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P OLICY OUTLOOK. ISSUES AHEAD OF MIDTERM ELECTIONS. Jim Wiesemeyer Senior VP, Farm and Trade Policy Informa Economics, Inc . wiesemeyer@gmail.com. WHERE ARE WE GOING?. I S WASHINGTON STILL DYSFUNCTIONAL ?. Mostly… a few examples of functionality on some issues
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POLICY OUTLOOK ISSUES AHEAD OF MIDTERM ELECTIONS Jim Wiesemeyer Senior VP, Farm and Trade Policy Informa Economics, Inc. wiesemeyer@gmail.com
IS WASHINGTON STILL DYSFUNCTIONAL? • Mostly… a few examples of functionality on some issues • President Obama: Use of executive orders | Legacy focus • Midterm Elections: 24/7 politics from July forward • House GOP Majority Leader Cantor’s stunning defeat • LINOs: End of earmarks in House; outside funding
IS WASHINGTON STILL DYSFUNCTIONAL? • If GOP wins Senate:Obama’s reaction…more dysfunction? • Senate: Dem leader Reid allowing very few amendments • Key issues ahead: Lame-duck | Debt ceiling increase • Appropriations • Block WOTUS, other regulations • Tax incentive extenders
IMMEDIATE RISKS TO GLOBAL ECONOMY • Ukraine: Downed Malaysia flight – Key is Europe reaction • Russia threatens retaliatory moves against US, EU sanctions • Vulnerability of Eurozone banking system • Emerging markets: slower capital flows, rising deficits, currency volatility, reduced growth, political uncertainty • China: Steady growth, but policy changes… • Geo-political risks, particularly in Middle East • KEY: U.S. ability to recover growth momentum
WHY SOLID U.S. GROWTH IS NEEDED • More jobs • More tax revenue • Lower entitlement spending • Lower budget deficits than current estimates
BUSINESS INVESTMENT IS KEY TO GROWTH AND JOB ACCELERATION IN U.S. ECONOMY… 2015?
FOMC PLANS GETTING CLEARER • Asset purchases:Final taper of $15 bil. in Oct. • Still-hefty portfolio: $4.38 trillion as of July • Inflation: Still seen ‘consistent’ with Fed expectations • Housing: Still sluggish due to several factors, including potential ‘structural’ changes i.e., aging population and evolving lifestyle preferences. • Focus ahead: Communication & exit strategy
SHORT TERM DEFICIT RELIEF MEANS LONG TERM REVENUE & SPENDING CHANGES ARE POST-2014
RISING DEFICITS • Current gov’t debt:$18 trillion | will surge next 5-7 years • Each day, 10,000 baby boomers retire and begin receiving Medicare and Social Security benefits. • Ratio: 5 workers supported benefits of each retiree in 1960; two by 2030. • Medicare: 77 million retirees. Rising health-care costs. Couple retiring next year will have paid $140,000 in lifetime Medicare taxes and premiums, yet will receive nearly $430,000 in Medicare benefits.
RISING DEFICITS • Social Security:Trust funds depleted 2030 (CBO). • Perspective: Before SS began in ‘30s, retirees had highest poverty rate of any age group. Today they have the lowest. • Fact: Less than half of households 55 to 64 have retirement savings, and of those, half have less than $120,000. • Importance: Majority of retirees — incomes up to $32,600 — get 2/3 to all income from SS. At higher incomes, up to $57,960, SS single biggest source, almost half. • Solutions: Hiking ceiling to cover 90% of wages | Raise payroll tax rate 1% from current 6.2%
IMPACTS OF RISING INTEREST RATES • Interest payments on debt in 2013: $255 billion, but… • Perspective:Treasury pays 0.01% on 3-month T-bills, 2.98% on 10-year notes. Historical avg: 3.3% and 5.2% • If rates rise to 4% & 5.2% by 2018… • Payments on federal debt will soar to $505 billion in 2018 | Higher if rates rise more • Ann. int. payments on pace to exceed defense budget • Rising debt service costs mean less spending on discretionary, entitlement programs
IMPACTS OF RISING INTEREST RATES • Impact of rate hike: Upward pressure on US dollar | Decreased competitiveness for US exports • Loans: Depending on rise, negative pressure on housing market and servicing housing debt, other loans
FARM INCOME DROPS SHARPLY IN 2014 FOR CROP SECTOR; ANIMAL PROTEIN REMAINS STRONG
COMMODITYMARKETS SEEKING EQUILIBRIUM AMID ECONOMIC SHIFTS; 2014 HARVEST FIRST STEP Transition 2004-2008 ? Transition Old Normal Data source: World Bank
Why Effective Safety Net Needed Ahead • Potential key market changes ahead: In 2015, 2016… • Higher interest rates: Federal Reserve strategy • Higher U.S. dollar: Impact on exports • Research dollars for sugar ‘natural alternative’: Longer term issue • Increased crop yields: ‘Normal’ weather eventually, and… • Lower prices: How low depends on carryover buildups • Barometers: Watch farm equipment and land values Retail sales volumes of high-horsepower tractors down 10.3%
CORRECTION, NOT A BUST, THIS TIME • Strong liquidity and low farm debt • Greater use of crop insurance • Low interest rate environment • Renewable Fuels Mandate • Rebound of livestock sector • Export market Factors Supporting Farmland Values
STORAGE WOES: Look for Much Bigger Piles on the Ground • Harvest as currently forecast will strain storage capacity. • An even bigger crop will overwhelm storage. • How will this influence prices?
