Reuters news reported today that, “Rising prices for wheat, soybeans and other commodities should propel U.S. net farm income to a record $87.5 billion this year, up sharply from about $59 billion in 2006, the U.S. Department of Agriculture forecast Thursday.

“‘The higher prices available to U.S. farmers are principally resulting from strong demand from the domestic biofuels industry and from foreign buyers. As a result, farmers have lots of production to sell at high prices,’ the USDA said in its farm income report.

“The surge in demand for U.S. crops is partly the result of low rainfall in other countries, rising international consumption and a weak U.S. dollar that has boosted ‘farm-level prices to a level that more than offsets the increase in production costs.’”

After noting that, “Receipts from corn and soybeans — the top two cash crops — are expected to rise, with corn receipts reaching nearly $33 billion and soybeans $21 billion;” the Reuters article indicated that, “Production costs also are soaring. Total production expenses are forecast to increase $21.7 billion to a record $254.2 billion in 2007, the result of higher feed, labor and fertilizer costs.”

More specifically, the Economic Research Service (ERS) indicated at this webpage that, “The average household income—from farm and off-farm sources—of principal farm operators was forecast to be up 7.7 percent in 2007 to $83,622.”

ERS also noted that, “Farm income is forecast to increase by more than 30 percent between 2006 and 2007, versus 5 percent for off-farm income. Only the households that operate the largest 8 percent of farms (sales of $250,000 or more) have an average farm income greater than off-farm income in a typical year, and these commercial farms posted the largest income gains of all farm sizes in 2007.”

For an excellent graphical breakdown of income by commodity specialization, see this graph that was included in yesterday’s update.

For more complete details regarding these updated projections, see this ERS briefing room, “Farm Income and Costs: 2007 Farm Sector Income Forecast.”

With respect to corn, ERS stated that, “Cash receipts for corn have benefited from the higher farmgate price in 2007 (up over a dollar per bushel from 2006 to around $3.40). Rising corn prices are the result of continual food and feed demand and expanding ethanol demand. Ethanol refineries in the United States have the capacity to produce more than 7 billion gallons per year and, as early as 2010, are expected to add 6.5 billion gallons of annual productive capacity through new construction and expansion of existing facilities. However, prices at ethanol plants in Iowa and Nebraska have fallen around 75 cents per gallon since Spring, reducing profitability for ethanol producers. USDA recently reported that a 40 million gallon Midwest ethanol plant, receiving the late September price of $1.52 per gallon for ethanol and paying $3 per bushel of corn, was earning 17 cents per gallon above variable cost of production and 3 cents below total cost of production. The forecast for corn exports in 2007 is up about 11 percent from last year. An estimated 93.6 million acres of corn was planted in 2007, the largest area planted to corn in over 60 years. Favorable weather in the major corn producing States will result in a record 13.2 billion bushels, up 2.7 billion bushels from last year.”

More specifically with respect to wheat, ERS noted that, “Wheat prices, which started to rise in late 2006 and continued through 2007, are expected to average a recordof nearly $5.70 per bushel in 2007. This year’s domestic ending stocks could be the lowest since 1948/49. Even with current high prices, U.S. wheat exports are forecast to rise in 2007 by nearly 27 percent, with a number of importers removing import restrictions and/or subsidizing consumption. Global wheat production in 2007 is projected to lag behind world demand due to a U.S. freeze and heavy rains in the Plains, Canadian planting delays and hot summer, Australian drought, EU-27 rains in the West and drought in the East, and Ukraine/Russia drought. As a result, global ending stocks are expected to fall to their lowest level since 1975/76.”

Later, ERS highlighted federal government payment levels, stating that, “Direct government payments are expected to total $12.1 billion in 2007, down from the $15.8 billion paid out in 2006. This level would be 26 percent below the previous 5-year average. Direct payments under the Direct and Countercyclical Program (DCP) in 2007 are forecast at $5.26 billion, less than a 5-percent increase from 2006. Direct payment rates are fixed in legislation and are not affected by the level of program crop prices.”

“Countercyclical payments are forecast to decrease from $4.0 billion in 2006 to $1.18 billion in 2007. This follows a small decrease in 2006. In 2007, only upland cotton and peanuts are expected to receive payments.”

