Big drops in prices for crops make it tough down on the farm

ByABC News
October 22, 2008, 10:28 PM

WASHINGTON -- 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."

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.