Friday, December 2, 2011

Random Statements from the 2011 Agricultural Symposium Report by Jason Henderson

Jason Henderson, vice president and Omaha Branch executive at the the Federal Reserve Bank of Kansas City has a new report out titled, "Recognizing Risk in Global Agriculture: A Summary of the 2011 Agricultural Symposium".

I've chosen several key issues from the report on the symposium to feature here:

On global food security. . .
After echoing support for new private/public sector investments and partnerships, Mike Baroni, vice president of economic policy at Archer Daniels Midland, said additional investments are needed in public infrastructure of developed and developing countries. Across the globe, infrastructure investments in roads, railways, waterways, bridges, ports, and storage capacity are needed to link growers to global consumers and avoid waste. In 2007, for example, as much as 30 million tons of corn, 20 million tons of wheat, and 3 million tons of soybeans were lost globally after harvest from causes ranging from bad storage to weather contamination, as well as the lack of market access.
On ethanol. . .
With the political debate over ethanol policy heating up, other policy questions were discussed by conference participants. Babcock raised questions about the cost of using ethanol to satisfy nonmarket objectives such as the reduction of greenhouse gas emissions, air pollution, and the U.S. dependence on foreign fuel sources. In fact, Babcock noted that the lowest-cost option for meeting these nonmarket objectives might be taxing carbon or gasoline. Moreover, given current U.S. fuel consumption, the current ethanol mandate of 15 billion gallons may be too large.

Unless additional investments are made in blending infrastructure, particularly flex-fuel cars and blender pumps, ethanol may face a “blend wall,” where gasoline consumption may not need the mandated amount of ethanol. In addition, other technologies, such as drop-in fuels and biobutanol, which use existing blending infrastructure, may provide an attractive alternative to ethanol. Symposium participants noted that the next round of investments could lock the United States into a path of no return for alternative fuels. As a result, policymakers will need to decide whether ethanol is the alternative fuel source for the future.
On whether there is a bubble in the farm sector. . .
The farm sector’s debt-to-asset ratio has fallen to record lows, and the debt coverage ratio remains historically strong. In fact, Ellinger’s analysis suggests a few pockets of the U.S. farm sector—young farmers, large farmers, and livestock producers—would be vulnerable to significant financial stress if farm income and farmland values fell 20 percent to 30 percent.

Volatile markets, however, have caused annual net farm incomes to drop more than 25 percent in three of the past 10 years.
Investment interest in the Ag sector. . .
With the strong financial health of agriculture, participants noted the intense competition in agricultural financing. In recent years, the bullish opportunities in agriculture arising from larger global populations and economic development in emerging countries have rekindled the interest of investment companies in agriculture. Ejnar Knudsen, portfolio manager from Passport Capital, described how investment companies are searching for ways to control resources and scanning for slow-moving trends that are not priced in the market.
To read the entire report go here: [pdf]