ag quarterly
Summer 2009
Cap-and-Trade,
Carbon-Offsets,
Farms and
Forests
A Driving Force in Agriculture
®
Some Reprieve with
Farm Production
Expenses
p. 2
Citrus Market Setting the Stage
for More Optimism
p. 3
metlife agricultural investments newsletter
A US climate law has yet to materialize, but the
government is still hoping to define new legislation
that would pass Congress by year end, in time for
the start of negotiations on a new global climate
agreement in December. Last June, the cap-andtrade approach gathered some momentum when
the House passed the American Clean Energy and
Security Act, but its prospect in the Senate was still
uncertain by late summer. Its economic cost and
complexity, including production restrictions on
landowners, will likely continue as a challenge for
the Administration to pass a Bill.
Considering the political challenge, others have
advocated the variant cap-and-dividend approach
as a more palatable way to muster support in
Congress since it would return some of the carbon
revenues back to the taxpayer. A straight carbon
tax, yet another form, has not gathered significant
momentum despite its simplicity. In all, the relative
appeal of cap-and-trade relates to the market - rather
than the government – doing most of the work of
allocating emission reductions. In a market auction,
those in the best position to cut emissions (i.e.,
lowest cost producers) would do so while allowing
the others to buy emission allowances or “polluting
permits”. However, cap-and-trade continues to
draw criticism. Besides raising the cost of doing
business, defining the right emission cap can be
particularly tricky. If set too tight, it will boost
carbon prices, causing undue harm to economic
growth - especially for regions more dependent upon
heavy industries; if set too loose, it simply becomes
ineffective. For example, Europe has implemented
a cap-and trade system under Kyoto, but it has yet
to actually lower emissions. European companies
bought so many offsets that they apparently did not
reduce emissions in 2008 relative to 1990.
Closer to home, the Waxman-Markey bill passed by
the House in June would set the limit on greenhouse
gas emissions at 97% of 2005 levels, dropping to 83% in
2020 and 58% by 2030. Setting the overall emission cap
is the first step of a cap-and-trade program. Companies
in the heavy industrial sector, for instance, would get the
bulk of their polluting permits for free, but would then
need to take action for excess emissions. Companies
would then have three options; (1) they could invest in
pollution-reduction technologies to get under initial
permit levels, (2) they could buy additional permits
from companies willing to sell, or (3) they could invest
in pollution reductions realized elsewhere, like buying
carbon offsets from farmland or timberland owners
using recognized production methods to store carbon.
It is widely accepted that farming and timberland
management practices can sequester large amounts
of carbon. Simply put, forestry and agricultural
production use the sun’s energy to store carbon from
the atmosphere into the “carbon sinks” like trees, crops,
soil, etc. However, key questions remain; like how much
incremental carbon could be stored and measured such
that farmers and timberland owners can actually receive
carbon credits? It also raises questions as to production
restrictions attached to such carbon credits that could
diminish or even negate such incremental revenues to
farmland or timberland owners.
Overall, a cap-and-trade program would likely increase
energy costs to business, which would then be passed
on to consumers in the form of higher prices. Farmers
continued on p.2
www.metlife.com/ag
Annual and Permanent Crops
Livestock Production
Food and Agribusiness
Timberland
• Agricultural real estate lender for over 90 years
• Solid capital position, financial strength and capacity
• Long-term fixed or adjustable rate financing
• Competitive interest rates
• Flexible terms and structuring
• Internal underwriting, appraisal and approval process
Turn to MetLife for your agricultural
and timberland real estate loans
metlife agricultural investments newsletter
All information contained herein has been obtained by MetLife from sources believed by it to be reliable. The
analysis, opinions, forecasts and predictions contained herein are believed by MetLife to be as accurate as the data
and methodologies will permit. However, MetLife makes no representations or warranties, either express or implied,
to any persons as to the completeness, accuracy and reliability of such information, forecast and/or predictions and
expressly disclaims any liability with respect to any of the foregoing.
