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Corn+Soybean Digest

“Caution-Flag” In Ag Economy

Some Midwest farm operators are saying that 2008 is their most stressful year ever in farming. Obviously, crop producers in Iowa, Illinois, Indiana, Minnesota, and other areas that are facing flooding and crop losses in 2008 have some added issues to deal with. Even producers that are in areas not affected by the excessive early June rains and flooded fields are concerned by late planting dates and cooler than normal weather early in the growing season. These conditions usually lead to slower crop development, resulting in greater potential for drought, and diseases later in the growing season, a higher risk of damage from and earlier than normal frost, weather challenges with timely Fall harvest, and higher corn drying costs. These early season growing conditions also reduce the likelihood of reaching the corn and soybean yield levels that most producers have achieved in the past several years, when more favorable growing conditions have existed. However, crop conditions in some areas of the Midwest have improved significantly since June 15, which should help improve the 2008 crop prospects in those locations.

Crop input costs for 2008 were considerably higher than in 2007, and will likely be much higher again for 2009. The rapid rise in oil prices in the U.S. is having a very big impact on farm input costs. The cost of anhydrous ammonia for nitrogen fertilizer is nearly double what it was 12-18 months ago, now selling at around $850/ton, and costing corn producers about $65-75/acre. Farm operators are being encouraged to purchase their 2009 nitrogen fertilizer now and pay cash, in order to guarantee both the current price and having an adequate supply for the 2009 crop. Some experts are projecting that anhydrous ammonia fertilizer costs could rise to as high as $1,100-1,200 per ton by this fall, or close to $100/corn acre for 2009. The cost of dry fertilizer is also expected to take a drastic increase for the 2009 crop year, as are costs for seed, chemicals, and fuel. Most land rental rates increased 15-25% in 2008, compared to a year earlier, and rental rates are expected to increase again for 2009 in most areas. The breakeven cost of producing corn at “trend line” yields will likely be over $4/bu. for most producers in 2009, compared to $3.00-3.40/bu. in 2008, and approximately $2.25/bu. as recently as 2006.

Most crop producers had very profitable years in 2006 and 2007, and will have another profitable year in 2008, unless the crop loss from poor growing conditions, severe storms and flooding is too excessive. However, 2009 and beyond could be a different story for some producers. Most grain elevators and users of corn are not offering any forward contracting opportunities for 2009 grain, unless a producer is willing to finance “margin calls” in the grain market. The only other alternative is for producers to “hedge” the 2009 grain on the Chicago Board of Trade and again be responsible for the cost of “margin calls” and other grain trading costs. If 2009 crop inputs reach the high levels now projected, and grain prices drop more than expected in the next 12 months, there could be some serious financial issues facing many farm operators by the end of 2009 and beyond.

Even beyond the crop problems, there are other segments of the agriculture industry already facing financial challenges. The livestock industry is facing serious financial difficulties due to high feed, fuel, and other input costs. Some hog producers have been losing $25-50/head marketed in the first few months of 2008, while cattle feedlot operators have been losing $100/head or more on fed cattle that are being marketed. Profits have also been negative for poultry producers. About the only livestock sector that is still profitable is the dairy industry, due to continued strong milk prices. It is likely that we could see some major liquidation of both hog and cattle operations in the coming months, which could lower long-term demand for corn and soybean meal. Also, many crop producers have invested in hog finishing facilities, hoping to use the swine manure as a crop fertilizer alternative.

The ethanol industry in the Midwest has seen rapid expansion in the past five years, increasing from a total U.S. production of 2.1 billion gallons in 2006 to over 6.5 billion gallons in 2007. Earlier in 2008, there were over 60 new ethanol plants either under construction, and several more plants expanding their production, which would have increased the annual output of ethanol in the U.S. to about 13 billion gallons per year by 2010. However, the high corn prices in recent months, along with low profit margins in ethanol production have caused the construction of some new ethanol plants to be discontinued, the opening of some plants to be delayed, and the production level at some plants to be reduced. This will likely cause the future ethanol output numbers to be lowered. The U.S. ethanol industry utilized about 2.4 billion bushels of corn in 2007, and is expected to utilize over 3 billion bushels of corn in 2008. Some members of Congress are now calling for legislation to relax renewable fuel standards, reduce ethanol subsidies, and to lower import tariffs, all of which could have a negative impact on the profitability of ethanol plants. Many farm operators, ag cooperatives, rural banks, and others have a significant amount of capital invested in Midwest ethanol plants that could be at risk if ethanol profits do not improve.

“One size does not fit all” in the agriculture industry, and there are segments of the U.S. Ag industry, as well as individual farm operators that continue to be highly profitable, and will likely have a very high profit year in 2008. However there is a growing list of concerns and “yellow caution flags” signaling that the ag industry could be heading for significant financial challenges in the years to come. Farm operators and others in the ag industry need to start preparing for some of the potential adjustments that could affect their business in the coming years.

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