Washington Insider - Thursday

Russia Looks for Food Source Alternatives

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Major Cellulosic Ethanol Plant Nearing Bankruptcy

The operator of one of the nation's first cellulosic biofuel plants says the KiOR facility in Columbus, Miss., has only enough financing to make it through September. In a filing with the Securities and Exchange Commission this week, KiOR reported a net deficit of $629.3 million and said it expects to continue incurring losses for the foreseeable future. As of July 31, the company had just $800,000 in cash on hand.

At one time, KiOR was a pioneer in the renewable fuels industry and last year produced the nation's first commercial quantities of cellulosic gasoline and diesel from pine waste. Analysts note that the Environmental Protection Agency factored in KiOR's projected production levels when the agency set last year's initial cellulosic biofuel targets.

Even counting KiOR's projected production, EPA set last year's cellulosic mandate at just 6 million gallons, or at just 6 tenths of 1% of the 1 billion gallons specified in the Energy Independence and Security Act of 2007. This raises the question: what figure will EPA mandate for cellulosic ethanol use if KiOR does go out of business and its production cannot be factored in?

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No Major Action Anticipated from Congress, Either Before or After Elections

Republicans have not wanted to work closely with President Obama on much of anything during his time in office, and the relationship is unlikely to change during what remains of this year. And this is likely to be true regardless of the outcome of the mid-term elections.

When Congress returns from its five-week summer recess, members will have –– at most –– just a dozen legislative days in Washington before recessing for another five weeks to campaign. In their brief time back in September, they may approve some appropriations bills to keep the government funded after Oct.1. But it is far more likely that they instead will pass a continuing resolution that will keep the government running until a later date, likely a later date in 2015.

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Earlier, the president said, "When Congress returns next month, my hope is, is that instead of simply trying to pass partisan message bills on party lines that don't actually solve problems, they're going to be willing to come together to at least focus on some key areas where there's broad agreement." However, in this Congress, it does not appear that there are issues beyond re-naming post offices that enjoy much broad agreement.

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Washington Insider: Russia Looks for Food Source Alternatives

To no one's surprise, Russia now is actively beating the bushes in Latin America for sources of food to replace those it has banned and it is finding at least a few. For example, the European press is reporting that Brazil's poultry industry is eagerly preparing to step up production levels to replace Russia's imports from the European Union, United States, Canada and Australia.

At the same time, at least some Latin American industries are moving cautiously, reflecting their limited capacity, longer production cycles and a history of trade disruptions, including prickly relations with Russia.

Things are moving quickly, however. News of the Russian embargo was quickly followed by its approvals of dozens of Brazilian meat plants, a step that Moscow thinks will help prevent market shortfalls. The EU says it plans to hold talks with Brazil and other South American countries to dissuade them from taking advantage of Russian supply gaps, and similar efforts by the United States and others can be expected to materialize soon. However, few observers give such efforts much of a chance.

For example, Brazilian officials are moving to take advantage of this market opportunity to "revolutionize" the country's agriculture, similar to the demand surge stimulated by Chinese soybean import policies over the last decade. And, of course, they are eager to suggest that Russia might permanently rely on Brazil as its main alternative for a range of foodstuffs

So, the embargo is supporting a burst of Brazilian optimism, especially on the part of chicken producers whose fortunes have been declining in recent years as sales to Russia have fallen in tandem with Russia's efforts at self-sufficiency. Brazilian chicken exports now are expected to triple, reaching at least 250,000 tonnes during the year the restrictions are expected to remain in force.

Brazil's chicken exports also have been under pressure from the loss of sales to traditional importers (the EU and Japan) as populations there have aged and as Brazilian chicken has become less competitive due to higher production costs. Now, however, this substantial excess capacity is expected to provide a leg up to boost output quickly without much pressure on domestic market prices.

At the same time, chicken production in Russia has been moving most rapidly toward self-sufficiency, so longer-term opportunities for Brazil in that market may be limited.

Beef is another commodity that Brazil has traditionally exported to Russia, but one that may be harder to increase than chicken. This may be true even though Russia says it will take more offal and meat of types not previously permitted. Some beef may be diverted from less profitable markets, and domestic beef prices in Brazil already have begun to rise, observers say. And, the Brazilian pork sector appears to have little excess capacity to support increased exports to Russia without diversions from domestic and other, less profitable markets and at least some disadvantage to domestic consumers.

Russia is not now a significant importer of Brazilian fruit and vegetables. A possible additional obstacle is the fact that all fruit now enters via Rotterdam, which may prove difficult from now on. Also, much of the meat bound for Russia now enters via Baltic ports, and this too, may prove to be a problem since those ports close down in the winter.

Overall, skeptics note that Russia has traditionally been a difficult customer, quick to cancel the export licenses of processing plants, sometimes over modest or unspecified concerns. Obviously, Brazilian exporters now hope Russia's push to strengthen ties with Brazil and other BRICS (Brazil, Russia, India, China and South Africa) countries means it will be a more reliable trade partner in the future.

In any event, the Russian import bans will make world food markets much more volatile as government interventions grow. This has happened many times before, with the U.S. 1980 embargo of exports to Russia over its invasion of Afghanistan providing a prime example of a massive market intervention — and one that upset U.S. farm policies for years. Even now, the continuing embargo of Cuba damages the United States more than it does Cuba, who can get what it needs quite readily on global markets. Many experts are suggesting that the current bans will damage Russia more than its suppliers, as well.

Embargos achieve, by definition, the result of making resource allocation less efficient and efforts to provide food to growing markets more costly. The justifications advanced almost always involve "national security efforts" but generally turn out to be national embarrassments rather quickly because trade in food and agricultural products is fluid and can take many, many alternative pathways.

Thus, it will be important to observe this effort closely. Russia thinks it has a powerful tool and is applying it dramatically, as others have in the past. The results will involve at least a flurry of policies by those involved to mitigate the effects of the new policies, and many of those may still be dragging down markets a decade or more from now.

In any case, the cost will include a decline in market confidence and likely a severe loss in momentum toward better global market access, certainly a high cost for Russia's most recent imperialist frolic, Washington Insider believes.


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