ag quarterly
093008 Cornfield Rev.ai
AGISummer09.09.04.09.indd 1
9/9/2009 11:12:46 AM
Cap-and-Trade, Carbon Offsets, Farms and Forest (continued from p. 1)
and timberland owners would also face such higher production
expenses - although the incremental cost could be mitigated
by “carbon offset” income. Interestingly, one major expense
category that may get a reprieve is fertilizer. USDA made a
special mention of a provision in the House climate bill that
would allow the fertilizer industry to qualify for an exemption
from purchasing emission allowances until 2024. As an energyintensive and a trade-sensitive sector, it could be temporarily
exempt from the need to buy pollution permits. Consequently, it
would delay additional increases in fertilizer prices to the more
distant future, representing savings to farmers, especially for
corn, wheat and cotton growers – among the largest fertilizer
users.
Regardless of its form, there is still political momentum to
continue working on a climate bill. If implemented despite
current concerns, a new climate law in the US would imply a net
additional cost to the economy as the government creates a new
scarce resource – carbon. Here, the agricultural and timberland
sectors could see a new mitigating source of income, but the net
impact would all depend on how carbon offsets’ features and
restrictions are ultimately defined and implemented.
Some Reprieve with Farm
Production Expenses
© 2009 METLIFE, INC. PEANUTS © United Feature Syndicate, Inc.
Farm production expenses had steadily risen since 2002 before
jumping in 2008 amid a surge in energy costs. Fortunately, this
course was reversed in 2009. However, rising revenues through
2008 also reversed course, at a faster pace. Farmers across the US
and Canada have seen their ratio of total expenses to revenues
climb since 2007, due to the lag created by input costs reaching
higher and taking longer to moderate back down as commodity
markets settle at lower price levels.
Of all major categories of production expenses, manufactured
inputs (orange bars in the chart) stand out as particularly volatile
over the past few years. Led by fertilizer prices skyrocketing amid
record energy prices in 2008, manufactured input costs rose nearly
50% in two years, jumping from $37 bi. in 2006 to $55 bi. in 2008.
However, this record pricing, as we entered a global recession,
eventually preceded a major correction in 2009. Manufactured
input costs are expected to drop nearly 20% in 2009, led by both
fertilizers and fuels. Nonetheless, this is a significant lagged
response relative to commodity prices that had already entered
correction mode by late summer in 2008. By comparison, farm
origin inputs - including feed, livestock and seed costs - are
expected to decline modestly this year. Other expense categories,
which include interest expenses and a variety of overhead and
operating expenses, are expected to continue on a modest
upward trend, rising an expected 2% this year. Overall, farm
expenditures are declining, but not as fast as commodity prices,
2
AGISummer09.09.04.09.indd 2
thus putting downward pressure on net cash income which is
now likely to be 30% off its 2008 record level.
Citrus Market - Setting the Stage
for More Optimism
As the 2008/09 citrus season comes to a close, it is hard not
to think of this difficult citrus season as another rough year
following seven consecutive years of declining sales, but still,
growers are more hopeful. As the nation searches for the bottom
of an economic downturn, the citrus industry is also paying close
attention to key indicators that could be signaling better times
ahead. A recent break in the weak demand has begun to revive
retail pricing, and emerging trends in the small fruit market may
lead to keeping fresh fruit sales active.
Agricultural producers across the US and Canada are certainly
not immune from macroeconomic challenges that range from
skyrocketing energy expenses to cooling demand for agricultural
goods. The chart above illustrates the impact of such trends on
farm expenditures by comparing total expenses relative to total
farm revenues for 1996 through 2009. While record farm revenues
and income pushed the ratio of expenses to revenues down near
the 70% level in 2007, this ratio increase is likely to continue again
this year as total revenues are expected to decline faster than total
production expenses.
Longer-term, farmers are expected to face attractive demand
drivers as the global economy recovers and demand for agricultural
products – especially for higher value products – starts to improve.
