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Prepared by Philip Gotthelf

Finally, a Secretary of Agriculture

(April 27, 2017) In the background of all the Trump coverage, Secretary of Agriculture Sonny Perdue was confirmed and is already embroiled in the Canadian negotiations over their soft lumber and our dairy products. This may not seem like a big deal, but for the forestry businesses in Washington and Oregon and Maine, relief from subsidized Canadian lumber spells the difference between marginal profits and healthy returns. For dairy farmers in California, Wisconsin, New York, Idaho, Michigan, and Pennsylvania, opening up Canada's market could add 10% to 20% to the bottom line. This does not mean a huge 10% to 20% price rise. The gains come from efficiencies and cutting down on waste (forfeited) milk production.

Although only 2% of the U.S. population is directly involved in farming, the trickle down from agriculture is enormous. This sector represents our largest export potential… ahead of technology and weapons. We may recall the debate over candidate Trump's anti immigrant rhetoric relative to Hillary Clinton's assertion that farmers need migrant workers. During the presidential campaign, Hillary felt assured Wisconsin and Michigan were solidly in her camp because farmers in town hall gatherings claimed they were against Trump's position. However, Trump spent many rallies in farm states where he asserted that American jobs needed to come first and, more importantly, U.S. agriculture must be protected in world markets. Obviously, Trump's message won the votes that yielded the presidency.

When you examine the importance of lumber and dairy within "blue states" like Oregon, Washington, and California as well as the former "blue wall" including Wisconsin and Michigan, Trump's strategy emerges. Alas, the general media lacks insight into "Trump dynamics" that won the election and continues cementing his position regardless of negative news. While MSNBC, CNN, and the major networks continue pursuing a potential Russian connection, Middle America isn't listening and doesn't care. However, dairy farmers and processors are keenly watching the Canadian situation. If Agricultural Secretary Perdue manages to gain concessions, Trump keeps his voters happy… possibly converting more to his side.

Some talking heads and congressmen claim U.S. milk prices will be forced higher… a "bad thing." If lumber prices rise, housing costs will go up… "a bad thing." Any rational person knows that higher prices are not necessarily inevitable simply because the market is expanded (dairy) or the playing field is leveled (lumber). For one thing, Uncle Sam subsidizes dairy. You would think that a congressman or congresswoman would know that… DUH! So, when the market supports milk above the subsidy level, the cost to taxpayers declines while to retail impact remains static. Only if there is a true demand surge that creates a supply dislocation would we see price consequences for U.S. consumers. By the way, milk is usually less expensive than bottled water!

I find Sonny Perdue intriguing because I cannot determine if President Trump's timing is purposefully designed to kick-start the Secretary of Agriculture. Could Trump actually be that intelligent? According to almost every Democrat I know, the answer is unequivocally "NO." According to people who know President Trump, the answer is "probably." Sonny Perdue comes from an agricultural background. He was also Georgia's governor. His combination of political and business skills is well positioned for dealing with Canada. Perdue understands the impact Canada can have on dairy prices and profits.

Unlike the press and most politicians, Perdue addresses industry and regulation quirks like state expiration date statutes. For example, Montana imposes a 12-day post pasteurization expiration date upon milk when the national average is 21 to 24 days. A farmer cannot sell or even donate milk past expiration even though it is perfectly safe to drink. The result is millions of wasted gallons that detract from a farmer's top and bottom line. By liberalizing and unifying "freshness" standards, farm profits could rise even as retail prices fall. Equally important, opening Canada's market can allow farmers to rapidly go to market, lowering waste and increasing revenues.

Using the same analytical context, most housing construction costs are labor. This is certainly the case relative to lumber. The average cost per square foot for single family homes rose from $80/sq.ft. in 2011 to $95/sq.ft. in 2013. According to the Home Advisor web site, the current cost is $150/sq.ft. Of these estimates, framing and trusses account for just 16.7%. Throw in the roof at another 3.5% and you're up to 20.12%. This means that the incremental increase in lumber that might be attributed to an evenhanded Canadian deal would hardly budge overall construction costs. In the National Association of Homebuilders cost breakdown, the sales commission is 3.2% and marketing costs are 0.8% for a 4% total. That's a fixed cost regardless of anything else unless the sales commission is negotiated. Further, that's really only half the customary 6% commission that's split between buyer and seller when two brokers are involved.

I point out the details because our media's glittering generalities combine with nonsense from politicians to distort news which may not be "fake," but certainly leaves false impressions.

We see lumber rallied from January, but that was based upon construction numbers. According to various builder publications and DOW Jones News, milder winter weather across the country kicked off 2017 housing in January and February rather than March and April. This was also the explanation for why housing starts were down 6.8% in the latest news which I touched upon last week. So, it is allegedly a seasonal aberration. I don't concur. There was plenty of snow and unsettling weather through January and February. More likely, speculative building was accelerated because the FED virtually promised higher interest rates that would impact carrying costs and construction loans. Examine the chart. Trump's Canadian intervention didn't have the expected impact upon lumber. To the contrary, prices just retraced from recent highs even after the "breaking news."

