A Year of Clipped Wings for Hot Startups

Late last month, Stephen Grocer reported at The New York Times Online that, “WeWork, Lyft, Uber, Peloton: To their early backers, these are companies that would transform the way the world works, works out or gets around.

“To public stock investors, they are companies with inflated valuations and real questions about when they will start making money.

“The two views have collided this year, disastrously in WeWork’s case. After it failed to sell its stock to the public last month, throwing its funding plans into disarray, the company was bailed out on [October 28th] by SoftBank, its largest outside investor.”

The Times article noted that, “WeWork, which is based in New York, might be the most extreme example of the rebuke that public stock investors have delivered to high-flying start-ups, but it is hardly alone.

“Across Wall Street, in Silicon Valley and at some of the world’s largest companies, a reckoning is unfolding as valuations slide for the so-called unicorns — start-ups worth at least $1 billion — that everyone was once so eager to buy.”

Mr. Grocer stated that, “Fund companies including Fidelity and T. Rowe Price, which had typically invested only in public companies, started taking part in private funding rounds, and so-called mega funds, which could make huge bets on a single firm, most notably SoftBank, were born.

“Soon the sums raised in private markets were dwarfing the money from I.P.O.s. Over the past six years, companies have raised about $550 billion from venture capital funds, easily exceeding the $320 billion of proceeds generated from I.P.O.s over that period, according to data from PitchBook and Dealogic.

“But the private money meant companies could grow without the scrutiny of public-market investors — no quarterly financial updates or demands for proof that they would find a way to become profitable. Now that they are moving into the glare, it has become evident that a number are still far from being ready to live up to the market’s demands.”

The Times article added: “‘These companies are still not mature,’ said Kathleen Smith, principal at Renaissance Capital, which provides research on I.P.O.s and manages exchange-traded funds that track their performance. ‘Maturity isn’t measured by the number of years you have been around. It’s measured by whether you can earn money. That’s maturity.'”

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Despite Robust Ag Land Prices and Low Interest Rates- Working Capital Declines

Last month, DTN writers Katie Dehlinger and Todd Neeley reported that, “Tight profit margins are likely here to stay, and that could create challenges for producers, especially if land values stumble or interest rates rise above their current historically low levels, according to bankers and economists at two separate events on Tuesday.

“A group of farm credit CEOs held a press call on [October 22nd], outlining the state of the agriculture economy.

“Jeff Swanhorst, CEO of AgriBank, which provides farm loans throughout the Corn Belt, said the debt-to-asset ratio in agriculture remains in a strong position at 13.5%, and stable land values continue to hold up the farm economy.”

The DTN article noted that, “Currently, total U.S. farm assets stand at about $3.1 trillion with debts at $415.7 billion, according to USDA. By comparison, in 1980, farm assets stood at around $2.7 trillion with debt at $431.6 billion. The 1980 debt-to-asset ratio was 16.1%.

“In the current stressed farm economy, farmers are continuing to cut into working capital to weather low prices. Working capital is seen as a cushion to survive adversity, Swanhorst said.

“During agriculture’s boom time in 2012, working capital came in at just north of $160 billion, dropping to just under $60 billion in 2019.”

Dehlinger and Neeley added that, “University of Missouri FAPRI professor and former USDA World Agricultural Outlook Board Chairman Seth Myers said at a separate Farm Foundation event that the current low-price environment is here to stay for row crops. Farmers will need to adapt, or they’ll be pushed further to the margins. It’s a slow process, unlike the 1980s, when financial conditions deteriorated rapidly.”

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Slower Home Sales Due in Part to People Staying Longer in Their Residences

Wall Street Journal writer Laura Kusisto reported earlier this month that, “U.S. homeowners are staying in their residences much longer than before, keeping a glut of housing inventory off the market, which helps explain why home sales have been sputtering.

Homeowners nationwide are remaining in their homes typically 13 years, five years longer than they did in 2010, according to a new analysis by real-estate brokerage Redfin. When owners don’t trade up to a larger home for a growing family or downsize when children leave, it plugs up the market for buyers coming behind them.