The recovery in demand should lead to agricultural prices settling
above their historical levels. For instance, the ongoing shift in
consumer preferences from grain to meat-based diets, which
implies higher levels of grains and oilseeds demand for the same
level of calories consumed, is indicative of the positive drivers that
will push world agricultural productivity higher.
Assuming that agricultural production is already efficient, we can
expect this pressure to result in additional market incentives in the
form of a price premium over historical prices. Major agricultural
commodities - as well as inputs – could settle somewhere above
their historical range. This transition can still result in a mismatch
between agricultural commodity and input prices, which can
cause significant income volatility. However, as price and cost
adjustments trickle down the supply chain, farm profitability
should revert to its long-term positive trend.
Hugues Rinfret, CFA, FRM
Agricultural Investments Research
The economic recession has had a significant impact on the
citrus industry, evidenced by a modest decline in orange juice
continuing the downward trend in sales that shows a drop
of over 20% since 2005. Sales of top juice brands were down
significantly, but reconstituted orange juice, which is used heavily
for private-label orange juice, increased almost 15%. This is a
sign that Americans aren’t buying as much higher priced orange
juice since grocery shoppers are being much more careful how
they spend their money in these tough economic times and are
shifting to lower cost options.
The current recession is not the beginning of difficult times for
the citrus industry, which has been looking for recovery
since a devastating hurricane season in 2004. The
subsequent dramatic price increases were more than
consumers could bear, and consumption of orange juice
declined severely, leading to little improvement to grower
revenues. While the Florida crop is used mainly for juice,
this also affected the price of fresh citrus from other
regions, most notably the California crop, which saw the
price increases bringing the consumption of fresh oranges
down as well. As the industry struggled to pull through,
a January 2007 freeze destroyed much of the California
crop.
Weather wasn’t the only natural force affecting the industry.
Florida growers began to struggle with a new pest after the
greening, or Huanglongbing (HLB), and citrus canker began
to damage the fruit and trees of the Florida groves. Fighting
the effects of these diseases has proven costly from both the
application of treatments to the trees and the funding of research
to develop more effective methods of combating the diseases. Not
only has the cost of fighting disease, along with other increasing
input costs, made production less profitable, it has also taken
funds away from much needed marketing in a time of decreased
demand. The US consumption of fresh fruits has shown some
increase in the past few years, but total citrus consumption has
not been able to take advantage of this growth, and has continued
to contract.
Still, there is reason for hope, and growers are more optimistic.
The past few months have shown some decline in retail orange
juice prices that has spurred renewed demand. This year’s
production numbers appear high enough so that beginning
orange juice inventories for 2009/10 season will unlikely be any
lower than last year’s. With the persistent disease issues, total
crop size is anticipated to decrease, to about 150 million boxes,
according to analysts, down from the 162 million boxes produced
in Florida this year. This lower level of supply should help focus
the crop on fulfilling juice contracts, and avoids the poor cash
market returns that have been a bane on small producers when
faced with a large crop.
In California, there is also reason to stay positive. The past few
years have seen growth in the sale of fresh grapefruits on the
back of sales that had been in decline from 1997 to 2006. Initial
reports for the 2008-09 season seem to indicate that there will
be a slight contraction in grapefruit sales this year, but this trend
could reverse as prices drop and consumer spending increases.
Also, the demand for small citrus fruits (shown on the following
chart as a combination of lemons and tangerines) has shown a
positive long-term trend. The increased availability of imported
small fruits has made small citrus available year-round, building
consumer awareness of different varieties. Convenient easy-peel
and seedless varieties have become popular items, and continued
retail support makes them a real focus for opportunity.
Even as weather, disease, and the economic climate prove to be
hazardous, the citrus industry maintains its livelihood through
persistence. As any farmer from Florida to California can
tell you, there is no such thing as a “normal” season, and the
only way to survive is to adapt to what unique conditions are
presented. Improved demand for orange juice shows that this is
once again a ripe market, and the trend in small fruits presents
an opportunity for increased diversification for the industry.
