Washington Update: Will Dysfunctional Washington Ever Function - Jim Wiesemeyer, Informa Economics, from the 2014 Iowa Pork Congress, January 22-23, Des Moines, IA, USA. More presentations at http://www.swinecast.com/2014-iowa-pork-congress

1. Can Dysfunctional Washington Ever Function?
Issues impacting business of agriculture
Jim Wiesemeyer
Senior VP, Farm & Trade Policy
Informa Economics, Inc.

2. The 3 Stooges – Circa 2014

3. GOP Living Close to the Edge

4. Could Washington Be More Dysfunctional?

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
4

5. What’s Wrong With Washington?

6. How Did We Get Here?

7. Where Are We Going?

8. From Dysfunctional to Functional?

Budget: Compromise found on FY 2014, 2015 budgets
 FY
2014: $1.1 trillion – Obama signed
 FY
2015: Funding agreed, but details to follow
 Debt
 But
limit hike… until Feb. 7, 2014
elections will put many issues on hold…
8

9. U.S. Economic Policy Inaction Creates
Headwinds for Break-out Economic Growth
2014 elections to impact timing of some policy issues/reform
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
Trade Agreements
TPA vote; Trans-Pacific (TPP); Trans-Atlantic (TTIP)
Deficit
reduction
Changing tax policy and entitlement programs
likely on hold until 2015.
Risk management and investment strategies cannot deal with policy vacuum.
Companies can measure and adjust to risk based on actual policy decisions
9

11. The World’s Central Banks May Have
Difficulty in Coordinating Policy Actions
Bank of
England
Bank of
Japan
U.S. Federal
Reserve
Bank
European
Central
Bank

12. Advanced Economies Have Run Massive Deficits
and Pushed Debt to Unsustainable Levels
Percent (fiscal balance as percent of GDP)
Percent (Net government debt as percent of GDP)
0
90
80
-2
70
60
-4
50
40
-6
30
20
-8
10
-10
0
2008
2009
2010
2011
2012
Fiscal Deficit
2013
2014
2008
2009
2010
2011
2012
2013
Net Government Debt
2014

13. Global Economy Reflects Guarded Optimism As
Growth in Advanced Economies Improves
Percen t ch an g e in an n u al w o rld g ro w th (p u rch asin g -p o w er p arity rates)
Rising
Middle
Economic
Policy
Class
Turmoil Realignment
2004-08
2009-13
2014-18
Avg.=4.5% Avg.=2.9%
???
6
4
2
0
13
18
14
16
10
12
06
08
India
02
04
C hina
98
00
94
96
R e s t of w orld
86
88
82
84
78
80
74
76
70
72
A dv a nc e d c ount rie s
90
92
-2

14. China‟s Economic Growth from 2000-2010
Driving Agricultural Demand
Magnitude of growth on a per capita basis is phenomenal
14

15. Chinese Growth Likely to Remain Subdued
As Advanced Economies Remain Weak
Percen t g ro w th rate p er year
15.0
14. 2
Fiscal stimulus may
be needed to stay
above 7%
12. 7
12.5
11. 3
10.0
10. 4
9. 8
9. 6
9. 3
9. 2
7. 8
7. 6
2012
2013
7.5
7. 3
5.0
2.5
0.0
93-02 2005
2006
2007
15
2008
2009
2010
2011
2014

16. Focus On
U.S. Economic Prospects
• 2014 “Organic Growth” Less Fiscal Drag
• Little or No Inflation
• Federal Reserve Tapering
• Political Pitfalls, but…

17. U.S. Economic Prospects

18. Short Term Deficit Relief Means Long Term
Revenue and Spending Changes Are Post-2014
Defici t in b i ll io n d o l lars
200
Reagan
G.
Bush
Percent of GDP
Clinton
G.W. Bush
Obama
2
0
0
-200
-2
-400
-4
-2.4%
-600
-6%
-800
-6
-5.3%
Deficit as
percent
of GDP
-8
-1000
-1200
-1400
Assumptions:
 phase-out in Iraq/ Afghanistan
 American Taxpayer Relief Act of 2012
 Sequestration
2013 Deficit
estimate
-11%
-10
-12
-14
21
23
17
19
13
15
09
11
05
07
01
03
97
99
93
95
89
91
85
87
-16
81
83
-1600
Source: Congressional Budget Office (September, 2013), BEA and Treasury Department and forecast

