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Farm planning difficult without ag investments

By ANN HINCH
Assistant Editor

CHICAGO, Ill. — As farmers awaited USDA’s October crops and grain stocks reports last week, they had more to concern them than the usual questions of yield and acreage differences from the previous month’s report.

Overall falling prices in commodities futures seem tied to larger stock market troubles. This is the time of year when growers plan their strategy for the coming winter and spring growing seasons, and Dan Basse – a Chicago agricultural analyst and president of AgResources Co. – admitted that’s difficult to do given the possibility of decreased worldwide demand, coupled with changes in index and hedge funds investment strategies.

“We all know in the United States, that housing prices have been down and this is part and parcel of the meltdown in the stock market,” he said, adding that his company estimates our population has lost more money on an absolute and percentage basis than was lost in the Great Depression – “so, indeed, we all feel poor.”

As a result, Basse said the commodities market has been seeing an exodus of index and hedge funds monies by speculators seeking to lessen their risk, what he called disinvestments. “Everybody’s heading for the mattress,” he said, putting money in government bonds and avoiding commodities and similar investments.

Index funds, in fact, have been disinvesting since May. Up until February, Basse said the agriculture market was seeing new index investments of $1 billion-$1.2 billion per week. Large traders are also liquidating hedge funds, which has helped put downward pressure on ag futures.

This is not to say everybody’s getting out of agricultural investment. He pointed out the California state pension fund, as one example, still invests heavily in commodities.

At the same time, Basse said over the past few months, the value U.S. dollar’s value – which had been down – has rallied “dramatically.” As various analysts have explained in the pages of Farm World over the last several months, the dollar, the price of crude oil and U.S. corn prices are intertwined.

As the base of today’s ethanol, corn seems to follow oil’s trend, and oil tends to run counter to the value of the dollar. Thus, an increased dollar value is tied to lower crude prices, which helps drives down corn prices.

“I, as an agricultural analyst, can no longer just do research on the supply-demand of corn or soybeans, wheat, cattle or hogs,” Basse pointed out. “I now have to do it in tandem with currencies and energies, and so it’s a much more complex world, which we think adds to the volatility in the market.”

So, as farmers are trying to plan for 2009, the financial markets might not be much help. Last year, he said speculators investing in commodities gave farmers a preview of what might be desirable to plant based on futures. This year, those speculators are “beaten up” and may not be able to provide that kind of guide until at least after Thanksgiving.

Fellow analyst Brian Hoops – president and senior market analyst for Midwest Market Solutions of South Dakota – said speculators will regain interest in commodities at some point. His prediction is that corn and soybean prices will have to get back above where they are now and stay awhile.

For corn, he believes December futures need to be at least above $4.68; for soybeans, November futures need to be above $10.35.
He said there’s a fair chance corn could fall below $4 and soybeans, $9 or below.

“I’m afraid until we get this economic situation rectified, that we’re going there,” Hoops said.

Basse’s worst-case scenario is $3.50 corn and $7.50 soybeans, give or take 50 cents on each, over the next couple of months if this turns out to be a worldwide recession.

Inputs and global demand

Hoops explained growers probably won’t see fertilizer prices going down soon despite the fact natural gas used to make it is now cheaper. Fertilizer manufacturers likely contracted with their suppliers earlier this year, when gas was still high, he said, and need to recoup their costs from the end user.

Farmers, on the other hand, are hesitant to buy if they haven’t already contracted, and are either contemplating planting less corn and more soybeans, or waiting for spring fertilizer prices to possibly drop.

Basse said lower spring prices are entirely possible, but cautioned growers not to look for a “big break.” China, for instance, just imposed a 185 percent tariff on exports of urea.

He added corn-growing countries that have these supplies understand fertilization is key to getting higher crop prices, and are hoarding to improve their own yields. He predicts farmers might see a drop of $40-$70 a ton, which isn’t much when urea is going for $810 and ammonium nitrogen is even more.

“In many farmers’ eyes, we’re already below the costs of production in many areas,” Hoops said.

Both analysts agreed worldwide demand could slow, at least for a while. Hoops said end users will buy grains, but it may be gradual since farmers did a lot of selling this spring. Basse added while India and southeastern China should keep showing strong demand for U.S. grains and livestock, it might not be as strong if those residents’ disposable income is down because of their own financial markets’ problems.

10/16/2008