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