“‘If people aren’t moving on, there just are fewer and fewer homes available for new home buyers,’ said Daryl Fairweather, Redfin’s chief economist.”

“People Are Staying in Their Homes Longer—a Big Reason for Slower Sales,” by Laura Kusisto. The Wall Street Journal (November 3, 2019).

The Journal article pointed out that, “Economists say aging baby boomers are the biggest culprits because many are staying healthier later in life and choosing not to downsize. Some look around at the lack of smaller, less expensive homes and are loath to get into bidding wars with their children’s generation to get one.

“States, such as California and Texas, have also implemented tax policies that make it easier for older residents to remain in place.”

Ms. Kusisto added that, “The lack of mobility among homeowners isn’t the only reason why supply is tight. Since the recession, home construction hasn’t been keeping up with demand due to shortages of labor and land. The share of U.S. homes that are purchased by investors rose to an all-time high of 11% in 2018, according to CoreLogic. Some of those investors quickly flip those purchases, but others turn them into single-family rentals and hold on to them for years.”

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Positive Indicators from the Housing Market

Wall Street Journal writer Laura Kusisto reported last week that, “Three indicators released on [Oct. 29th] show the housing market is gaining modest strength in the latter half of the year thanks to lower mortgage rates.

“Average national home prices grew 3.2% in the year ending in August, according to data released Tuesday by the S&P CoreLogic Case-Shiller National Home Price Index, up slightly from 3.1% the prior month.

The number of Americans who own a home also grew through the summer months. The homeownership rate ticked up to 64.8% in the third quarter, from 64.4% a year earlier, the Commerce Department reported. That matches the highest levels in five years and is within striking distance of its long-run average of 65.2%.”

The Journal article noted that, “Pending home sales, a forward-looking indicator based on purchase contracts signed, indicated that home sales could tick up in the coming months. Pending sales rose 1.5% in September, the second consecutive positive month, the National Association of Realtors said [on Oct. 29th].

“Lawrence Yun, the trade group’s chief economist, said he is still concerned that prices are rising too fast because of a shortage of homes for sale.

“‘Going forward, interest rates will surely not decline in a sizable way, so the changes in the median price will be the key to housing affordability,’ he said.”

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Federal Lawmakers Introduce Real Meat Act- Bill Defining “Beef” and Imitations

DTN Ag Policy Editor Chris Clayton reported late last month that, “Some cattlemen groups often don’t agree on much, but they can agree the word ‘beef’ should only come from cattle, and not a plant-based or lab-grown alternative.

“Both the National Cattlemen’s Beef Association and the U.S. Cattlemen’s Association praised the introduction of the Real Marketing Edible Artificials Truthfully (MEAT) Act, by Rep. Roger Marshall, R-Kansas, and Rep. Anthony Brindisi, D-N.Y. Marshall stated the bill would ‘codify the definition of beef for labeling purposes‘ and provide enforcement measures for USDA if FDA does not take action against confusing protein claims.

“While ‘beef’ and ‘beef products’ are defined under the Beef Research and Information Act, the legislation that created the beef checkoff, the definition for beef and beef products does not have another federal definition. The Real Meat Act would change the Federal Food, Drug and Cosmetic Act will require the word ‘imitation’ for any product that is not derived from or does not contain meat.”

Mr. Clayton noted that, “Several states have passed laws restricting plant-based or lab-grown proteins from using terms such as beef or meat. A federal judge in early October declined to place a preliminary injunction on Missouri’s law, the first passed in the country. The company that makes Tofurkey products is suing the state, along with the Good Foods Institute.”

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WOTUS Rule Repeal Still Faces Legal Challenges

DTN writer Todd Neeley reported yesterday that, “The agriculture industry celebrated the 2015 waters of the United States, or WOTUS, rule repeal that EPA finalized in recent weeks. But an attorney with the Pacific Legal Foundation and an official with a major agriculture group said farmers and ranchers still face regulation under the Clean Water Act.

