Can Dysfunctional Washington Ever Function?

Issues impacting business of agriculture

Jim WiesemeyerSenior VP, Farm & Trade Policy

Informa Economics, Inc.

The 3 Stooges – Circa 2014

GOP Living Close to the Edge

Could Washington Be More Dysfunctional?

4

Obama: Second term woes

Healthcare reform: Rollout termed a “debacle”

Intelligence snafu: A sense that U.S. is losing clout

Executive orders: Climate change, other issues

Regulations: A growing backlog at OMB

Farm Bill: Discord between farm groups, lawmakers, Obama

Foreign policy issues: Egypt – Syria – Iran – North Korea

What’s Wrong With Washington?

How Did We Get Here?

Where Are We Going?

From Dysfunctional to Functional?

8

Budget: Compromise found on FY 2014, 2015 budgets

FY 2014: $1.1 trillion – Obama signed

FY 2015: Funding agreed, but details to follow

Debt limit hike… until Feb. 7, 2014

But elections will put many issues on hold…

9

U.S. Economic Policy Inaction Creates Headwinds for Break-out Economic Growth

2014 elections to impact timing of some policy issues/reform

Risk management and investment strategies cannot deal with policy vacuum. Companies can measure and adjust to risk based on actual policy decisions

Financial sector Financial sector regulatory reform implementation

Energy sector New energy paradigm; Fracking & horizontal drilling technology change fossil and renewable roles

Immigration Piecemeal progress likely in 2014

Health care sector Affordability Care Act, unintended consequences

Regulatory oversight Increasing regulation; Clean air & water, Food safety

Deficit reduction

Changing tax policy and entitlement programs likely on hold until 2015.

Trade Agreements TPA vote; Trans-Pacific (TPP); Trans-Atlantic (TTIP)

The World’s Central Banks May Have Difficulty in Coordinating Policy Actions

U.S. FederalReserve

Bank

Bank ofJapan

EuropeanCentralBank

Bank ofEngland

Advanced Economies Have Run Massive Deficits and Pushed Debt to Unsustainable Levels

2008 2009 2010 2011 2012 2013 2014-10

-8

-6

-4

-2

0

Percent (fiscal balance as percent of GDP)

2008 2009 2010 2011 2012 2013 2014

0

10

20

30

40

50

60

70

80

90

Percent (Net government debt as percent of GDP)

Fiscal Deficit Net Government Debt

PolicyRealignment

2014-18???

RisingMiddleClass

2004-08Avg.=4.5%

EconomicTurmoil2009-13

Avg.=2.9%

13

-2

0

2

4

6

Percent change in annual world growth (purchasing-power parity rates)

Advanced countries Rest of world China India

Global Economy Reflects Guarded Optimism As Growth in Advanced Economies Improves

China’s Economic Growth from 2000-2010 Driving Agricultural Demand

14

Magnitude of growth on a per capita basis is phenomenal

15

9.8

11.3

12.7

14.2

9.69.2

10.4

9.3

7.8 7.6 7.3

93-02 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

0.0

2.5

5.0

7.5

10.0

12.5

15.0

Percent growth rate per year

Chinese Growth Likely to Remain Subdued As Advanced Economies Remain Weak

Fiscal stimulus may be needed to stay

above 7%

Focus On

U.S. Economic Prospects

• 2014 “Organic Growth” Less Fiscal Drag

• Little or No Inflation

• Federal Reserve Tapering

• Political Pitfalls, but…

U.S. Economic Prospects

-1600

-1400

-1200

-1000

-800

-600

-400

-200

0

200

Deficit in billion dollars

-16

-14

-12

-10

-8

-6

-4

-2

0

2

-6%-5.3%

-2.4%

Reagan ClintonG. Bush

G.W. Bush

Source: Congressional Budget Office (September, 2013), BEA and Treasury Department and forecast

Deficit aspercentof GDP

Percent of GDP

Obama

-11%

Assumptions: phase-out in Iraq/ Afghanistan American Taxpayer Relief Act of 2012 Sequestration

Short Term Deficit Relief Means Long Term Revenue and Spending Changes Are Post-2014

2013 Deficit estimate

* Currencies weighted by relative market importance to total U.S. trade.

70

80

90

100

110

120

130

140

150

Indexes of major currencies/US$ (March 1973=100)

80 82 84 86 88 90 92 94 96 98 00 02 04 06 0874 76 78 10 12 14

From 2002 to 2011 ………....... -39 %From August 2011 bottom

to October 2013 ..… +11 %

Weak U.S. Dollar in 2002 to 2011 Boosted Commodities; Continued Volatility in 2014

Dollar declined by over 25% after

floating in 1973!

