Healthcare as a Paradigm for Food Policy |
If Food Were Treated as healthcare ...
The debate in Congress last year over Obamacare and in the GOP primary this year over Romneycare as well as the Supreme Court's consideration of the federal healthcare law can provide an interesting debate for food and agricultural policy. Right now Congress is trying to draft a farm bill, which includes food and nutrition programs such as the Supplemental Nutrition Assistance Program (SNAP). When it comes to SNAP, House Budget Committee Chairman Paul Ryan (R-Wisconsin) has said that the social safety net is at risk of becoming a "hammock." And that is one of the arguments against the new federal healthcare law. Indeed, one tenet in the Supreme Court oral arguments on the healthcare law is whether healthcare so important and unique that the federal government can require the purchase of certain services and standards.
Justice Kennedy said that mandatory purchase would "fundamentally change the relationship between the individual and the government." If a federal statute can make us buy health insurance, what constitutional principle prevents it from making us buy anything else? The Justice Department has argued that "not buying" health insurance foists costs on everyone else because the system ends up taking care of people anyway. In other words, those of us who do buy insurance end up paying more because others ride for free. The advocates of the law say that everyone will eventually need healthcare, so making us buy insurance just changes the timing of the payment and prevents people without insurance from imposing costs on others. But how is that different from food?
Friend of WPI and economist Brian Wesbury has commented recently on this and raises some compelling and interesting points: What is the "limiting principle" that would prevent the government from going further down the road on basic necessities when it comes to mandatory purchases? Based on the arguments put forth in defense of the healthcare law, it would seem to us that there is no limiting principle. Healthcare is a relative luxury in terms of human existence when paired directly with food. The need for food and nutrition is much more acute and near-term than healthcare. People need to eat every day -- or nearly so -- to live. Illness, accidents and other "demand creators" for healthcare services can be years apart in frequency intervals. That's the very reason why some low-income (and middle-income, too) people chose to forego purchasing healthcare services and health insurance, but virtually no one chooses to not buy food, even when down to the proverbial -- or even literal -- last dime.
So what if food were treated as healthcare and considered to be so unique as to require federal purchase? What would that impose? Think about what the food and ag commodities market would look like if food policy were treated as healthcare. As Wesbury notes, the tax deductibility of employer-paid healthcare costs, Medicare and Medicaid have driven consumers' out-of-pocket expenses down to about 10 percent of the total. Imagine if Americans bought food this way? It would be a radical change.
(This article was originally published in the 17 April 2012 issue of Ag Perspectives as part of a WPI analysis by Dave Juday. Click here to find out more about subscribing to Ag Perspectives.) |
Tax Policy Distorting Palm Oil Trade |
The Battle Between Indonesia, India and Malaysia
Tax policy is causing brouhaha in the palm oil trade. India has traditionally favored its palm oil refiners by imposing a 7.5 percent tariff on refined oil imports. However, now the largest exporter of palm oil, Indonesia, has raised its export tax on crude oil while lowering it on refined oil. As a result, India's imports of refined palm oil have risen, and so too has the blood pressure of India's refiners. Closely watching this battle is Malaysia, the second-largest exporter of palm oil, and several countries which also are major palm oil importers, including China. Just to keep it more interesting, Indonesia actually has a variable export tax, presumably to ensure adequate supplies for domestic consumers.
To more than offset the differential export tax benefits of Indonesia, India's palm oil refining industry is pressuring the Indian government to raise its tariff rates on refined palm oil. This would hurt Indian consumers, but it would not be unusual for Delhi to protect the domestic industry. Because of the sharp increase in India's imports of refined palm oil, the country's 20 MMT vegoil refining sector is operating at only about 50 percent of capacity, according to the Solvent Extractors Association. Many of the plants likely will close if there is no change in India's import policies. China's refiners are also being hurt, and the Chinese government is also likely to make a change in import tariffs.
Meanwhile, Malaysia's exports of refined palm oil are being hurt. The irony is that a few years ago Malaysia declined to support a U.S. effort in the WTO to discipline the use of such differential export taxes. The shame is that governments are so rampantly using border measures for mercantilist purposes and at disservice to their poor populations.