And with respect to marketing loans, ERS said that, “Marketing loan benefits—including loan deficiency payments, marketing loan gains, and certificate exchange gains—are projected at $1.0 billion in 2007, down from $1.8 billion in 2006. In 2006, upland cotton producers and corn producers received 62 percent and 24 percent, respectively, of total marketing loan benefits. In 2007, upland cotton producers are likely to realize almost 99 percent of the total marketing loan benefits, of which 95 percent are certificate exchange gains. At current price levels, marketing loan benefits are not available to the other program crops.”

See this graph for an excellent breakdown of government payment levels over the past 10 years.

A separate ERS briefing room, “Farm Income and Costs: Farms Receiving Government Payments,” was also updated yesterday. This page contains a reservoir of information regarding federal farm payments.

Numerous graphs and written explanations located at this ERS briefing room provide a variety of different angles to assess federal payment distributions.

In particular, this graph provides an interesting breakdown of payment levels by farm type; while this graph details farm payment levels by payment class.

***

In a related article regarding the price level of some agricultural commodities, Financial Times writer Javier Blas reported yesterday that, “Policymakers already concerned about the relentless rise in global food inflation are facing more bad news in the shape of soaring soyabean prices.

“Soyabean prices have risen to their highest level in 34 years, boosted by strong Chinese demand and fears that current prices are not high enough to swing acreage from corn to soyabeans in the US, the world’s largest producer.

“In Chicago, soyabean prices this week hit $11.14 a bushel, the highest level since July 1973, helped byrising demand from the biofuel industry as crude oil prices approached $100 a barrel and also by worries about the Brazilian crop - the world’s second largest - after dry weather in Mato Graso state, the key producing area. Soyabeans traded yesterday at $10.85½ a bushel.

“The price-jump threatens to resonate through the supply chain, boosting meat and poultry prices because soyabean is used largely for animal feed, analysts warned.”

The FT article added that, “Peter Thoenes, an oilseeds specialist at the UN Food and Agriculture Organisation in Rome, said that Brazil and other South America soyabean crops were now key to offseting the shortfall from the US, after farmers in the world’s largest soyabeans-growing region converted some of their acreage to corn.

“‘Any unfavourable weather in South America could spark a price hike,’ Mr Thoenes said.

“The lower soyabean crop coupled with higher demand for animal feed and for biodiesel production has led to a fall in global inventories, with the stock-to-use ratio at the lowest level for at least five years, according to FAO estimates.”

Ethanol – Energy Bill

Bloomberg writer Mario Parker reported in today’s Washington Post that, “VeraSun Energy, one of the nation’s largest ethanol producers,agreed to acquire US BioEnergy, as falling prices are prompting consolidation among producers of the gasoline additive.”

The article stated that, “Swelling supplies of the corn-based fuel have caused ethanol prices to slide 23 percent this year and prompted at least six producers to shelve construction projects. Stockpiles in September, the month of the most recent available data, were up 18 percent from a year earlier, according to the Energy Department.

“‘We needed to see some consolidation in the industry,’ said Ian Horowitz, an analyst at Soleil Securities in New York. ‘This will rationalize the business now.’”

And Lauren Etter reported in today’s Wall Street Journal that, “In a sign that ethanol-industry consolidation is gaining velocity, VeraSun Energy Corp. will acquire rival US BioEnergy Corp. in a deal valued at about $700 million, creating what could become the largest U.S. producer.

“The deal comes as the industry faces a glut of product, opposition from environmental and livestock trade groups and an uncertain future as Congress weighs mandates to help producers.

“Consolidation is seen as a way for producers to become more efficient and more competitive in a crowded, volatile and cutthroat market where profit margins are low and more production capacity is scheduled to come online. Shares of both companies rose yesterday.”

***

And with respect to the Energy Bill, John J. Fialka reported in today’s Wall Street Journal that, “With a deal nearly in hand that could have a profound effect on the auto industry, lawmakers hammering out a new energy bill are considering proposals that could impact oil refiners and other businesses in an effort to spur use of ethanol and other alternative fuels.

“The talks, which could run into the weekend, are aimed at drafting a compromise package for House and Senate floor action as early as next week on legislation intended to reduce the nation’s dependence on oil. The details could have a major impact on the oil refiners that would be required to make greater use of alternative fuels in their blends or pay a penalty. They are critical to farm groups and a number of high-tech companies hoping to create a new industry devoted to producing fuel from farm wastes, wood chips and other domestic feed stocks.”