“On Oct. 22, 2019, the EPA and the U.S. Army Corps of Engineers finalized the repeal of the Obama-era rule that agriculture and other industry groups and states had fought in court for years.

The repeal reverts regulations to the 1986 version of WOTUS while the EPA continues to rewrite the definition. The 2015 rule was opposed by critics as an example of gross federal overreach, yet the 1986 rule also had its share of concerns.”

Mr. Neeley noted that, “‘The 1986 regulations re-imposed by EPA this month are broader than the 2015 regulations the agency just repealed,’ said Tony Francois, senior attorney with the Pacific Legal Foundation.

“Francois is the lead attorney in a lawsuit filed by the New Mexico Cattle Growers Association on Oct. 22, 2019. The lawsuit in the U.S. District Court for the District of New Mexico attempts to protect ranchers from what Francois said is a broader WOTUS definition under the 1986 rule.

“‘The 1986 version asserts control over all non-navigable tributaries and all ‘neighboring’ non-navigable wetlands,’ he said. ‘The 2015 version merely asserts control over most of these features.'”

The DTN article explained that, “Don Parrish, senior director of regulatory relations for the American Farm Bureau Federation, said the next year will be important for agriculture when it comes to supporting EPA’s current efforts to rewrite the rule.

“‘The pre-2015 regs are problematic,’ he said. ‘They are expansive and lack the clarity we are hopeful the new regs will provide. We have two major goals — killing the 2015 rules so they will never come back and a new rule that provides significantly more clarity than the ’86 regs. To ensure we achieve both goals, we understand that we will have to go back to something before EPA finishes the new regs. If the process goes as we expect and hope, both the 2015 and the ’86 regs and guidance will be history soon.’

“Parrish said the main concern is, if the EPA’s repeal rule doesn’t hold up in court, it has the potential to bring the 2015 rule back from the dead.”

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Organic Trade Association Advances Court Battle to Defend Organic Standards

A news release last week from the Organic Trade Association stated that, “The Organic Trade Association on Thursday asked the U.S. District Court to rule in its favor on its organic livestock welfare lawsuit against the U.S. Department of Agriculture. In its motion for summary judgment, the trade association stated that USDA acted in an unlawful, arbitrary and capricious way when it killed new organic livestock standards centered around improving animal care and welfare.

“The Organic Trade Association argued USDA’s blocking of the implementation and rescission of the Organic Livestock and Poultry Practices (OLPP) rule in 2018 were actions plainly in excess of lawful authority and, if not corrected, threaten the consumer trust and historical growth that organic has always enjoyed.  The motion asked the court to immediately vacate USDA’s rescission and compel implementation of the Organic Livestock and Poultry Practices rule.

“The association contends the case has importance to all organic stakeholders because USDA made legal arguments that will reverberate adversely for years if not corrected by the federal judiciary. The association argues that USDA’s refusal to exercise its statutory authority to promote the improved livestock care practices on organic farms that were lost when the OLPP was rescinded and its refusal to consult with the National Organic Standards Board, are a radical departure from past administrations, and flatly contradict the intent of Congress in the Organic Foods Production Act (OFPA).”

Last week’s update added that, “The Organic Livestock and Poultry Practices final rule was published on Jan. 19, 2017, after more than a decade of extensive public input and a thorough vetting process. USDA in March of 2018 withdrew the final OLPP regulation, which was to go into effect in May 2018. Before the withdrawal, the agency attempted six times – either through the rulemaking process or through court filings – to delay the implementation of the rule, which had been developed by the organic industry and in accordance with the established federal rulemaking process. USDA failed to consult with the National Organic Standards Board on the withdrawal of the final rule, and arbitrarily ignored the overwhelming public record established in support of these organic standards.

“The Organic Trade Association filed its initial lawsuit against USDA in September 2017 over the department’s delays in implementing the final OLPP rule.

USDA’s cross-motion for summary judgment and opposition to the trade association’s s motion is now due Dec. 4. The Organic Trade Association’s answer to USDA’s cross-motion is due Dec. 31. USDA gets a final reply on Jan. 28.  Sometime after that, the court will rule on the case.”