George Szczepanski
Agricultural Investments Research
3
9/9/2009 11:12:49 AM
Cap-and-Trade, Carbon Offsets, Farms and Forest (continued from p. 1)
and timberland owners would also face such higher production
expenses - although the incremental cost could be mitigated
by “carbon offset” income. Interestingly, one major expense
category that may get a reprieve is fertilizer. USDA made a
special mention of a provision in the House climate bill that
would allow the fertilizer industry to qualify for an exemption
from purchasing emission allowances until 2024. As an energyintensive and a trade-sensitive sector, it could be temporarily
exempt from the need to buy pollution permits. Consequently, it
would delay additional increases in fertilizer prices to the more
distant future, representing savings to farmers, especially for
corn, wheat and cotton growers – among the largest fertilizer
users.
Regardless of its form, there is still political momentum to
continue working on a climate bill. If implemented despite
current concerns, a new climate law in the US would imply a net
additional cost to the economy as the government creates a new
scarce resource – carbon. Here, the agricultural and timberland
sectors could see a new mitigating source of income, but the net
impact would all depend on how carbon offsets’ features and
restrictions are ultimately defined and implemented.
Some Reprieve with Farm
Production Expenses
© 2009 METLIFE, INC. PEANUTS © United Feature Syndicate, Inc.
Farm production expenses had steadily risen since 2002 before
jumping in 2008 amid a surge in energy costs. Fortunately, this
course was reversed in 2009. However, rising revenues through
2008 also reversed course, at a faster pace. Farmers across the US
and Canada have seen their ratio of total expenses to revenues
climb since 2007, due to the lag created by input costs reaching
higher and taking longer to moderate back down as commodity
markets settle at lower price levels.
Of all major categories of production expenses, manufactured
inputs (orange bars in the chart) stand out as particularly volatile
over the past few years. Led by fertilizer prices skyrocketing amid
record energy prices in 2008, manufactured input costs rose nearly
50% in two years, jumping from $37 bi. in 2006 to $55 bi. in 2008.
However, this record pricing, as we entered a global recession,
eventually preceded a major correction in 2009. Manufactured
input costs are expected to drop nearly 20% in 2009, led by both
fertilizers and fuels. Nonetheless, this is a significant lagged
response relative to commodity prices that had already entered
correction mode by late summer in 2008. By comparison, farm
origin inputs - including feed, livestock and seed costs - are
expected to decline modestly this year. Other expense categories,
which include interest expenses and a variety of overhead and
operating expenses, are expected to continue on a modest
upward trend, rising an expected 2% this year. Overall, farm
expenditures are declining, but not as fast as commodity prices,
2
AGISummer09.09.04.09.indd 2
thus putting downward pressure on net cash income which is
now likely to be 30% off its 2008 record level.
Citrus Market - Setting the Stage
for More Optimism
As the 2008/09 citrus season comes to a close, it is hard not
to think of this difficult citrus season as another rough year
following seven consecutive years of declining sales, but still,
growers are more hopeful. As the nation searches for the bottom
of an economic downturn, the citrus industry is also paying close
attention to key indicators that could be signaling better times
ahead. A recent break in the weak demand has begun to revive
retail pricing, and emerging trends in the small fruit market may
lead to keeping fresh fruit sales active.
Agricultural producers across the US and Canada are certainly
not immune from macroeconomic challenges that range from
skyrocketing energy expenses to cooling demand for agricultural
goods. The chart above illustrates the impact of such trends on
farm expenditures by comparing total expenses relative to total
farm revenues for 1996 through 2009. While record farm revenues
and income pushed the ratio of expenses to revenues down near
the 70% level in 2007, this ratio increase is likely to continue again
this year as total revenues are expected to decline faster than total
production expenses.
Longer-term, farmers are expected to face attractive demand
drivers as the global economy recovers and demand for agricultural
products – especially for higher value products – starts to improve.
