KeNo's Housing and Economic Portal: Monday August 17 Housing and Economic stories

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After Fed creates commodities bubble through money printing, USDA to prop milk and cheese prices to aid struggling dairy farms - (www.ljworld.com) As usual, the Fed policies are behind the price bubbles (through money printing), then the resulting bust. And as usual, politicians believe in price fixing to aid certain segments of the population. Let’s aid the farmers by propping prices which will cause 300M people to pay more for milk and cheese prices. Of course, government believes they can aid farmers without affecting the general population. The Agriculture Department is helping struggling dairy farmers by raising the price the government pays for milk and cheddar cheese through a dairy price support program. The department estimates the temporary increases, which will be in place until October, will boost dairy farmers’ overall revenue by $243 million. Agriculture Secretary Tom Vilsack said Friday that the price increase will provide immediate relief, helping to keep dairy farmers on the farm while they weather what he called “one of the worst dairy crises in decades.” Many dairy farms around the country have been in danger of closing as milk prices have hit lows and operational costs have skyrocketed. As the problem has worsened, lawmakers from high-producing dairy states have been pushing the department to temporarily boost the prices for government purchases. Dairies increased production when demand for U.S. milk exports soared last year, but once the global recession accelerated last fall, demand dropped and farmers were left with too much milk and too many cows. Wholesale prices crashed. The price boost will result in additional government purchase of 150 million pounds of nonfat dry milk and 75 million pounds of cheese, the department said. The government price support program is just one of many ways the government helps dairy farmers. The Agriculture Department has otherwise tried to buoy wholesale prices recently by releasing 200 million pounds of excess powdered milk to schools, food banks and needy countries to reduce U.S. supply and by accelerating payments to farmers. The increase will raise the price paid for nonfat dry milk from $0.80 per pound to $0.92 per pound, the price paid for cheddar blocks from $1.13 per pound to $1.31 per pound, and the price of cheddar barrels from $1.10 per pound to $1.28 per pound. Vilsack has said the department is reviewing dairy policy to determine what changes are needed to reduce price volatility and enhance farmer profits. The issue of struggling dairy farms has been gaining momentum on Capitol Hill, with a bipartisan group of 56 members forming the Congressional Dairy Farmers Caucus in July. Lawmakers praised the decision Friday but said much more needs to be done. Sen. Patrick Leahy, D-Vt., said he hopes the purchases will be a catalyst to help stabilize the downward spiral in milk prices. “Dairy farms in Vermont and across the nation are hurting, and this is the fastest and most direct short-term step that’s available to stop the bleeding,” he said. “We will continue to push for other relief but those steps will take longer.” Plainview, Texas, dairyman John DeVos said it is too soon to tell whether the increased prices will be enough. He said he wished it wasn’t something that was necessary. “It sounds like it will help,” he said. “We don’t know as an industry what this will do. We hope that it will have a positive effect on our prices. How far, we don’t know.”

The FDIC Is in Trouble - (www.safehaven.com) As we all know, the Federal Deposit Insurance Corporation (FDIC) guarantees depositors that they'll get their money back if a bank fails, at least up to a certain amount. To fund its operations, the FDIC collects small fees from the banks that are held in reserve for the purpose of taking over troubled banks and paying off depositors. Since the Great Depression, a period marked by widespread runs on banks, the FDIC has done a good job of fulfilling its mandate. So how are they doing in this crisis? In a nutshell, they are in trouble. The FDIC insures 8,246 institutions, with $13.5 trillion in assets. Not all of them are going bankrupt, of course. Yet as of late July, a disturbing 64 banks had gone belly up this year - the most since 1992 - costing the FDIC $12.5 billion. At the end of Q1, the agency was already asking for emergency funding. And worse, much worse, is likely yet to come. The following chart shows the total assets on the books of the FDIC's list of 305 troubled banks. The list doesn't include the biggest banks that are considered too big to fail, as they are being separately supported with bailouts. By contrast, if the banks on this list fail, the FDIC is on the hook to have to step in and take them over and, of course, make depositors whole.

Other measures of how serious the losses at banks are becoming can be seen in the chart below, which shows charge-offs and non-current loans at all banks. You can see that the Net Charge-offs remain stubbornly high, with banks charging off almost $40 billion in bad loans in the last two quarters alone. And the number of non-current loans - loans where payments are not being kept up - is soaring. Together, these measures indicate the potential for more big failures and more big bailouts coming down the pike.