It is very interesting that India and Malaysia are now concerned about the trade-distorting differential export taxes (DETs) of Indonesia. A few years ago the U.S. oilseed industry led an effort to establish, as part of the World Trade Organization (WTO), a level playing field for the oilseeds sector which would have led to the elimination of DETs. The level playing field also would have addressed other trade-distorting practices as well as import tariff rates among participants. However, Malaysia declined to support the level playing field initiative because it also utilizes them to support it palm oil refiners. Without Malaysia's participation, the level playing field initiative went nowhere. However, now might be a good time for Malaysia to reconsider its opposition to the level playing field idea.
(This article was originally published in the 13 March 2012 issue of Ag Perspectives as part of a WPI analysis by John Baize. Click here to find out more about subscribing to Ag Perspectives.) |
Another Golden Era for U.S. Agriculture |
Is This a Different Farm Land Boom?
The Jewish Passover seder rite begins with the youngest person, the one least familiar with history, to ask the question, "Why is this night different from all the others?" And so begins the ritual explanation of the history of the Jewish people. Recently, Jason Henderson, a vice president at the Omaha branch of the Kansas City Federal Reserve, posed the economic equivalent question for agriculture: "Why is this farm land boom different from all the others?" He went on to explain the cycle of U.S. agriculture over the past 100 years. The following are some highlights.
U.S. agriculture enjoyed two golden eras in the 20th century: the 1910s and the 1970s. Both were led by strong global demand and rising exports; both boosted agricultural commodity prices and farm incomes; both were periods of low interest rates, which sparked stronger capital investments in land and machinery. With regard to those characteristics, those periods were the same as the current farm boom. And in those periods, the following decades resulted in what Henderson coined "severe contractions" in income and farm land values. The first boom ended with supplies catching back up with demand as the war ended plus a massive gain in efficiency due to mechanization. Ironically, in comparison to today, the mechanization resulted in less grain going toward fuel (i.e. feed for draft animals) and more toward human consumption. Of course, one trend today pushing up grain prices is more grain going toward fuel use via biofuels. In 1920, the Fed turned toward higher interest rates. That led to a recession, and eventually a depression. The second boom ended with a major grain embargo and a strengthening of the U.S. dollar. These combined for a 60 percent drop in exports. There was also expanded production in the late 1970s -- the era of "fence row to fence row" and oil price shocks. Eventually, that also led to a recession. Farm land values dropped more than 40 percent by 1987 and were equivalent to 1960s values.
So what is different today? At first blush, not so much, really. Global demand is up. Production is limited in terms of marginal gains to supply that growing demand (the result of recent drought in the U.S., drought in Russia, flooding in the U.S., and the signs of drought in Argentina). Also, like with the previous booms, interest rates are low and high farm incomes are capitalized into farm land. With low interest rates, land values outpace cash rent values. That rent-to-value ratio is like a stock's price-to-earnings ratio (P/E); the higher the P/E, the more the market is willing to pay up front for the future earnings. Lower interest rates on farm land reduce the rate at which expected future returns are capitalized -- or in short, future farm income is valued at more today. This is a market signal that we are seeing a somewhat lower demand for farm land in the future, and of course, lower demand means reduced prices. So will the current boom end the same way as the last two did?
It is not a matter of whether the real price of farm land will decline so much as it is a matter of by how much and over what period. The last two booms ended in busts. What, therefore, could drive a softer landing this time?
From an economics standpoint, farmers are less leveraged. Unlike the last two booms, farmers have not borrowed as much to invest in land and have not increased the rate of borrowing for non-land assets (tractors, equipment, etc.) beyond the increased level in farm profits. Part of the reason, according to Henderson, is that equipment has not undergone the quantum leaps it did coinciding with prior booms (in the 1910s it went from horses to tractors; in the 1970s it was the growth in size and horsepower and the addition of four-wheel drive). Debt service, should this trend hold steady, shouldn't be the issue it was in leaner times.