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Number of Roundup Plaintiffs More Than Doubles

Wall Street Journal writer Ruth Bender reported yesterday that, “Bayer said the number of plaintiffs claiming its Roundup herbicides caused cancer more than doubled to 42,700 in the past three months, adding pressure on the company to resolve the legal battle that has raised questions about its future.

“The chemicals-to-pharmaceuticals company was thrown into one of the worst crises in its 156-year-old history after its $63 billion acquisition of Roundup inventor Monsanto Co. last year opened it up to thousands of lawsuits about the herbicides.

Since August 2018, three juries have found the products caused non-Hodgkin lymphoma, chopping roughly 30% off Bayer’s market value.”

The Journal article indicated that, “The increase in Roundup plaintiffs, from 18,400 in early July, comes as their lawyers and Bayer discuss a potential settlement. Some investors, including activist hedge fund Elliott Management Corp., have urged Bayer to consider settling.

“Bayer had warned about a sharp rise in plaintiffs earlier in October, but played down the significance, saying the numbers said nothing about the size of any settlement payment or the merits of the claims. It blamed the rise on an advertising push by lawyers seeking to recruit more plaintiffs before any settlement is reached.”

Ms. Bender added that, “The spike in plaintiffs has made a resolution even more challenging, as Bayer faces more plaintiff lawyers, said Thomas Claps, a litigation analyst for Susquehanna Financial Group.”

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Home Sales On the Rise

Wall Street Journal writers Ben Eisen and Laura Kusisto reported this week that, “The mortgage market turned red hot over the summer, posting its biggest three months since the financial crisis.

Lenders extended $700 billion of home loans in the July-to-September quarter, the most in 14 years, according to industry research group Inside Mortgage Finance. Mortgage originations for the full year are on pace to hit their highest level since 2006, the peak of the last housing boom.

Falling interest rates spurred homeowners to trade higher-rate mortgages for lower-rate ones to save on monthly payments. Refinancings kept mortgage lenders busy, though home sales haven’t recovered as much as economists expected.”

“Falling Rates Boost Mortgage Market to Precrisis Levels,” by Ben Eisen and Laura Kusisto. The Wall Street Journal (October 28, 2019).

The Journal article noted that, “Home sales have risen on an annual basis for the past three months, according to the National Association of Realtors, reversing a slowdown that persisted for more than a year. But sales fell about 2% in September from August, indicating the market is struggling to maintain its newfound momentum.

A decline in mortgage rates often takes longer to boost home purchases than refinancing because people need to shop for a home first. That could mean a few more months of improving sales as buyers who were drawn back into the market by lower rates continue to close on their purchases.”

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USDA Encourages Affected Producers to Contact Agents for Delayed Harvest

A news release Thursday from USDA’s Risk Management Agency (RMA) stated that, “The [USDA] said today that producers who currently participate in Federal crop insurance and are experiencing a delay in harvesting their crop should contact their Approved Insurance Provider (AIP) to file a Notice of Loss and request more time to harvest.

“Producers in several states, including Colorado, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin, and Wyoming, have been affected by extremely wet and snowy conditions early this fall.

“‘Farmers are having a hard time with weather this year, and this early fall snow is just another example of this year’s weather challenges,’ said Martin Barbre, Administrator of [RMA]. ‘Impacted producers covered by Federal crop insurance should contact their insurance agent as soon as possible to determine what actions they can take.'”

The release added that, “Producers must file a Notice of Loss and request more time to harvest before the end of the insurance period, so that Federal crop insurance claims are settled based on the amount of harvested production. The end of the insurance period for crops such as spring-planted wheat and barley is October 31 and for corn and soybeans is December 10.”

“More information on requesting assistance due to delayed harvest is available on RMA’s website. Crop insurance is sold and delivered solely through private crop insurance agents. A list of crop insurance agents is available at all USDA Service Centers and online at the RMA Agent Locator. Learn more about crop insurance and the modern farm safety net at rma.usda.gov.”

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