19. Weak U.S. Dollar in 2002 to 2011 Boosted
Commodities; Continued Volatility in 2014
Inde x e s of ma jor c urre nc ie s /U S$ ( Ma rc h 1 9 7 3 =1 0 0 )
150
140
130
From 2002 to 2011 ………....... -39 %
From August 2011 bottom
to October 2013 ..… +11 %
Dollar declined by
over 25% after
floating in 1973!
120
110
100
90
80
70
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02
* Currencies weighted by relative market importance to total U.S. trade.
04
06
08
10
12
14

20. Farm Income Remained Strong in 2013
With Better Balance Among Sectors
Billion dollars
150
125
100
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.
75
Net Farm Cash Income
50
25
Direct government payments*
0
78
80
82
84
86
88
90
92
94
96
98
00
* emergency payments are striped area of government payments)
20
02
04
06
08
10
12
14

21. Balance Sheet of Agriculture is Better
Prepared for Volatility and Transition
Billion dollars
Billion dollars
Change 1968-1978 Change 1978-1988 Change 1988-1998 Change 1998-2008
3000
Assets ... +179% Assets .. +1.4%
Debt ....... +155% Debt ...... +7.5%
Assets ... +37% Assets ... +98%
Debt ....... +24% Debt ....... +59%
600
2500
500
Change 2008-2013
Assets …. +41%
Debt ……....+19%
2000
400
1500
300
Farm assets
(left scale)
1000
200
Farm debt
(right scale)
500
100
14
12
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
72
70
0
68
0

22. Pork and Broiler Sectors Riding Wave of
Reduced Beef Supplies Lower Feed Costs
Billion pounds
40
Broilers
Beef
30
-0.75
-4 to -6%
Pork
35
Change in
2013
2014
+2.0
+3 to +5%
- 0.25
+1 to +3%
Broilers
25
Beef
20
Pork
15
10
Percent change in total meat output
2010 2011 2012 2013 2014
1.3% 0.7% 0.2% 0.3 0 to +1
5
22
14
12
10
08
06
04
02
00
98
96
94
92
90
88
86
84
82
80
78
76
74
0

23. A Recovery in Global Grain Stocks Will
Require Two Years of Large Harvests
Mil l io n metri c to n s o f w h eat & co arse g rai n s
Sto cks-to -u se p ercen tag e
500
One good harvest will
not remove volatility
40
400
32
300
24
200
16
100
8
W o rl d sto cks
Sto ck/ u se
23
14
10
12
06
08
02
04
98
00
94
96
90
92
86
88
82
84
78
80
74
76
0
70
72
0

24. Stocks of World’s Major Soybean
Exporters Have Risen Sharply
Mil l io n metri c to n s o f so yb ean s
70
60
World
Major Exporters
China
50
40
30
20
10
0
90
92
94
96
98
00
02
04
(Major exporters are Argentina, Brazil, Paraguay and U.S.)
24
06
08
10
12

25. Smaller Than Expected 2013 Crops Limit Price
Declines But Pressures Remain in 2014/15
USDA January Supply and Demand
2011/12
2012/13
2013/14
2014/15
--------------- dollars per bushel ---------------
Wheat
Corn
Soybeans
7.24
6.22
12.50
7.77
6.89
14.40
6.60 - 7.00
4.10 – 4.70
11.75 – 13.25
--------------- dollars per short ton ---------------
Soymeal
394
468
415 - 445
--------------- dollars per cwt ---------------
Rice
14.50
14.90
15.30 – 16.30
--------------- cents per pound ---------------
Cotton
88.3
72.5
72 - 77

26. Significant Acreage Realignments Likely in
2014: Prices, Weather and Farm Programs
2010
2011
2012
2013
2014
Change
13 to 14
----------------- million acres -----------------
Corn
88.2
91.9
97.2
95.4
92.0
-4 to -2
Soybeans
77.4
75.0
77.2
76.5
82.0
+4 to +6
Wheat
53.6
54.4
55.7
56.5
57.5
+1 to +2
Upland Cotton
10.8
14.4
12.3
10.3
11.0
0 to +1
7 other crops*
19.6
17.1
20.6
20.3
20.0
0 to +1
Hay harvested
59.9
57.6
56.3
56.6
57.0
+1 to +2
314.8
324.3
320.0
324.5
+4 to +5
31.3
31.1
29.5
26.9
25.3
-1 to -2
Double cropping
2.8
5.0
5.9
6.0
6.0
0 to +1
Prevented planting
6.9
11.0
1.3
4.0
2.0
-2 to -3
All crops acreage 314.8
CRP
Total acreage
350.1
349.5
349.2
345.0
345.8
* Barley, oats, sorghum, rice, sunflowers, peanuts and canola
-2 to -1

