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MSU expert: Store unpriced corn, but not your soybeans

By SHELLY STRAUTZ-SPRINGBORN
Michigan Correspondent

EAST LANSING, Mich. — As the worldwide financial crisis continues to unfold, agricultural experts are warning farmers to be cautious while they harvest this year’s crops and plan for spring planting.

Jim Hilker, professor and extension marketing specialist with the Department of Agricultural, Food, and Resource Economics at Michigan State University, said larger than expected corn and soybean supplies combined with falling oil prices are major contributors to falling commodity prices.

On Oct. 10, the USDA released its October crop production report and its updated U.S. and world supply-demand estimates. The survey showed the U.S. will produce 12.2 billion bushels of corn in 2008, or 130 million bushels more than the trade was expecting. This was in addition to nearly 50 million more bushels than was expected to be carried into this year as reported in the Sept. 30 stock report.

“So, now the market has about 175 million more bushels on hand than it was expecting just two weeks earlier,” Hilker wrote in his most recent online commodity market outlook report.

The same USDA report showed a 2.2 million-acre increase in soybean production over previous estimates, which pushed up the 2008 production estimate to 49 million bushels from the September report.

“The financial markets and credit issues have to do with the world economies dropping off, and a lot to do with oil prices dropping off,” Hilker said. “It takes people a little bit of time to change their demands. You can’t get rid of your SUV right away or change the way you’re heating your home for the first year.”

He said people have had time to adjust their energy demands, however, and that is part of the reason the market is shifting and commodity prices are falling.

“We use a third of our corn for gasoline,” he said. “I can put the last six months of corn futures prices on top of oil prices and think they were on the same chart. Now, the economies are backing off. When people see someone else out of a job, they change their spending habits as well.”

Hilker said it’s tough to predict the future because of market volatility. “This year farmers are stuck. They already paid higher prices for inputs and expected $5 corn,” he said. “A lot of them did lock in pricing on some of their crop, but some farmers got shut off because the credit crunch at elevators kept them from pricing as much as they may have liked to.”

That means there’s a lot of unpriced corn and soybeans as new crop harvest continues.

“In the short run, we’re going to feed our animals and the rest of the world is going to import some to feed their animals,” he said.
For unpriced commodities “on-farm storage for corn is reasonable, but for soybeans it’s not reasonable,” Hilker said. “Soybeans should be stored on a basis contract, but the base is so screwed up on soybeans right now that the loss farmers would take is huge. Really, the market is not telling farmers to store them.”

As for commodity price recovery this fall and input costs for the next growing season, he believes those issues will largely be impacted by oil prices.

“I’m pretty confident input costs won’t go up because farmers can’t afford to buy them at these prices if they aren’t getting $5 per bushel for corn,” Hilker said. “The question is whether input costs will come down proportionately. I think input prices have to come down, or we’ll plant a lot less acres. If farmers plant less acres or put less fertilizer on, that will by definition drive the input costs down.”

The American Farm Bureau Federation (AFBF), however, has a different take on input costs.

“Fertilizer costs are expected to be higher in 2009 than they were in 2008,” said AFBF Senior Economist Terry Francl in a news release. “Pesticide prices may also rise, but due to the increased role of biotechnology it is not clear how much actual spending on pesticide will rise.”

Farm Bureau officials said the saving grace for farmers is a recent rise in land values, but Francl warns that “just because land values went up this year, doesn’t mean they will continue to go up.”

According to Michigan Farm Bureau Commodity and Marketing Department Manager Bob Boehm, the state’s diverse agricultural offerings are creating opportunities for Michigan producers to continue to be competitive. But, he warns the changing financial landscape will force farmers to look at commodities futures market in a new light.

“Extreme price volatility has resulted in dramatically higher cash needs to meet margin requirements, putting many traditional investors on the sideline,” he said.

“The agriculture balance sheet in Michigan is strong, but much of the strength is tied to appreciation on land values, up 42 percent since 2004 to $4,150 per acre.”

Hilker said land prices continue to be strong because of the upward swing in commodity prices. If commodity prices continue to decrease, he believes people renting farmland will really feel the squeeze.

“For people who owned all their land before all this inflation, the land is worth as much and maybe a little bit more,” he said. “But, when land prices went up, land rents went up as well. Those people are who I’m worried about. I’m pretty sure there are people out there who offered a lot of land rent on a lot of land. That rent was based on $5 corn and now they’re not getting it.

“In that case, how do they pay their land rent now?”

10/29/2008