The recovery in demand should lead to agricultural prices settling
above their historical levels. For instance, the ongoing shift in
consumer preferences from grain to meat-based diets, which
implies higher levels of grains and oilseeds demand for the same
level of calories consumed, is indicative of the positive drivers that
will push world agricultural productivity higher.
Assuming that agricultural production is already efficient, we can
expect this pressure to result in additional market incentives in the
form of a price premium over historical prices. Major agricultural
commodities - as well as inputs – could settle somewhere above
their historical range. This transition can still result in a mismatch
between agricultural commodity and input prices, which can
cause significant income volatility. However, as price and cost
adjustments trickle down the supply chain, farm profitability
should revert to its long-term positive trend.
Hugues Rinfret, CFA, FRM
Agricultural Investments Research
The economic recession has had a significant impact on the
citrus industry, evidenced by a modest decline in orange juice
continuing the downward trend in sales that shows a drop
of over 20% since 2005. Sales of top juice brands were down
significantly, but reconstituted orange juice, which is used heavily
for private-label orange juice, increased almost 15%. This is a
sign that Americans aren’t buying as much higher priced orange
juice since grocery shoppers are being much more careful how
they spend their money in these tough economic times and are
shifting to lower cost options.
The current recession is not the beginning of difficult times for
the citrus industry, which has been looking for recovery
since a devastating hurricane season in 2004. The
subsequent dramatic price increases were more than
consumers could bear, and consumption of orange juice
declined severely, leading to little improvement to grower
revenues. While the Florida crop is used mainly for juice,
this also affected the price of fresh citrus from other
regions, most notably the California crop, which saw the
price increases bringing the consumption of fresh oranges
down as well. As the industry struggled to pull through,
a January 2007 freeze destroyed much of the California
crop.
Weather wasn’t the only natural force affecting the industry.
Florida growers began to struggle with a new pest after the
greening, or Huanglongbing (HLB), and citrus canker began
to damage the fruit and trees of the Florida groves. Fighting
the effects of these diseases has proven costly from both the
application of treatments to the trees and the funding of research
to develop more effective methods of combating the diseases. Not
only has the cost of fighting disease, along with other increasing
input costs, made production less profitable, it has also taken
funds away from much needed marketing in a time of decreased
demand. The US consumption of fresh fruits has shown some
increase in the past few years, but total citrus consumption has
not been able to take advantage of this growth, and has continued
to contract.
Still, there is reason for hope, and growers are more optimistic.
The past few months have shown some decline in retail orange
juice prices that has spurred renewed demand. This year’s
production numbers appear high enough so that beginning
orange juice inventories for 2009/10 season will unlikely be any
lower than last year’s. With the persistent disease issues, total
crop size is anticipated to decrease, to about 150 million boxes,
according to analysts, down from the 162 million boxes produced
in Florida this year. This lower level of supply should help focus
the crop on fulfilling juice contracts, and avoids the poor cash
market returns that have been a bane on small producers when
faced with a large crop.
In California, there is also reason to stay positive. The past few
years have seen growth in the sale of fresh grapefruits on the
back of sales that had been in decline from 1997 to 2006. Initial
reports for the 2008-09 season seem to indicate that there will
be a slight contraction in grapefruit sales this year, but this trend
could reverse as prices drop and consumer spending increases.
Also, the demand for small citrus fruits (shown on the following
chart as a combination of lemons and tangerines) has shown a
positive long-term trend. The increased availability of imported
small fruits has made small citrus available year-round, building
consumer awareness of different varieties. Convenient easy-peel
and seedless varieties have become popular items, and continued
retail support makes them a real focus for opportunity.
Even as weather, disease, and the economic climate prove to be
hazardous, the citrus industry maintains its livelihood through
persistence. As any farmer from Florida to California can
tell you, there is no such thing as a “normal” season, and the
only way to survive is to adapt to what unique conditions are
presented. Improved demand for orange juice shows that this is
once again a ripe market, and the trend in small fruits presents
an opportunity for increased diversification for the industry.
George Szczepanski
Agricultural Investments Research
3
9/9/2009 11:12:49 AM