LOOKING AHEAD: Low Crop Prices • Expect pressure on input prices, especially fertilizer; seed pricing may be more inelastic. • Pressure should develop on land prices and rental rates. • Crop insurance guarantees will shrink – so will premiums. • The safety net provisions in the new Farm Bill will be important source of income support. • The new legislation reduces Conservation Reserve Program (CRP) just as prices decline. • What will provide the demand boost as ethanol gains begin to flatten out, and if China draws down large corn stocks?
SOURCES OF RISK & UNCERTAINTY • Geopolitical questions abound, and include two major grain exporters, Ukraine and Russia. • Argentina, another major exporter of grain and oilseeds and products, is in “default” on debt. • What will happen with RFS as EPA considers changes? • Can foreign producers continue to compete with a lower scale of prices? • How fast will U.S. producers reduce planted area?
USDA SUGAR ESTIMATES Trying to make sugar market and policy decisions with volatile USDA projections and trying to project Mexico exports
SUGAR: POLICY AND OTHER ISSUES AHEAD • Sugar & 2014 Farm Bill:Attempts to change won’t succeed • Quota: User pressure to increase current quota, and also after April 1, 2015 • Farm policy ahead: Need for 4th leg… • 1- Import quota • 2 - Domestic quota • 3 – Price support • 4 – Deal needed to limit Mexican access to US market
TRADE POLICY ISSUES • COOL: WTO interim decision | Will go into 2015 • TPA: Nothing before elections • TPP: Japan-US talks | Timeline • U.S.-EU Trade Agreement: Lots of issues, disagreement • Sugar and Mexico: Managed market? ITC: Dept. of Commerce prelim. on countervail case no later than Aug. 25. DOC prelim on dumping duties due Sept. 3, but likely delayed until late-Oct. Bottom line: nothing final until 2015.
BRAZIL-US COTTON ISSUE • $400 million financial compensation sought… won’t happen • $56.6 mil. for delayed transfers to U.S. Cotton Fund | Vilsack has authority but not using it • KEY: Brazil says U.S. wants to avoid WTO panel on cotton issue to avoid opening farm bill to broader scrutiny • Brazil to seek WTO panel?
2014 farm bill in place… • REGULATIONS BEING DEVELOPED • Process of converting legislative intent into regulatory authorities will raise issues and take some time • Elimination of direct payments and movement to insurance programs. • No change to sugar program. • Some delays in program rollouts. • End of 2014: USDA to define active engagement | Partnerships, etc. • WTO challenges ahead?
TOTAL OUTLAYS: $489 Billion PROJECTED OUTLAYS UNDER 2014 FARM ACT,2014-2018 Source: USDA Economic Research Service using data from Congressional Budget Office, Cost Estimates for the Agricultural Act of 2014, Jan 2014.
OTHER ISSUES • Clean Water Act: Waters of the U.S. • Transportation & Infrastructure: Funding needed • GMO food labeling: State actiononly | Surpeme Court? • Tax reform: Not until Obama leaves offices, unless… • Immigration: Not in House, unless…
MIDTERM ELECTIONS: DEMS IN TROUBLE? • Obama’s job approval slump… Low 40% nationally | mid-30s in key states | Tied closely to fate of his party in midterm election • Unhealthy: Voters’ wariness of health care law • In key states, voters prefer to vote for a GOP over Democrat by 7 points, 41 percent to 34 percent • House: GOP pickup likely double-digits • Senate: W. Va., Mont., S.D. likely GOP wins | Need 3 from: Alaska, Ark., Colo., Ia., Mich., La., N.H., N.C. for GOP control
PERSPECTIVE ON CONGRESS • Obama wins 2008: Health care, climate change… • 2010 wave election: GOP gains 63 House seats, 19 legislative bodies, and 6 governors (total 29)… • 2010 Census: GOP in many states control redistricting process | Protects many GOP House members • After elections: Key committee changes in both chambers
POSSIBLE SENATE CHAIRS IF GOP WINS • Agriculture: Pat Roberts (Kan.) • Appropriations: Thad Cochran (Miss.) • Finance: Orrin Hatch (Utah) • EPW: Inhofe (Okla.) • Judiciary: Chuck Grassley (Iowa)
CHANGES IN HOUSE GOP LEADERSHIP: Ag Friendly • New House Majority Leader Kevin McCarthy (R-Calif.): Ag friendly. From San Joaquin Valley. Grapes, citrus, almonds, milk. Supports ag funding, cuts in regs. Replaces Cantor. • Next House Ag Chairman: Rep. Mike Conaway (R-Texas). Lucas term-limited. Conaway from West Texas. Cattle, sheep, wheat, sorghum & cotton. Big supporter of crop insurance, livestock aid in farm bill. Among leading champions of sugar in the House.
QUESTIONS • www.iemonitor.com