(This article was originally published in the 7 February 2012 issue of Ag Perspectives as part of a WPI analysis by Dave Juday. Click here to find out more about subscribing to Ag Perspectives.)
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Will Ethanol Production Slow?
Forty percent of the U.S. annual corn production now goes directly into ethanol production. As the world is fully aware, this is a massive number that has changed the face of the world corn and feed grains balance sheets to a degree never before witnessed.
Mandates and subsidies certainly elevated this demand much more rapidly than imagined when the Renewable Fuels Standard (RFS) was first implemented. Ethanol production margins were so big in the early stages of the industry that more plants than anyone had predicted were built and came on line in a very short period of time. That was followed be the global financial collapse in 2008 that sent between 30-40 percent of the ethanol industry into bankruptcy.
The industry has since rationalized itself again and appears on very solid financial ground. In fact, ethanol margins were very good in the last half of 2011. The point is that ethanol production has been setting weekly records the last several months, which means that corn consumption in ethanol has also been setting records. Two important tax items expired at the end of 2011 that have caused some concern about ethanol demand in the future: the blender's tax credit and tariffs on imported ethanol.
Some analysts have called for a slowdown in ethanol production because of the expiration of these protective taxes/tariffs, but there are plenty of reasons to believe that that will not be the case, including the fact that demand for ethanol in the U.S. will remain strong with or without the blender's credit.
(This article was originally published in the 9 January 2012 issue of Ag Perspectives as part of a WPI analysis by Mike Krueger. Click here to find out more about subscribing to Ag Perspectives.) |
Tough Times for Foreign Soy Crushers in China |
Excess Capacity and Additional Plants Indicate Crushed Margins
Anyone who has paid any attention to the soybean crushing sector in China knows that the last year or so have been brutal in terms of margins. Except for relatively brief periods since May 2010, soybean crush margins have been negative for both South American and U.S. soybeans imported and crushed in China. There was a short period in September when margins were positive, but they turned negative again in October and have mostly remained that way since then. The most recent data we've seen shows that Chinese crushers currently are losing around 150 yuan/MT (about $23.60/MT) processing South American soybeans and about 115 yuan/MT (about $18.15) processing U.S. soybeans based on replacement values. The average loss since early October has been about 58 yuan/MT for South American soybeans and about 34 yuan/MT for U.S. soybeans.
China's crush margins are so poor because of a huge excess of crushing capacity. China's soybean crush volume in 2010/11 was about 55 MMT, but its crush capacity is close to 100 MMT per year. However, a significant share of the excess crush capacity is from older plants located in the northeast along the coast that mostly do not operate the bulk of capacity and serve to crush imported soybeans. Any time margins are positive because of good soymeal demand, the excess capacity means that the companies increase their throughput and soon drive margins to negative territory. And it is largely soymeal demand and prices that are the key determinants of margins since China is a large net importer of soyoil, and there is almost always a good market for soyoil.
To make matters worse, additional crushing plants are under construction in China which are expected at add an additional 10 MMT of annual crush capacity. We have seen data that indicates China's total soybean crush capacity likely will surpass 110 MMT by the end of 2012. Yet, USDA is forecasting total crush volume in China will reach only 60.1 MMT in 2011/12. This scenario almost guarantees continued negative crush margins for the foreseeable future unless a lot of less efficient or poorly located capacity plants shut down.
Almost all the new and planned soybean crushing capacity is owned by Chinese firms. The China National Cereals, Oils and Foodstuffs Corporation (COFCO), a state-owned company, has been the largest builder of new crushing capacity. Sino Grains Oils, another state-owned company, also has added capacity. Foreign companies, like Cargill, Bunge, Wilmar and Noble, have mostly been forbidden to build or acquire additional capacity in the last couple of years. However, some of the businesses have leased capacity from Chinese firms. It has clearly been Chinese government policy to favor Chinese-owned firms in the crushing industry, and it mostly has been state-owned firms that have been favored.
