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Financial Crisis Delivers Indirect Blow to Agriculture

Financial Crisis Delivers Indirect Blow to Agriculture


While the uncertainty on Wall Street directly affects the financial sector, Mike Boehlje, a Purdue Extension agricultural economist, says it's the indirect consequences coupled with weather concerns that has the agriculture industry on edge.

Agriculture, with the exception of livestock, has been more resistant to recession, says Boehlje. Much of the demand for U.S. grain comes from the mandated use of ethanol and in the form of exports, which have recovered more quickly in recent years than has domestic demand.

"The Chinese economy is growing, and that has increased demand for U.S. grains, especially soybeans," he says. "We've also had short supply problems with grains."

High demand means higher grain prices. While that benefits crop farmers, livestock producers tend to suffer. More expensive grain means higher feed costs and tighter profit margins for animal agriculture.

Boehlje also says because now is not the borrowing season for grain farmers, they're unlikely to see much increase in interest rates. But because there is no real "season" when livestock producers borrow money, in the short term they could see increased risk premiums passed on in the form of higher interest rates.

While the capital markets are not to be ignored by farmers, Boehlje says the effects of the current financial turmoil are more indirect and focus mostly on demand adjustments.

"Going forward, the key concerns for agriculture are less in the capital markets and more in what the U.S. debt problems might do to put us in a recession," Boehlje says. "The Chinese economy also is important because should it take a hit, export demand would decrease."

Should the U.S. end up in a "double-dip" recession, Boehlje says there is potential for livestock producers to face higher feed costs, reduced domestic demand and lower export demand.

"A situation like that certainly has the potential to take the profitability out of livestock production," he says.

One bright spot, however, is when the markets become unstable, investors are more likely to put their money into real assets rather than financial assets. Real assets include agricultural commodities, metals and land.

"When there is long-term instability there tends to be a flight to real assets," Boehlje says. "People move away from financial assets. Agriculture is a real asset industry, so that does offer some protection."

What agriculture isn't protected from is the weather, which Boehlje says could do more harm than the financial crisis. Yield losses from this year's extreme weather could be where grain farmers take the hardest hit. While weather and yield loss have little to do with the overall financial crisis, it could play into the scenario if it results in grain shortages.

It also could cause financial problems for famers who forward-marketed crops that may not end up being produced.

From the consumer's perspective, Boehlje says oil prices have come down in the last few days, and food price increases may slow down some. Although that may seem like positive news, it might not be.

"An early response to the economic uncertainty has been a decrease in energy prices," he says. "If we go into a double-dip recession, it could take some pressure off of retail food prices, as well. But we certainly don't want that to be the reason for a reduction in price pressures."

Despite all of the seemingly bad news, Boehlje says agriculture is still a strong industry – especially relative to other industries.

"Other industries are downsizing, some even permanently," he says. "Relatively speaking, agriculture is a good place to be."

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