The financial crisis is hitting the Farm Belt, which has been one of the few bright spots in the U.S. economy.
Americans have been shaken by a recent, historic drop in stock prices, but grain markets have taken an even deeper dive. Corn, soybean and wheat prices have fallen roughly 50% from the historic highs of earlier this year. Wheat prices Wednesday hit a 16-month low.
The carnage is due to abundant supply from better-than-expected crop yields, a flight of investment money out of commodities and the prospect of a global recession that will cut demand. World grain production this year will rise nearly 5% from 2007 to a record, according to the United Nations' Food and Agriculture Organization.
Grain prices have also become more closely tied to oil prices — which have also plunged — because of the dramatic rise of the corn-based ethanol industry. Even as prices fall, the dollar is strengthening, making U.S. agricultural products more expensive for foreign purchasers.
"The market was overleveraged," says Jim Bower, head of Bower Trading in Lafayette, Ind. "You're seeing demand destruction taking place not only here, but all over the world."
Agriculture-related firms such as Monsanto mon and Deere & Co. de have seen their stock prices drop as the likelihood of a global downturn increases. Some ethanol makers who bought corn when prices were high now predict big losses. Farm bankers are generally in better shape than other lenders, though the real test will develop in coming months when growers apply for loans to plant next year's crop.
Some will feel relief
The outlook isn't uniformly grim. Lower grain prices could help livestock producers, who had been reeling from high feed prices. Consumers, over time, could see food inflation level off, though prices might keep rising for a while given the higher costs already in the pipeline.
Farmers are coming off several fat years, and many don't have big debt loads. The U.S. Department of Agriculture has predicted that net farm income will be a record $95.7 billion this year. World grain supplies, though improved, remain lean. Prices could bounce from current levels given limited reserves.
"Given that the balance sheets for corn, soybeans, cotton and — to a lesser extent — wheat still remain tight, … these crop prices are likely to be bid up again," says Terry Francl, American Farm Bureau Federation senior economist.
In the short term, farmers are being forced to make business decisions based on a highly uncertain price outlook.
"I don't think we've ever seen (corn prices) fall this much," says Gary Schnitkey, an economist at the University of Illinois.
How extraordinary are current conditions? From 1975 to 2006, the cash price for a bushel of corn averaged $2.40, Schnitkey says. In the past four months, the price is down $4. Corn contracts for December delivery at the Chicago Board of Trade closed at $3.85 per bushel Wednesday, down from more than $7.80 in June. Wheat futures plunged from about $12 a bushel in March to $5.18. Soybean prices have slid to $8.59, from more than $16 in July.
The market turmoil has hit right around harvest, when supplies are most abundant and grain prices are at seasonal lows.
"Many farmers are going to have to sell crops now at these lower prices just for cash-flow reasons," says Art Bunting, a farmer in Dwight, Ill., and president of the Illinois Corn Growers Association. "It could have come at a little better time."
Hoping for a break
Schnitkey says it will cost corn farmers in central Illinois about $4.02 on average next year to produce a bushel of corn. Fertilizer, seed, energy and land prices have risen sharply, though lower oil and diesel prices could ease the pain a bit.
David Kappelman, senior vice president of the Premier Community Bank in Marion, Wis., says farmers are holding off buying fertilizer for next year in hope that prices will come down. That may not happen, given that suppliers were forced to lock in inventories early. He expects the credit outlook to come into focus early next year as suppliers start pressing farmers for commitments.
"Agriculture is cyclical. We've had a pretty good run, and that run might be behind us," Kappelman says.
Recent, high prices helped farmers, but hurt consumers. That might not turn right away.
Bill Lapp, of Advanced Economic Solutions in Omaha, notes that wholesale food prices are up 8.1% on a year-over-year basis, while consumer prices in general have risen by 6.2%. Even though the slowing economy will make it harder for the food industry to pass on prices, Lapp expects prices to jump further before they level off.
National Turkey Federation President Joel Brandenberger says grain is 70% of the cost of bringing a bird to market. Many producers have already locked in contracts for pricier grain. While prices are falling they are still high, he says.
Lower sustained prices could help alleviate a food shortage in developing nations, so long as wealthy governments don't pare foreign assistance. Worsening economic conditions could make it tougher for farmers around the globe to sustain this year's increased output.
"The global financial crisis should not make us forget the food crisis," FAO Director-General Jacques Diouf said last week. "Agriculture needs urgent and sustained attention, too, to make hunger and rural poverty part of history."