About Those Reserves... Into the battle against bank insolvency the Fed brings a level of reserves that can best be described as paper-thin. From almost $60 billion last fall, the FDIC's reserves have been drawn down to only about $13 billion today, a 16-year low. A quick look at the FDIC's own data shows us how inadequate those reserves are compared to the deposits they are now insuring. The chart below says it all:

As you can see, the Federal Deposit Insurance Corporation currently covers each dollar on deposit with a trivial 2/10ths of a penny. And even that understates the seriousness of the situation: the $4.8 trillion in deposits the FDIC is providing coverage on doesn't include the expansion that now extends insurance coverage from $100,000 to $250,000 for normal bank accounts. That likely brings the exposure of the FDIC closer to $6 trillion. But that's pretty inconsequential at this point: using any reasonable accounting method, the FDIC is already bankrupt and will require hundreds of billions of dollars in government bailouts just to keep the doors open. So, given the dire shape of its finances, what measures is the FDIC taking, you know, to batten down the hatches and all that? For starters, they are expanding their mandate by guaranteeing bank loans - $350 billion and counting at this point. And the government has tapped the FDIC to play a pivotal role in guaranteeing the loans issued to buy toxic waste through the government's highly problematic and fraud-prone new Private Public Investment Partnership (PPIP). The FDIC's commitment to the PPIP is and may become limited based on its resources. It is hard to draw any other conclusion but that hundreds of billions in new funding will be required to keep the FDIC operating. Given the catastrophic consequences of the FDIC failing, starting with a bank run of biblical proportions, there's no question it will get whatever funding it needs. By loading the new loan guarantee responsibilities and the PPIP onto the FDIC's back, the administration will go back to Congress and ask for the next large bailout.

U.S. Farmland Values Fall for First Time Since 1987 - (www.bloomberg.com) U.S. farmland values declined last year for the first time since 1987 as the country suffered the worst housing crisis since the Great Depression. The value of all land and buildings on farms averaged $2,100 an acre at the start of this year, down 3.2 percent from a revised $2,170 a year earlier, the U.S. Department of Agriculture said today in an annual report. The change compares with a 19 percent drop in urban home prices. Agricultural commodities including corn, wheat and soybeans plunged from records last year, as the recession worsened and the world’s farmers increased production of some crops. The USDA expects net-farm income to drop 20 percent this year to $71.3 billion from last year’s record. “Valuations are running sideways,” said Jeff Conrad, a managing director at Hancock Agricultural Investment Group in Boston, which manages about $1.1 billion of farmland. Conrad said prices are beginning to rise again this year on signs of economic recovery. The most expensive farmland in the U.S. was in Rhode Island at $15,300 an acre, followed by New Jersey at $13,800, according to the USDA. The cheapest was in New Mexico, at $480 an acre. Northeast states were the most expensive of the 10 regions in the lower 48 states tracked by the USDA, with an average price of $4,830 an acre. Cheapest Land: The least-expensive area was the Mountain states, at $922 an acre. Values fell most in Montana, where farmland plunged 22 percent to $700 an acre. Prices in Corn Belt states including Iowa and Illinois fell 2.2 percent to $3,620 an acre. A boom in commodity prices followed by a bust sent wheat down 31 percent last year on the Chicago Board of Trade, while soybeans fell 19 percent and corn declined 11 percent. Each of the crops had set record highs during the year. “Livestock and crop-commodity prices have declined from a year earlier, thus producers and investors are less optimistic than a year ago,” the USDA said in the report. “A decrease in the demand for recreational land has also contributed to the overall decrease in land values.” Home Prices Fall: The farmland decline coincided with the steepest drop in U.S. home prices since the 1930s, according to the National Association of Realtors. Farmers, who saw land lose value four out of five years from 1983-1987, have steadily reduced debt since then, making drops less drastic in rural areas. The USDA says this year’s debt-to-assets ratio will be the lowest since at least 1960, when the department began tracking the statistic.

Treasury Plans to Sell Record $75 Billion in Debt Next Week - (www.cnbc.com) The US Treasury said Wednesday it would sell $75 billion in debt next week in a record quarterly refunding and announced plans to gradually increase issuance of inflation-indexed notes as its borrowing to fight a recession grows. The Treasury said it would sell $37 billion in three-year notes, $23 billion in 10-year notes and $15 billion in 30-year bonds, raising $14.9 billion in new cash. The refunding comes as the U.S. government continues to break new borrowing records, selling over $6 trillion in gross Treasury debt for the first 10 months of fiscal 2009 and raising $1.4 trillion in new debt. The Treasury said it was "well poised to meet the balance of its financing requirements not only for the remainder of this year but also for fiscal 2010," according to minutes of a meeting with primary bond dealers. The Treasury's borrowing advisory committee estimated that the Treasury's net debt issuance for fiscal 2009, which ends Sept. 30, would be $1.5 trillion to $2.05 trillion. This would fall to $1.0 trillion to $1.6 trillion for 2010. However, the group noted that Treasury could face headwinds as it shifts from shorter-dated bills and notes to securities with longer maturities. "The government's considerable funding needs are problematic for the longer end of the Treasury market," the committee said, adding that current budget deficits were "unsustainable". U.S. Treasury debt prices, pressured in recent weeks as signs of economic recovery appear, extended losses after the announcement, but yields on longer-dated Treasury Inflation Protected Securities rose.