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Expert: Be extra careful with input costs in 2009

By LINDA McGURK
Indiana Correspondent

LEBANON, Ind. — The boom period for U.S. agriculture isn’t over yet, but come next year it may be time for producers to become more careful about locking in cash rents for multiple years and stocking up on fertilizers, advised Purdue University ag economist Chris Hurt during the Sept. 4-6 Farm World Expo.

“We should think about getting a little more cautious getting into (2009) and a lot more cautious toward the end of ’09,” he said. “This year production costs for corn came close to $4 per bushel and for next year, we’re projecting it will get close to $5 per bushel. These are enormous cost increases that put us in a vulnerable position.”

For soybeans, he predicted the cost of production will increase from $9 per bushel this year to $11 in 2009, but he added, “Bids for corn and soybeans for the ‘09 crop are still above the cost of production.”

While the cost of production keeps edging upward, the U.S. ethanol production expansion – which is a main driver behind corn prices – is slowing down. At this point, roughly two-thirds of the planned ethanol plants are nearing completion or are already up and running. Meanwhile, the plants’ demand for corn has increased by 1 billion bushels per year since 2007 and that will continue through next year.

In comparison, corn production in the state of Indiana is projected to reach 900 million bushels this year. “This is an enormous undertaking for U.S. agriculture. We haven’t seen demand increase like that since the ’70s,” Hurt said.

Under the federally mandated Renewable Fuels Standard, corn ethanol production is scheduled to reach 15 billion gallons per year by 2015, but U.S. ethanol plants will have the capacity to produce 13.5 billion gallons of corn-based fuel as early as next summer.
After that, “we only need to expand (ethanol production) about 2 percent per year until 2015,” Hurt said. “It’s not over yet, but we’ve only got one more crop year with this continuing huge demand surge for corn.”

Hurt said corn and soybean inventories will remain short in the near future, whereas the situation for wheat and rice has improved due to decent yields worldwide.

“Last spring was scary in terms of how close we were of running out of food in the world. Virtually every crop was on the verge of running out. We’re slightly better off now,” he said.

Hurt predicted corn acres will increase 6-8 percent next year, at the expense of wheat and soybeans. But “the market will bid on whatever crop is in short supply. And if we have weather problems in South America it might very well be that soybeans will outbid corn by March,” he added.

Even though the ethanol expansion is slowing down, Hurt doesn’t expect the demand surge to come down immediately, unless there’s a dramatic drop in oil prices or a change in current biofuel policies in Europe or the U.S. Whether the boom period is coming to an end is too early to tell, but he said there are some signs prices may have peaked.

“It feels a little bit like we were going over the top in March to June,” he said, adding that corn will likely sell in the $5-$6 range this year, with possible surprises of $6.50. Soybeans are projected to sell for $11.50-$13 per bushel.

9/10/2008