Washington Insider-- Monday

The Mysterious Ag Markets

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

US Trade Rep, EU Trade Commissioner to Meet

Discussions of major US-European Union (EU) sticking points in Transatlantic Trade and Investment Partnership (TTIP) trade deal negotiations, including ag and public procurement, are set to take place Apr. 11 during a London meeting between U.S. Trade Ambassador Michael Froman and EU Trade Commissioner Cecilia Malmstroem.

The next round of TTIP talks is set to take place in New York at the end of April. EU officials are expecting the U.S. to make a second proposal regarding the opening of U.S. public procurement to EU entities. Also, the U.S. is expected to continue pressing for EU concessions on greater opening of their ag and services markets to the U.S.

Meanwhile, those disagreements on TTIP are not expected to affect U.S.-France cooperation on ag issues, according to USDA Secretary Tom Vilsack and French Ag Minister Stephan LeFoll. The two officials, speaking at the April 7-8 Organization for Economic Cooperation and Development (OCED) Ag Ministerial in Paris, indicated the areas of ag cooperation include global food security, climate change and natural resource scarcity.

Vilsack was the co-chair of the Ag Ministerial meeting that focused on how OECD countries can work together to feed the world’s growing population and simultaneously manage natural resources and handling climate change.

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FDA Moves to Withdraw Approval of Swine Drug; Phibro Defends Product

The U.S. Food and Drug Administration (FDA) said that its Center for Veterinary Medicine (CVM) took the first step toward rescinding its approval of the use of carbadox to treat swine because the drug may leave trace amounts of a carcinogenic residue. The agency re-examined the safety of carbadox, an antibiotic, and concluded that there could be potential risk to human health from eating pork from hogs treated with the drug.

FDA said pork liver, which is used to make liverwurst, hot dogs, lunchmeat and some types of sausage, may be especially risky.

FDA is not recommending that people make changes in their food choices while the agency is working to remove carbadox from the market. Potential cancer risks are based on an assumed lifetime of consuming pork liver or other pork products containing carbadox residues, and short-term changes in diet are unlikely to affect a person’s lifetime risk. However, removal of the product from the market will reduce the lifetime risk to consumers, which is why CVM is taking this action.

Carbadox was first approved in 1972 for use in swine to control swine dysentery and bacterial swine enteritis. It has also been used for weight gain and feed efficiency.

The FDA decision follows a move by the World Health Organization’s Codex Alimentarius Commission in 2014, which concluded that there was no safe level of residues of carbadox in food. Health officials in Canada and the European Union have already banned its sale.

The manufacturer of all of the drug applications for carbadox is Phibro Animal Health, based out of Teaneck, New Jersey. It is sold under the brand name Mecadox, and is not used in human medicine. It is commonly used in the swine industry to treat diarrhea caused by salmonella and other bacteria in young pigs, but can also be added to feed to promote faster weight gain.

Phibro Animal Health has 30 days beginning on April 8 to request a hearing on whether the approval should be withdrawn, which the company said it intends to do, to refute the allegations. If the company does not request a hearing, FDA said it can proceed with removing the drug from the market.

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Washington Insider: The Mysterious Ag Markets

A preoccupation of much of the press recently has been “low prices,” based on the large stocks of commodities now on hand, the so-called market funk and the ringing warnings of economists about “farm struggles ahead,” the Financial Times (FT) says.

So, imagine the analyst shock when USDA reported that U.S. farmers at the end of March planned to boost corn plantings to the third highest level on record despite low prices.

The question of why producers do not plan to cut back on corn output suddenly became very popular, and is leading to a lot of guesses being offered.

The Financial Times says one reason for the increase is that costs are creeping lower. For example, in Minnesota, total expenses for growing corn dropped 8% between 2013-15, according to the University’s Center for Farm Financial Management at the University of Minnesota, FT says.

A second reason, widely suggested is that many farmers have had good years recently, have unusual amounts of cash and have invested in assets such as land and machinery. A third reason may be “mainly ... the expectation of higher returns in 2016 for corn compared with other crops,” USDA noted in its prospective plantings report last week. At the same time, USDA expects a nominal drop in US soybean acreage and a big one in wheat, FT says.

Overall, USDA says it expects this year’s net farm income will be the lowest since 2002 — a pretty heroic estimate since it is still so early in the season. Farms’ debt-to-asset ratio is expected to rise to 13.2%, still very low when compared with other low-price periods, especially during the 1980s, USDA says.

In addition, farmers who could once finance themselves are now borrowing from banks and suppliers, according to the Federal Reserve Bank of Kansas City. The bank says that farm loan demand is “headed for a third straight annual rise, while repayment rates are expected to soften.”

FT notes that about 40% of loans to U.S. farm businesses come from the federal government-backed Farm Credit System. The system set aside $106 million for loan losses in 2015, up from a $40 million provision in 2014, reflecting “continued low grain prices and a slight deterioration in credit quality of certain loans to a limited number of customers”, according to its annual report.

Stephen Gabriel, chief economist at the Farm Credit Administration, which oversees the credit system, still thinks farm lending institutions are “very well capitalized”. For farmers, “input prices will drop; they’ll start working more efficiently”, Gabriel says. “But in the meantime there definitely could be some pain. We’re expecting to see some credit issues arise over the next few years in the grain sector in the Midwest.”

Well, nobody expects cheerful bankers, either, although there have been some in recent years.

So, nobody thinks farmers will do especially well this year, although things can change very rapidly with a few dry weeks. At the same time, farmers are respected for their especially sharp pencils and a jump in spring planting intentions for a major crop like corn almost certainly suggests expectations of at least relatively positive financial incentives. It also suggests that the country should recognize the financial general strength of its farm sector. And, that its new economic safety nets may well allow it to expand production on the basis of even modest expected future productivity as prices hover below levels of recent years, Washington Insider believes.


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(GH/CZ)