In the last four months of 2002, 94,717 metric tons of Brazilian soybean meal and 27,050 mt of feed wheat from the UK came into the port of Wilmington, NC. Another 83,651 mt of British and French wheat came into the port of Brunswick, Georgia. It is clear that other ports in the Southeast also have potential for feed ingredient imports including Chesapeake/Norfolk Virginia, Tampa Florida, and Mobile Alabama. These imports warrant attention because a third of the 330 million acres planted to principal crops are devoted to producing feed ingredients for domestic use. Anything that affects returns to that land affects all of field crop agriculture.

The companies involved in the Wilmington terminal have generally been candid about their motivation. The terminal lease is only one part of their strategy as a buying collective that also jointly purchases feed ingredients from domestic sources. The terminal lease had the following purposes:

· Improve their leverage in negotiating rail freight rates.

· Improve their leverage with soybean crushers in the Southeast.

· Diversify their sources of supply.

· Take advantage of seasonal factors associated with the South American harvest.

· And overall to minimize their feed ingredient costs.

Concern over security of supply and the cost of feed has been stimulated by the growing feed deficit in the region. Hog and poultry production has grown dramatically in the Southeast over the past decade. Hog slaughter has more than doubled since 1990 and broiler production is up 31%. At the same time, the region’s production of grain and soybeans has stagnated, resulting in a widening gap between demand for feed and what is locally available.

These developments have raised a number of questions in the minds of US farmers. The organizations sponsoring this study therefore asked us to answer three main questions:

· What are the main factors behind the Southeast’s imports of feed ingredients, and what is their relative importance?

· Is this a sign of bigger problems ahead?

· What can US farmers do to improve their competitiveness in the market for feed ingredients in the Southeastern states?

We looked in depth at the various agronomic, behavioral, governmental, logistical and macroeconomic factors causing these imports to occur. With regard to the following, there have been no significant changes that one could characterize as suddenly causing these imports:

· US production costs have not suddenly increased.

· Ocean freight rates have not fallen and made imports more economic.

· Internal US grain handling costs and rail and trucking rates have not markedly increased the last few years.

This does not mean that farmers should not worry about reducing their production costs or getting grain handlers, crushers, railroads, barge lines and others in the logistical chain to continue to increase efficiency and limit costs. That is a never-ending challenge.

The things that have changed and triggered imports are the following, in order of importance:

· Producers in Brazil and Argentina have significantly improved their competitiveness as a result of reduced production costs and improvements in the logistical system.

· Soybean production costs in Brazil and Argentina have been further reduced by evasion of payment of technology and licensing fees for Roundup Ready seed.

· These changes were magnified by a combination of their currency devaluations and the strength of the US dollar.

· Looking ahead, Argentine competitiveness in the meal market will be increased by their reintroduction of differential export taxes.

· US hog and poultry producers have gotten bigger and more globally oriented and are now willing and able to look abroad for raw materials.

· International grain companies and merchants have become less worried about adverse farmer reactions to imports.

· The growing feed deficit and the variability in crop yields in the Southeast has made hog and poultry producers more focused on the need for reliable and cost-competitive feed supplies.

· Stagnation in feed crop production in the Southeast has in turn been caused by a combination of rising cotton production, land idling under the Conservation Reserve Program, low soybean crusher offer prices, and a paucity of research on corn and soybean varieties more suited to the region.

· Growing wheat exports from Russia, Ukraine, Kazakhstan, Hungary, India and other countries have depressed world feed wheat prices.

Two factors that have not changed but that help make imports feasible are the Jones Act which eliminates the possibility of coastwise shipment of feed ingredients to the Southeast, and the level of rail transportation costs to that region which might be amenable to further reduction through a variety of steps.

First, we can eliminate the things that US producer groups cannot affect: non-seed production costs in South America, exchange rates for our own or other countries’ currencies, wheat production in these newly emerging competitors, ocean freight rates in the world market, or the changed mindset of large hog and poultry producers. That leaves three basic areas on which farmers could focus their efforts: increasing feed ingredient production in the Southeast, reducing the cost of moving Midwest feedstuffs to the region, and pursuing changes in relevant policies in Brazil and Argentina.

Here there are three questions: can it be done, who is affected, and would it make a difference? Production of feed grains and soybeans in the Southeast can be boosted through higher plantings, higher yields, or both. To achieve higher plantings, either more land must be available or these crops must improve their attractiveness to producers relative to cotton.

More land could be made available by not renewing CRP contracts when they expire. Since much of that land is apparently in trees, however, that would not necessarily have an immediate result. Those holding the current contracts would also oppose such a policy decision.