27. Improving Global Economy, Peaking Ethanol and
Growing Grain Stocks Trigger Market Transitions
Ag ri cu l tu re co mmo d i ty i n d ex (2010= 100)
150
Rising
Economic
Policy
Global
Turmoil Realignment
Middle class 2009-13
2014-18
?
100
50
Old Normal
0
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
Data source: World bank
18

28. 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

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
28

29. Farm Bill: Patience and Wisdom…
Developing
Countries
29

30. Farm Bill Process…Fifth calendar year
2010
Nov 2011
Rep. Peterson holds First
Hearing in House on Farm Bill
Farm Bill discussions in
“Super Committee”
2010
1
2
Jan 2013
July 2012
June 2012
April 2012
1-year extension of
2008 Farm Bill
House Ag
Committee
Markup of
2012 Farm Bill
Senate Passage
of 2012
Farm Bill
Senate Ag Committee
Markup of
2012 Farm Bill
6
4
5
May 2013
Senate Cmte Markup
of 2013 Farm Bill
House Cmte Markup
of 2013 Farm Bill
7
June 2013
Senate
Passage of
2013 Farm
Bill
8
3
July 2013
Sep 2013
Jan 2014
House Passage of
2013 Farm Bill
(“Farm Only” Farm Bill)
2008 Farm Bill
Extension Expires
Dairy and other
commodities
revert to 1949
Permanent Law
9
Today

31. Farm Bill Conference Provisions
Item
Expected Outcome
DAIRY POLICY
No supply management language.
USDA Secretary authority
Authority to annually adjust
premium paid by plus or minus 5%
Blended indemnification
payment
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.

32. Farm Bill Conference Provisions
Item
Expected Outcome
Country-of-origin labeling
Under discussion – could be
voted on
Budget savings
$25-$30 billion/10
years, inclusive of
sequestration impacts
USDA Undersecretary of
Trade
Needed trade policy reform

33. Farm Bill Conference Provisions
Item
Expected Outcome
Duration
Crops years 2014-2018
Direct Payments
Eliminated
Basis for Payments
Base acres
-- Yield update option
Chance to reallocate bases
One time option – 2009-12 plantings
Cotton base acres
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
Conservation compliance/crop
insurance
Yes – But no AGI test, or cap on crop
insurance payouts

34. Farm Bill Conference Provisions
Item
Expected Outcome
Revenue or Price Loss Coverage
(ARC)
One time choice – ARC or PLC
(PLC)
Marketing Loan Eligibility
Yes for both ARC, PLC
Supplemental Coverage Option SCO
Begins with 2015 crop year
ARC = No | PLC = Yes

35. Farm Bill Conference Provisions
Item
Expected Outcome
Conservation Reserve Program
(CRP)
Acreage 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
Conservation Stewardship
Program (CSP)
Max acres cut to around 10.3 mil.
ac., or 2.4 mil. fewer than
enrolled in recent years
Environmental Quality
Incentives Program (EQIP)
Continued, carve out for wildlife
habitat – Appropriations bill cut

36. Outlook for elections

2014 Congress
– -- House: GOP likely will retain control
– -- Senate: Key is candidates

2016 President
– -- Democratic candidate
– -- Republican candidate
36

37. What Will the 2014 Election Be About?
Answer: We Don’t Know Yet

38. Terrain: House Democrats Would Need to Win GOPLeaning 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.

39. 2014: The House
Today: 234 Republicans, 201 Democrats (Democrats
need +17 seats to win control)
Cook Outlook: Minimal Net Change

40. 2014: The Senate
Today: 55 Democrats (including 2 Independents
caucusing with Democrats), 45 Republicans
Cook Outlook: GOP gain of 4-6 seats.

41. Democrats Must Defend 7 Seats
in States Romney Won:
 Retirements in MT (Baucus), SD (Johnson), WV (Rockefeller)
 Incumbents: Begich (AK), Pryor (AR), Landrieu (LA), Hagan (NC)
Source: Cook Political Report.

42. Kentucky: Grand-Daddy of them All
 Also watch primaries in SC
(Graham), GA (Open), KS
(Roberts), MS (Cochran)
Source: Cook Political Report.

43. 2016: Presidential Contest Begins Early

44. 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

45. 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?

46. On Election Night 2016, Watch…
2012: Obama 19,712 Romney 19,369

47. QUESTIONS
www.iemonitor.com
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