P OLICY OUTLOOK

1. POLICY OUTLOOK ISSUES AHEAD OF MIDTERM ELECTIONS Jim Wiesemeyer Senior VP, Farm and Trade Policy Informa Economics, Inc. wiesemeyer@gmail.com

2. WHERE ARE WE GOING?

3. 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

4. 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

5. THINGS CAN GET DONE IN LAME DUCK

6. 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

7. WHY SOLID U.S. GROWTH IS NEEDED • More jobs • More tax revenue • Lower entitlement spending • Lower budget deficits than current estimates

8. BUSINESS INVESTMENT IS KEY TO GROWTH AND JOB ACCELERATION IN U.S. ECONOMY… 2015?

9. 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

10. SHORT TERM DEFICIT RELIEF MEANS LONG TERM REVENUE & SPENDING CHANGES ARE POST-2014

11. 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.

12. 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%

13. 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

14. 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

15. FARM INCOME DROPS SHARPLY IN 2014 FOR CROP SECTOR; ANIMAL PROTEIN REMAINS STRONG

16. COMMODITYMARKETS SEEKING EQUILIBRIUM AMID ECONOMIC SHIFTS; 2014 HARVEST FIRST STEP Transition 2004-2008 ? Transition Old Normal Data source: World Bank

17. 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%

18. FARM REAL ESTATE: 83% of Assets

19. 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

20. CROP OUTLOOK AT A GLANCE

21. LIVESTOCK & DAIRY OUTLOOK AT A GLANCE

22. 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?

23. 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?

24. 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?

25. USDA SUGAR ESTIMATES Trying to make sugar market and policy decisions with volatile USDA projections and trying to project Mexico exports

26. USDA Stocks-to-Use History

27. USDA: Avg. Monthly Change in Ending Stocks

28. 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

29. 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.

30. U.S. LEADING MEXICAN SUGAR EXPORT MARKET

31. 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?

32. 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?

33. 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.

34. 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…

35. 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

36. 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

37. 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)

38. 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.

39. QUESTIONS • www.iemonitor.com