By ANN HINCH
Assistant Editor

CHESTERFIELD, Mo. — Opinions vary in severity about the impact of last week’s financial crises of Wall Street on U.S. agriculture. One corn official thinks while the ag sector is basically sound, farmers will feel a credit crunch.

“Right now, the ag economy is pretty strong,” said Rick Tolman, CEO of the National Corn Growers Assoc., “but the regular economy has impacts on the farming economy as we go along.”

He pointed to a “dichotomy” of farm banks – which seem to him in good shape – versus struggling commercial banks, but said even before last week, some farmers were having a hard time expanding their lines of credit for rising input costs at either kind of bank. Another problem has been many grain buyers not getting more credit to participate in the commodities market because of fluctuating futures prices and widening basis.

“This week, commodities’ prices declined quite significantly,” Tolman observed, drawing a likely connection between speculation in the stock market and the success of the commodities market.
December corn declined from $5.63 on Sept. 12 to $5.42 on Sept. 19, with a dip to $5.27 on Sept. 18. On those same dates, November soybeans were $12.02, $11.43 and $11.16, respectively. According to the CME Group in a Sept. 18 newsletter, both fell on weaker demand and possible liquidation of holdings.

This did not surprise Shawn Hackett, president of Hackett Financial Advisors in Florida. “Both AIG and Lehman (Brothers) had very large commodities operations, no question about that,” he said, explaining those holdings were likely among what was being sold to raise cash.

He also said commodities futures have been going down all summer, so perhaps there was already warning in the market that last week’s problems were on the way. He added that quick selling tends to affect futures first, but could extend to farmers trying to get credit to pay for input costs, storage or hedging.

“Everyone is very worried and very uncomfortable when large financial institutions seem to be going down in short order,” he said.

Last week, Hackett pointed to the rise in gold prices as demand surged, explaining in times of market trouble, it is considered a safe haven. Steve Vrooman of Grain Growers LLC, which provides market consulting to farmers from Frankfort, Ind., said he has never witnessed the “pure panic” investing in gold that was happening as of Sept. 18. (According to various news sources, that “panic” buying fell off last Friday on promises the U.S. federal government would bail out failing banks and companies.)
On top of that, Vrooman said the Sept. USDA Crop Production report reflected a bigger anticipated harvest than investors previously expected based on early summer flooding and late summer drought. He also said worldwide demand for grains is slowing, particularly on corn and soybeans as feedstock, since there is surplus wheat that can be substituted more cheaply.

Finally, he said the American dollar has been rallying over the summer on lower demand for crude oil, raising the price of exports to foreign buyers. With that rally, he said index funds – which invest partly in commodities – started losing money.

“Things are just so jumpy,” Vrooman said, opining that until the country’s mortgage situation is “leveled out,” things won’t get better.
There was a time, he said, when the commodities market saw stable grain prices. This year alone, however, there has been a nearly $3 swing in corn prices and $5 in soybean prices; corn can vary widely from day to day, even when it’s not hitting the daily exchange limits.

Between this and input costs that won’t come down, he worries more farmers may leave agriculture. “At some point, farmers are going to say ‘I’m not going to pay you,’” Vrooman added. “We’re into history-making time, I promise you.”

Still, he acknowledged things aren’t rock bottom for farming, even as he believes the commodities market could go there. “This whole thing can get much worse,” he said, citing the potential of $4 corn and $6 soybeans.

“I hate to be a doom-and-gloomer, but you have to be realistic.”
Tolman said corn growers need to see corn in the $5 range to make farming profitable. He said some he knows are worried demand may soften and input costs will not come down. Plus, “it takes a while for land prices to come down, and machinery, and feed prices.”

This could affect planting decisions for 2009. Even before last week’s Wall Street woes, commodities analysts were speculating on more soybeans next spring, for the simple fact corn is more expensive to plant and draws a similar income per acre as soybeans.

Bill Medley, vice president of marketing for Farm Credit Services (FCS) of Mid-America, said the Farm Credit System is basically sound, though he acknowledged farmers will see higher interest rates for awhile (see related article on page 7). He pointed out before harvest, nobody knows what the final crop numbers will be – for example, the USDA’s crop report was released before high winds from Hurricane Ike tore through the Midwest, and it’s not yet known what damage that has done.

“These are times when you get these very high prices” on land, fertilizer and other inputs, he said, warning farmers to carefully consider purchases right now. “You might want to be cautious about how aggressive you are.”

“We’ll get through it,” Vrooman said, though he added, “I have no idea what’ll come out the other side.”