Cotton acreage has gone up in the region for a combination of reasons including eradication of the boll weevil and the success of Bt varieties. Favorable price supports relative to other crops have also been an important factor. Given the huge importance to the region of poultry, egg and swine production, is it counterproductive to continue to encourage expansion of cotton plantings at the expense of the corn and soybeans needed for animal feed? This is another case where a potential response to feed imports might encounter resistance within the agricultural community. One could raise grain and soybean loan rates in the Southeast to encourage production but that would likely require lowering them elsewhere to keep the national average the same. Similarly, any effort to make cotton less attractive would not be embraced by those farmers in the Southeast who are now producing it.

Another alternative would be to beef up public sector research on appropriate corn and soybean varieties for the region that would boost yields closer to the national average and improve the profitability of those crops, enabling them to compete with cotton for land. With declining acreage in the region there has simply been less private sector research on higher yielding varieties of appropriate maturity groups.

Consideration should also be given to how to encourage the development of contracting arrangements between crushers and soybean growers that would assure crushers of larger regional soybean plantings and production, and assure farmers of greater financial returns for their soybeans. Crushers could be better off paying more for local soybeans if it encourages output because they would not have to bring in as big a volume of Midwest soybeans at high cost.

There are undoubtedly situations where particular companies are not being well served in the Southeast by the railroads, but we found no broad pattern of egregious rates, and profits of the two Class 1s are within normal bounds. Norfolk Southern’s pre-tax profits in 2001 were 10.7% of revenue and in 2002 they were 13.8% of revenue. For CSX the numbers were 5.5 and 8.9%, respectively, for the two years. These are not so low that shippers should give up on extracting further concessions, but nor are they so high that there is a lot of potential for significant freight rate reductions. The margin for negotiation in the Southeast is cents per bushel, not dimes, and that translates into a factor of only $2-3 per metric ton in terms of import competitiveness.

In view of the nationally more concentrated rail sector, farm groups must closely monitor any further developments in this regard that would affect competition. Every session of Congress also brings legislative initiatives with respect to the railroads that can be either favorable or adverse to farmer interests. Legislation must therefore be closely tracked so that producer groups can intervene and make their position known.

The main path to lower rail transportation costs is that towards greater utilization of unit trains of 50 or 75 cars or more. In Georgia there are only 5 poultry facilities that can take 75s, and some of those still take mostly 50s for scheduling reasons. It will require additional investment in unloading and storage facilities, and in Cornbelt loadout capability, but freight savings of several dollars per ton are achievable in many cases.

With regard to the Jones Act, an exemption for bulk feed ingredients would be helpful but would not fundamentally alter the situation. As economists we are almost genetically predisposed to criticize such blatantly protectionist laws. In our view the country would be better off without the Act. However, our calculations indicate that the likely reduction in coastwise shipping rates would not be sufficient to fundamentally alter the economics of the main competitive threat which is soybean meal imports, and would have almost no impact at all on the grain equation.

Since no domestic bulk carriers are involved in coastwise feedstuff trade though, one can make a case that maritime interests might not automatically reject the exemption idea. Politics offers many opportunities for quid pro quos and we would be foolish to say this is impossible to achieve. The idea could certainly be explored with the affected interest groups. But in the absence of a negotiated solution, producer groups have to weigh whether it would be worth the expenditure of political capital necessary to prevail over maritime interests in getting an exemption to the Jones Act.

Since the major import threat is going to be from South American soybean meal, and possibly soybeans, there are two initiatives that farm groups can pursue that will help maintain competitiveness of US feed in the Southeast:

· Get the US government to pressure Argentina to levy the same export tax rate on both soybeans and soybean meal.

· Get the US government to pressure both Brazil and Argentina to prevent piracy of Roundup Ready and other biotech soybean and corn seed, and to enforce the relevant intellectual property laws.

Argentina’s differential export tax (DET) structure for the soybean complex clearly subsidizes crushing margins and has the effect of depressing their soybean meal export prices. Export taxes themselves are not objectionable as a revenue raising measure, and in fact they actually discourage soybean production. However imposing a lower tax on meal exports than on bean exports is a problem that needs to be rectified.

The American Soybean Association has already been active in calling attention to the effects of the piracy situation and failure to charge technology fees in Brazil and Argentina. It is in the interest of other groups to be active on this issue as well.

One can summarize in terms of a "to do" list. We rank the potential industry responses to this new import competition as follows, in order of importance (i.e. a combination of feasibility and potential impact):

· Challenge Argentina’s DET system for the soybean complex.

· Promote further conversion to unit train capability in the Southeast and in the Eastern Cornbelt.

· Monitor, and influence where necessary, all legislative and regulatory initiatives affecting the railroads.

· Explore whether a deal can be struck with maritime interests on a bulk feed exemption.

· Tackle the biotech seed piracy problem in South America.

· Explore ways to make corn and soybeans more attractive relative to cotton, including support program and loan rate adjustments

· Increase public sector research on appropriate varieties

· Encourage crushers to offer favorable soybean production contracts.

· Oppose renewal of CRP contracts in the region.

· Pursue a Jones Act exemption in the face of maritime industry opposition.

For more information, download the complete report (2,018 KB PDF file).