The Journal article noted that, “On the alternative-fuel front, House leaders are trying to modify the goals, standards and timetable in legislation already passed by the Senate that will determine which type of ‘advanced biofuels’ would be covered by the effort. Among other disputes, the House wants the Environmental Protection Agency to oversee the program, but the Senate prefers the Energy Department.

“The House proposal would require production of 20.5 billion gallons of ethanol and fuels based on farm wastes and other biological materials by 2015. The Senate proposal calls for 36 billion gallons by 2022.

“The House proposal, which appears to have heavy input from environmental groups, places restrictions on fuels that might qualify. They must produce 50% to 75% less carbon dioxide, measured against conventional ethanol, and face other hurdles. For example, one potential raw material — wood chips — can’t come from national forests where environmental groups object to commercial logging.”

Farm Bill

Reuters news reported yesterday (via DTN) that, “Senate staff workers want to shorten a list of amendments so the stalemated U.S. farm bill can be freed for debate next week, said a spokeswoman for Agriculture Committee chairman Tom Harkin on Thursday.

“If the Senate passes its bill before adjournment in late December, Congress may be able to send a final version of the bill to the White House in January, said House Agriculture Committee chairman Collin Peterson.”

The article noted that, “Staff workers met on Wednesday to identify amendments that would be cleared for floor debate. [Senate Majority Leader Harry Reid (D-Nev.)] has suggested each side could offer a limited number of amendments.

“‘These negotiations are ongoing but we remain hopeful that we can continue to make progress and resume consideration of the bill when the Senate returns,’ said the Harkin spokeswoman.”

EU CAP “Health Check”

Jack Thurston, writing yesterday at the CAP Health Check Blog, noted that, “As DG Agriculture’s spokesman Michael Mann has been keen to stress over the past few days since the publication of the Commission’s communication on the CAP health check, this is just the start of the process of deliberation and debate. Dr Tamsin Cooper of the Institute for European Environmental Policy has written a useful briefing on the next steps in the process.

“According to Tamsin,

“‘Following the publication of the Commission’s Communication, a six-month period of debate and reflection is likely to ensue during which common positions and irreconcilable differences are likely to emerge. This will involve the Commission, in dialogue with stakeholders, the Member States and the European Parliament, prior to the tabling of formal legislative proposals by the Commission in May 2008. The views of stakeholders will be solicited through two stakeholder conferences to be held on 6 December 2007 and 11 January 2008. Itis understood that participants representing a wide range of interests have been invited to the first conference, whereas the second event will focus on issues relating to the dairy sector.’”

The update also pointed to Tamsin’s full briefing regarding the CAP “Health Check,” which can be viewed by clicking here.

(Additional, more general background on the “Health Check” is also available here).

Meanwhile, EU Commissioner for Agriculture Mariann Fischer Boel, updated her blog yesterday, indicating that, “On 20th November, I put my ideas on the table on how to further improve, modernise and streamline the Common Agricultural Policy.

“The Health Check is a chance to build on the reforms introduced since 2003 and prepare both the CAP and farmers for new challenges and opportunities.”

Commissioner Fischer Boel added that, “But I am determined that the next six months should be a period of real consultation with as many people as possible.

“I have called two big conferences. A general hearing on the 6th of December which will deal with all the topics covered by the Health Check and on the 11th of January 2008, a special conference on the future of the dairy sector.

“Both conferences will be web-streamed on the website of DG Agriculture so regardless of where you are in the world, it will still be possible to watch.”

And a news release issued yesterday (“Simplifying the CAP: administrative burden of Cross-Compliance limited, study shows”) stated that, “The burden of red tape on farmers resulting from compulsory standards of environmental protection, public, animal and plant health and animal welfare (so-called Cross-Compliance) is very limited, according to a new report carried out for the European Commission. The report is based on research carried out in five EU Member States, which also showed that the model of direct payments to farmers chosen by each country also has a limited influence on the administrative burden they face. These results, and the proposals for simplification contained in the recent Health Check, put the Common Agricultural Policy in a good position to meet the target of a 25 percent reduction in administrative burden by 2012.

“Mariann Fischer Boel, Commissioner for Agriculture and Rural Development, commented: ‘Simplifying life for our farmers is one of my main priorities. This study shows that a sensible and pragmatic implementation of the Single Payment Scheme and Cross-Compliance can make life a lot easier for farmers. We’ll take the findings of the report very seriously as we continue our efforts to simplify the CAP. And I’m sure that the Health Check exercise will contribute considerably to this process.’”

Keith Good