of it is acres of production. We have added a lot of acres," Gloy said. "Somewhere the switch needs to be pulled. Really the only way that happens is with weather problems."

Well, not exactly. The acreage response last spring was a surprise to many analysts, and many still don't know for sure why that jump in acreage happened. There were lots of signals about the likelihood of soft markets—but producers boosted plantings anyway and the lenders apparently went along. Some analysts suggest that was because a number of producers thought they could make money at the predicted weak prices as technology improves; or, are the new safety net programs better protecting against the risk of soft markets; or what?

It seems unlikely that many producers really counted on the "high precision" drought dream that Prof. Gloy described, or saw it as more than a dream.

Well, what about the future? Will the next round of prices provide something like the "switch" Prof Gloy discussed? The Star Tribune doesn't say, but notes that some producers continue to hope for emergency aid from the government of one kind or another.

At the same time, the costs for the new 2014 programs are trending well above expectations—and seem to be increasingly attracting the attention of budget hawks in the Congress. While major program changes are highly unlikely at this point in the farm bill and election cycle, the performance of the new policies is attracting unfavorable comment in some quarters, and can be expected to intensify the farm bill debate in the coming years, Washington Insider believes.

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