One has to wonder if the Chinese government's ultimate goal is to run foreign-owned companies out of the soybean crushing industry in China. Clearly, the government has indicated it does not want foreign firms to expand their capacity, but its objective now may be to drive them out of the business entirely. By allowing and supporting the building of additional soybean crushing capacity by state-owned firms, the government must know it is going to cause the entire industry to lose money. However, it may be that the government assumes that if this occurs, it ultimately will be the foreign-owned firms that exit the business first. That will be the case particularly if the government covers losses of the state-owned companies and perhaps discreetly does the same for private Chinese-owned firms. The multinational firms may have deep pockets, but they are not as deep as those of the Chinese government.
(This article was originally published in the 29 December 2011 issue of Ag Perspectives as part of a WPI analysis by John Baize. Click here to find out more about subscribing to Ag Perspectives.) |
Wheat Convergence Deja Vu |
Has the VSR Fixed the Wheat Convergence Problem?
Like the proverbial bad penny, the subject of wheat market convergence never seems to go away. In grain futures market jargon, "convergence" refers to the coming together of prices for physical grain and prices for the futures contracts representing that grain as each contract month becomes current for delivery of the physical grain. In theory, futures prices and cash prices should converge during the delivery month, or at least close thereto. The assumption that futures prices and cash prices of the underlying commodity will meet, or at least come closely together, is what makes futures markets a viable tool for hedging the price risks of being long or short the physical commodity. If that connection between cash and futures values does not exist, hedging cash positions with offsetting futures positions no longer shrinks price risks. It simply adds more risk.
We are not sure how long the problem of lack of convergence has plagued CBOT/CME wheat futures for which SRW is the underlying commodity, but it was more than nine years ago when we wrote a paper on the subject. Since then, the degree by which convergence was lacking varied. However, the problem became extreme in 2008 when wheat futures prices soared but cash prices did not. Cash SRW prices were nearly $2.00 below futures prices at one point, and CME wheat futures became useless, indeed dangerous for anyone owning or needing physical SRW.
This total breakdown of convergence attracted unusual public attention. We say unusual because esoteric structural issues with grain futures contracts hardly ever attract outside attention. But the extreme lack of convergence of CME wheat futures contracts in 2008/09 became so widely discussed that even a congressional sub-committee held a hearing on the topic. In the usual political fashion, the sub-committee blamed the lack of convergence on "excessive speculation," especially by index funds that held large long positions in CME wheat futures. We met with the sub-committee staff shortly before the hearing, and it was clear that this conclusion was already locked in well in advance.
To point the blame for lack of convergence on speculators required that quite a large body of contrary analysis be ignored. Most of the prominent academics known for their structural analysis of futures markets concluded that the level of speculation had little or nothing to do with the convergence problem. Even CFTC's analytical staff could find nothing to connect speculation or index funds to the lack of convergence. Nevertheless, speculators were tagged with the political blame, and this just added another reason for the subsequent Dodd-Frank financial market reform legislation to target them.
Aside from the politics, the trade and the CME (prompted by the CFTC) made a serious effort to identify factors causing the lack of convergence and find ways to "fix" the CME wheat contract that would improve convergence. The consensus was that if more SRW were delivered against spot contracts, futures and cash prices would be forced to meet. As it was, longs could take deliveries and hang onto them indefinitely by paying the delivery carrying charge of about 5 cents per bu per month. There was no way of impelling them to load out the wheat or redeliver it.
The solution seemed to be to increase the cost of carrying delivery wheat, but how? The CME's answer was to create a complex plan to produce variable storage rates (VSR) for delivery SRW. If during a set period of time the spread between the spot month and the next contract month averages a minimum of 80 percent of the delivery storage rate, then that storage rate is increased the equivalent of 3 cents per bu per month. If the average is between 50 percent and 80 percent, the rate is not changed. If it is below 50 percent, the rate is lowered 3 cents per month to a minimum rate of 5 cents per month.
(This article was originally published in the 8 December 2011 issue of Ag Perspectives as part of a WPI analysis by Bob Kohlmeyer. Click here to find out more about subscribing to Ag Perspectives.) |
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