The Department of Agriculture budget is huge because it encompasses Food Stamps. It deals with subsidies and other support programs including grants like the REAP initiative; Rural Energy for America Program. This is a budget item that rewards farmers or simply "rural businesses" for implementing energy conservation measures. Really? And that does what for agriculture? The USDA budget for 2017 is estimated at $151 billion, down from $154 billion in 2016. The decline is attributed to a dip in the Commodity Credit Corporation (CCC) fund. Here's the thing… 71% of the budget is "nutrition assistance." This is a catch-all that includes Food Stamps and other dietary assistance pursuits.

If I listed components of the USDA budget, most rational and objective people would be shocked. There is "Funding for an in-country presence in Cuba to cultivate key relationships…" Translation - political slush fund for horse swapping in the newly formed Cuban trade relationship. CUT?! "Resources to assist the next generation of new and beginning farmers and ranchers, including military veterans, overcome barriers they face when entering agricultural production." Hmmm… and the Veteran's Administration does what?

I believe Sonny will be tasked with turning the USDA back into a Department of Agriculture rather than a welfare office or marketing arm for political gain. Consider that the USDA has "Funding to continue efforts to increase the demand for biofuels." We are awash in crude oil and natural gas. Exxon/Mobile sports television ads for their green algae technology… hopefully with private funds. Hello, Sonny? Do we need all $151 billion, or can we CUT?

To be sure, I have no idea if there is too much political pork in the USDA budget to trim. President Trump calls it "draining the swamp." A whole lot of people rely upon pieces of that $151 billion. However, Trump is on a mission to reduce taxes and curb overly burdensome regulations. He is in a hurry to prove that reductions in revenue can be offset by government efficiency. One way to capture a portion of the 71% spent on nutritional assistance is to get people off of Food Stamps. That usually happens when a recipient gets a job.

In the "old days," the USDA was more narrowly focused upon promoting and supporting farm output. President Kennedy instituted a pilot food stamp program in 1961 by Executive Order and President Johnson continued "Food Stamps" by Executive Order in 1964 which was formerly legislated by Congress. In 2008 the program was renamed the Supplemental Nutritional Assistance Program; SNAP. Prior to nutritional assistance becoming an entitlement, the purpose was to distribute surplus production. It was more of a price support effort than a means of addressing poverty or malnutrition. If you read the 1964 legislative intent it says the program authorizes low income households to receive "a greater share of the nation's food abundance." In the 1970s the "program" was expanded to encompass all food products and to provide supplementation for the Supplemental Security Income program. Although SSI is administered by the Social Security Administration, it is funded by the Treasury. Politicians just kept piling on benefit after benefit and we might suppose that's a good thing.

I can tell you that there is so much mutual exclusivity between programs that individuals can actually have a better standard of living being on the dole than getting a job or simply playing the system(s). For example, you might have a miniature golf business in a rural area with a driving range. You decide to change your lighting to Golf-Bright™ to reduce energy. You apply for incentives from your power company and discover they are willing to rebate 50% of the entire $40,000 installation cost. Then, you apply for a USDA REAP grant and receive a quick $10,000 after fulfilling the requirements. Nice, but you're not finished, yet. You discover that you're able to apply for a piece of a Department of Energy conservation block grant… bingo! Another $10,000. WOW! The project is FREE!

It gets more absurd when you find out there are grants from the National Forest Service and Parks Service. By the time you're finished, you've made a profit on your relighting project. And, that's how government works! Now, the owner of the miniature golf establishment had to work to gain access to all the available funding. There are many who make a career out of "grant harvesting." Universities are notorious for sniffing out government money even as their endowments grow tax-free.

I believe Sonny Perdue is capable of trimming the USDA and making it more responsive to its original charter… to help farmers and smooth out cyclical variations in U.S. food production. Food is a national security issue. The importance of food management dates back to the Biblical story of Joseph when he interprets Pharaoh's dream of the Seven Cows. Joseph established granaries to store food during the seven years of abundance in anticipation of the seven years of famine. Yes, that's how far back the practice is documented.

I expect to see Sonny working very closely with the State Department and Department of Commerce to create a cohesive national agricultural policy and market. Consider that the Commerce Department has a grant program through the Special American Business Internship Training Program (SABIT) that provides "A technical assistance initiative of the International Trade Administration of the U.S. Department of Commerce, SABIT offers organizations competitive grants and an opportunity to host industry-specific delegations. SABIT serves as an initial entry point for U.S. businesses seeking funding to establish long-term relationships with potential customers, distributors, or partners in the former Soviet Union."

Do I really have to say more? Good luck, Sonny!

April 27, 2017
Philip Gotthelf
Commodity Futures Forecast
P.O. Box 566, Closter, New Jersey

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