Wednesday, February 20, 2013 - Seeds of Change

Seeds of Change

by Sinclair Noe

DOW – 108 = 13,927
SPX – 18 = 1511
NAS – 49 = 3164
10 YR YLD - .01 = 2.02%
OIL – 2.28 = 94.82
GOLD – 40.50 = 1565.10
SILV - .87 = 28.67

We may be seeing the seeds of change. Today, the Federal Reserve released the minutes from the January 30 meeting of the Federal Open Market Committee. The minutes reveal that several FOMC policymakers think it might be time to shake things up, vary the pace of their $85 billion dollar per month bond purchase program. According to the minutes, the debate “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved.”

The minutes of the FOMC meeting states: “Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound. Others pointed to offsetting factors, and one noted that losses would not impede the effective operation of monetary policy.”

The Fed  at its January meeting decided to continue buying $45 billion a month of Treasuries and $40 billion in mortgage- debt without setting a limit on the duration or total size of the purchases. Policy makers also affirmed their pledge to keep the target interest rate near zero “at least as long” as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. And the Fed's balance sheet has grown to more than $3 trillion and will likely grow by another $1 trillion this year, and the policymakers are getting nervous; maybe not so nervous, just prudently checking to make sure they're not painting themselves into a corner.

The bond market might already be influencing Fed confidence; there is a fairly significant pattern of reaching for yield behavior emerging in corporate credit. One concern is that the Fed might trigger instability in the financial markets when it starts selling bonds. As long as the Fed continues their QE to infinity and beyond, bond-buying program, the equity markets feel like they have a bid underneath it, a safety net. And the Fed isn't going to pull the safety net in the face of sequester and a possible debt ceiling shutdown. It would be good to see a stimulus plan that does more for Main Street than Wall Street, but that is not what the Fed does. A new report shows the bankers are flush with cash and unwilling to lend it out. The biggest banks are lending the smallest portion of their deposits in five years. The average loan-to-deposit ratio for the top eight commercial banks fell to 84% in the fourth quarter from 87% a year earlier.  Putting more of the unused money to work could boost profit and help turn around the economy, but the banks are stuck, kind of like the Fed itself.

And the latest inflation report will do nothing to alter the Fed's stimulus plans. The Labor Department reports inflation on the wholesale level is tame; over the past 12 months the increase in producer prices is just 1.4%, barely changed from the prior month. A couple of interesting points: Energy prices fell a seasonally adjusted 0.4%, but the index failed to capture the surge in gasoline costs that started shortly after the new year began. Higher fuel costs are expected to show up in the February PPI report. Also, the cost of food increased 0.7%. Cold weather in the West was the blame. Vegetable prices were up 39%.

And that brings us to the curious case of Vernon Bowman, a 75 year old farmer in Indiana. A few years back, Vernon bought some soybean seeds; as far as he knew they were just soybean seeds; he planted the seeds, and then saved seeds from the resulting harvest, which he planted, grew, and harvested yet again. Vernon did this for about 3 years. It sounds like the very definition of farming. Monsanto calls it patent infringement. They sued Vernon. A federal judge ordered Vernon to pay $84,000, and an appeals court upheld the decision. Yesterday, Vernon went before the Supreme Court to argue that he had a right to replicate the seeds.

At issue is whether patent rights extend to seeds and other entities that can "replicate themselves beyond the first generation.” The justices realize that the case is bigger than that. The Software Industry lobbying group weighed in on the case of Bowman v. Monsanto. A legal rule eliminating patent protection for 'self-replicating' seeds that had the same result with respect to temporary copies of software programs would facilitate software piracy on a broad scale. But there is a difference between seeds and software, and the most basic question is whether anyone, or any corporation should be able to control a product of life.

For most of this country's history, and for most of all history, seeds have been a part of the public domain - available for farmers to exchange, save, and modify through plant breeding and replanting. Through this process, farmers developed a diverse array of plants that could thrive in various geographies, soils, climates and ecosystems. But today this history of seeds is seemingly forgotten in light of a patent system that, since the mid-1980s, has allowed corporations to own products of life.

One of Monsanto's arguments is that when farmers save seed from a crop grown from patented seed and then use that seed for another crop, they are illegally replicating, or "making," Monsanto's proprietary seeds instead of legally "using” the seeds by planting them one time, and then buying more seeds from Monsanto for each subsequent crop. Farmers who buy the seeds must generally sign a contract promising not to save seeds from the resulting crop. Vern Bowman thought he found a loophole when he bought undifferentiated seeds.

The reach of Monsanto’s theory, is that once that seed is sold, even though title has passed to the farmer, and the farmer assumes all risks associated with farming, that they can still control the ownership of that seed, control how that seed is used.

What makes these seeds different? They are known as Roundup ready seeds; they are resistant to glyphosate, the weed killing ingredient in Roundup herbicide spray. The Roundup Ready soybean seed is now grown by more than 90 percent of the 275,000 soybean farms in the US. There is an old saying: Mother Nature bats last.

One of the interesting side effects, which the Supreme Court will probably not pay attention to, is the side effects of Roundup Ready soybeans. Last month, Farm Industry News reported that more than 61 million acres of US cropland is infested with glyphosate resistant weeds; Super weeds that no longer can be sprayed away with Roundup. In response, farmers resort to more soil-eroding tillage operations to combat the weeds, and they turn to more toxic chemicals. Based on data from the USDA, as much as 26% more pesticides per acre were used on genetically engineered crops than on conventional crops. The agrochemical companies are responding with even more chemicals, while accepting none of the liabilities.

The farmers don't have much choice. Ten agrochemical companies now control two-thirds of global commercial seed for major crops. The high adoption rate of genetically engineered seed is largely because the companies have stopped offering conventional seed. Over an 11-year period, the cost per acre of planting soybeans has risen a dramatic 325%. At a certain point, farmers will recognize the economic advantage of avoiding genetically modified seeds, but by then, the GM seeds will be ubiquitous.

So, the case of Bowman v. Monsanto went before the Supreme Court, and the justices will issue an opinion later this year, and that opinion will likely set precedent for patent law. I have no idea what they will decide. Farmer Bowman's lawyers argued a point known as the exhaustion doctrine, or first sale doctrine; this is a concept that limits the extent to which patent holders can control an individual article of a patented product after an authorized sale. Under the doctrine, once an unrestricted, authorized sale of a patented article occurs, the patent holder’s exclusive rights to control the use and sale of that article are exhausted, and the purchaser is free to use or resell that article without further restraint from patent law. Note, however, that under current law, the patent owner retains the right to exclude purchasers of the articles from making the patented invention anew, unless it is specifically authorized by the patentee.

The exhaustion doctrine was always limited to the particular article sold, a new crop of soybeans, three or four crops removed might be considered an entirely new article. Justice Breyer made a reference to a 1927 opinion by Justice Oliver Wendell holmes, in which Holmes sought to justify the forced sterilization of a woman with mental disabilities. “Three generations of imbeciles are enough,” Justice Holmes wrote.

Justice Breyer said: “There are three generations of seeds. Maybe three generations of seeds is enough.” Breyer was, of course making a lawyerly joke, but it brings up the question: what's next? Can a corporation control the entire food chain? Can we have patents on human genes? What is the appropriate role of ownership and control over the very elements of life?

I'll be speaking at the Wealth Protection Conference April 4. Click here for info.