20

Farm Income Remained Strong in 2013 With Better Balance Among Sectors

78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14

0

25

50

75

100

125

150

Billion dollars

Net Farm Cash Income

Direct government payments*

* emergency payments are striped area of government payments)

Improving margins in the protein and dairy sectors limited income declines in 2013. Net cash income was

second highest on record in 2013. However lower grain and oilseed prices could push incomes lower in 2014.

Balance Sheet of Agriculture is Better Prepared for Volatility and Transition

0

500

1000

1500

2000

2500

3000

Billion dollars

0

100

200

300

400

500

600

Billion dollars

Change 1968-1978

Assets ... +179%Debt ....... +155%

Change 1978-1988

Assets .. +1.4%Debt ...... +7.5%

Change 1988-1998

Assets ... +37%Debt ....... +24%

Farm assets(left scale)

Farm debt(right scale)

Change 1998-2008

Assets ... +98%Debt ....... +59%

Change 2008-2013Assets …. +41%Debt ……....+19%

22

Pork and Broiler Sectors Riding Wave of Reduced Beef Supplies Lower Feed Costs

0

5

10

15

20

25

30

35

40

Billion pounds

Beef

Pork

Broilers -0.75 -4 to -6%

- 0.25 +1 to +3%

Change in 2013 2014 +2.0 +3 to +5%

Beef

Pork

Broilers

2010 2011 2012 2013 2014 1.3% 0.7% 0.2% 0.3 0 to +1

Percent change in total meat output

23

0

100

200

300

400

500

Million metric tons of wheat & coarse grains

0

8

16

24

32

40

Stocks-to-use percentage

World stocks Stock/use

A Recovery in Global Grain Stocks Will Require Two Years of Large Harvests

One good harvest will not remove volatility

24

90 92 94 96 98 00 02 04 06 08 10 12

0

10

20

30

40

50

60

70

Million metric tons of soybeans

WorldMajor ExportersChina

(Major exporters are Argentina, Brazil, Paraguay and U.S.)

Stocks of World’s Major Soybean Exporters Have Risen Sharply

USDA January Supply and Demand2011/12 2012/13 2013/14

7.246.22

12.50

394

14.50

88.3

7.776.89

14.40

468

14.90

72.5

6.60 - 7.004.10 – 4.70

11.75 – 13.25

415 - 445

15.30 – 16.30

72 - 77

WheatCornSoybeans

Soymeal

Rice

Cotton

--------------- dollars per bushel ---------------

--------------- dollars per cwt ---------------

--------------- cents per pound ---------------

Smaller Than Expected 2013 Crops Limit Price Declines But Pressures Remain in 2014/15

--------------- dollars per short ton ---------------

2014/15

Significant Acreage Realignments Likely in 2014: Prices, Weather and Farm Programs

Corn

Soybeans

Wheat

Upland Cotton

7 other crops*

Hay harvested

All crops acreage

CRP

Double cropping

Prevented planting

Total acreage

-4 to -2

+4 to +6

+1 to +2

0 to +1

0 to +1

+1 to +2

+4 to +5

-1 to -2

0 to +1

-2 to -3

-2 to -1

Change13 to 14

----------------- million acres -----------------

* Barley, oats, sorghum, rice, sunflowers, peanuts and canola

88.2

77.4

53.6

10.8

19.6

59.9

314.8

31.3

2.8

6.9

350.1

2010

91.9

75.0

54.4

14.4

17.1

57.6

314.8

31.1

5.0

11.0

349.5

2011

97.2

77.2

55.7

12.3

20.6

56.3

324.3

29.5

5.9

1.3

349.2

2012

92.0

82.0

57.5

11.0

20.0

57.0

324.5

25.3

6.0

2.0

345.8

2014

95.4

76.5

56.5

10.3

20.3

56.6

320.0

26.9

6.0

4.0

345.0

2013

Data source: World bank

0

50

100

150

Agriculture commodity index (2010=100)

60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18

Old Normal

Tran

sition

2004

-200

8

Tran

sition

RisingGlobal

Middle class

EconomicTurmoil2009-13

PolicyRealignment

2014-18

Improving Global Economy, Peaking Ethanol and Growing Grain Stocks Trigger Market Transitions

?

Why Effective Safety Net Needed Ahead

28

Potential key market changes ahead: In 2015, 2016…

Higher interest rates: Federal Reserve strategy

Higher U.S. dollar: Impact on exports

Corn ethanol blend wall: Will exports take up the slack?

Increased yields: ‘Normal’ weather eventually, and…

Lower prices: How low depends on carryover buildups

Barometers: Watch farm equipment and land values

Farm Bill: Patience and Wisdom…

29

Developing Countries

Farm Bill Process…Fifth calendar year

Rep. Peterson holds FirstHearing in House on Farm Bill

2010

1

1-year extension of 2008 Farm Bill

Jan 2013

6

Dairy and other commodities revert to 1949 Permanent Law

Jan 20142008 Farm Bill Extension Expires

Sep 2013

Farm Bill discussions in “Super Committee”

Nov 2011

2

Senate Ag Committee Markup of

2012 Farm Bill

April 2012

3

Senate Passage of 2012 Farm Bill

June 2012

4

Senate Cmte Markup of 2013 Farm BillHouse Cmte Markup of 2013 Farm Bill

May 2013

7

Senate Passage of 2013 Farm Bill

June 2013

8

House Passage of 2013 Farm Bill (“Farm Only” Farm Bill)

July 2013

9

Today

2010

House Ag Committee Markup of

2012 Farm Bill

July 2012

5

Farm Bill Conference ProvisionsItem

DAIRY POLICY

USDA Secretary authority

Blended indemnification payment

Expected Outcome

No supply management language.

Authority to annually adjust premium paid by plus or minus 5%

Gross margin insurance indemnification would be blended payment when a producer exceeds historical (base) production – full payment on historical prod., lower payout on production exceeding base.

Farm Bill Conference Provisions

Item

Country-of-origin labeling

Budget savings

USDA Undersecretary of Trade

Expected Outcome

Under discussion – could be voted on

$25-$30 billion/10 years, inclusive of sequestration impacts

Needed trade policy reform

Farm Bill Conference ProvisionsItem

Duration

Direct Payments

Basis for Payments

Chance to reallocate bases

Cotton base acres

Conservation compliance/crop insurance

Expected Outcome

Crops years 2014-2018

Eliminated

Base acres -- Yield update option

One time option – 2009-12 plantings

Generic base - Annual option to plant other crops on cotton base acres and qualify for safety net provisions (ARC or PLC) for that crop, but not STAX for those acres

Yes – But no AGI test, or cap on crop insurance payouts

Farm Bill Conference ProvisionsItem

Revenue or Price Loss Coverage (ARC) (PLC)

Marketing Loan Eligibility

Supplemental Coverage Option - SCO

Expected Outcome

One time choice – ARC or PLC

Yes for both ARC, PLC

Begins with 2015 crop yearARC = No | PLC = Yes

Farm Bill Conference ProvisionsItemConservation Reserve Program (CRP)

Conservation Stewardship Program (CSP)

Environmental Quality Incentives Program (EQIP)

Expected OutcomeAcreage cap lowered to 24 mil. by FY 2018. CRP acres, 1.6 mil. ac. fewer than now. Will include carve out for grasslands as Grassland Reserve Program eliminated

Max acres cut to around 10.3 mil. ac., or 2.4 mil. fewer than enrolled in recent years

Continued, carve out for wildlife habitat – Appropriations bill cut

Outlook for elections

36

2014 Congress

– -- House: GOP likely will retain control

– -- Senate: Key is candidates

2016 President

– -- Democratic candidate

– -- Republican candidate

What Will the 2014 Election Be About?

Answer: We Don’t Know Yet

Terrain: House Democrats Would Need to Win GOP-Leaning Territory to Get to 218 Seats

Few Realistic Republican Targets: There are only 5 GOP members left from Democratic-leaning seats

After 2012 Gains, More Democrats Exposed: There are 18 Democrats left in GOP-leaning seats.

Source: Cook Political Report.

2014: The House

Today: 234 Republicans, 201 Democrats (Democrats need +17 seats to win control)

Cook Outlook: Minimal Net Change

2014: The Senate

Today: 55 Democrats (including 2 Independents caucusing with Democrats), 45 Republicans

Cook Outlook: GOP gain of 4-6 seats.

Retirements in MT (Baucus), SD (Johnson), WV (Rockefeller)

Democrats Must Defend 7 Seats in States Romney Won:

Incumbents: Begich (AK), Pryor (AR), Landrieu (LA), Hagan (NC)Source: Cook Political Report.

Kentucky: Grand-Daddy of them All

Also watch primaries in SC (Graham), GA (Open), KS (Roberts), MS (Cochran)

Source: Cook Political Report.

2016: Presidential Contest Begins Early

Total Makeover: Only a New Nominee in 2016 Can Resurrect the GOP Nationally:

The “Can Wins” (Christie, Bush, Rubio)

The “Can’t Wins” (Cruz, Paul, Santorum)

The “Maybes” (Walker, Ryan, Thune)

Source: Cook Political Report.

On Democratic Side, Will She or Won’t She?

For all of Republicans’ current problems, remember: Democrats may be lacking in “new blood” come 2016.

If not Hillary or Joe Biden, who? Cuomo, O’Malley, Warner, Hickenlooper, Gillibrand, or…Warren?

On Election Night 2016, Watch…

2012: Obama 19,712 Romney 19,369

QUESTIONS

www.iemonitor.com

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