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Ag outlook offers little good news

By Staff | Nov 13, 2008

However, corn price may carry farmers through economic ag slowdown


Farm News staff writer

Iowa State University Extension’s Agricultural Outlook and Management Seminar series kicked off Wednesday with its first meeting in Fort Dodge.

The seminars, designed to provide agribusiness leaders with a concise evaluation of current market conditions, expected trends in crop and livestock income potential and management implications, provided participants with an overview of the agricultural industry and to learn how changes may affect Iowa producers.

But there were more warnings to producers to proceed with the 2009 marketing year with caution, than there was of optimism and good news. One bright spot was the knowledge that since the price corn is still higher than its five-year average, this may help insulate farmers somewhat from the current economic slowdown.

In his “Outlook for Agriculture: Does a Downturn Loom?” Bruce Babcock, with ISU’s Center for Agricultural and Rural Development, opened the daylong seminar by discussing the current Chicago Board of Trade corn and soybean prices and the trends the corn market seems to follow along with crude oil markets.

“Corn has followed the price of oil very closely,” Babcock said. “Had crude oil stayed at $140 per barrel corn might still be at $7.”

With that said, Babcock pointed out that as nice as it is to have high dollar commodities, high prices encourage investment in production capacity and there are no real limits on production capacity if investment occurs.

“The last thing Iowa farmers want is to encourage investment in production capacity,” said Babcock.

Babcock showed a graph of the potential arable land by country in Sub Saharan Africa which could easily be a main competitive area for Iowa farmers in corn production.

He also provided some predictions of the general economy explaining that the mortgage crisis, or as he would like to call it, a consumption crisis, led to a bank crisis and now a crisis in the real economy.

Other predictions he provided include a 75 percent chance of a normal recession that will end in the summer of 2009 with 8 percent unemployment and an early up-tick in stocks. There is a 20 percent chance, Babcock said, that Fed economists do not know what is going on and that it will get much worse and there is a five percent chance that this will blow over with Christmas sales, cheap gas and positive media coverage of the new president.

An overview of Iowa’s economy showed that the 1997-2006 average of the Iowa corn crop was $4 billion. In 2007 it was $9.47 billion and in 2008 it is estimated at $11.9 billion. The values for soybeans were $2.6 billion, $4.78 billion and $5.35 billion, respectively. The total increase from the 1997 average to 2008 is about $11 billion or $3,666 for every person in Iowa.

These funds, Babcock pointed out, coupled with Section 179 spending and a relatively strong property market may allow Iowa to avoid the worst of the crisis.

Turning the discussion to ag inputs, Babcock explained how the fertilizer market is imperfect and methods farmers used last year to forward-contract won’t work for 2009.

“Forward buying last year worked well, it’s the wrong strategy this year,” he said.

One of the issues leading towards this problem, he explained, is that many retailers are caught with supplies for which they paid too much and they need to sell at these high prices.

Therefore farmers are not buying because they know these prices will fall once the expensive inventory has been moved. However, due to the lack of competition it looks as though farmers will be forced to pay a lot more for fertilizer this year.

On the bright side, Babcock predicted input costs would eventually fall, but maybe not for the 2009 growing season.

Babcock’s ag industry overview noted the global drop in income growth that will hold down growth in demand for meat, wheat and feed grains; the impact of a stronger dollar and a supply and demand outlook.

Babcock finished his overview by discussing the impact of the Renewable Fuels Standard (RFS).

The RFS requires 9 billion gallons of biofuels in 2008 and 10.5 billion gallons in 2009, which means gasoline producers must either blend their share of ethanol or by Renewable Identification Number (RIN) from another producer.

He explained that if ethanol becomes scarce, the RIN price will increase thereby increasing the price of ethanol and the increases in ethanol price will therefore keep corn prices high.

“Through the RFS there will always be a built-in demand for corn to keep it from falling too far,” said Babcock. “$2 corn isn’t enough to grow the needed 87 million acres of corn and the ethanol plants would shut down and that can’t happen unless they get rid of the RFS.”

Contracting issues

Steve Moline with the Iowa Attorney General’s office took the floor to focus on contracting issues, but most of his presentation was based upon the recent bankruptcy filing of VeraSun.

Moline explained to the attendees that VeraSun’s bankruptcy has been filed in Delaware, where it was incorporated, which will not make things easy for Iowans that have dealings needing to be settled with the company.

“With the bankruptcy in Delaware, that issue makes it hard to take regulatory action against VeraSun,” said Moline.

According to Moline, claims can be made to Iowa’s Grain Indemnity Fund until Feb. 28, 2009.

Moline said VeraSun has made good on 100 percent of all grain delivered up to this point. However, he is encouraging anyone that has information or documents that prove VeraSun has failed to pay for grain from an Iowa producer to contact the Iowa Department of Agriculture and Land Stewardship’s Grain Warehouse Bureau staff at (515) 281-3056.

Moline said he is not getting much information back from VeraSun and that is why he is trying to get as much information as he can.

According to Moline, VeraSun has not made any decisions concerning executor contracts as to which ones they will assume and which ones they will reject.

He also stressed that before endorsing any checks to seek advice from a lawyer as endorsing a check from the company will not only give you money, but will make you state that you will conduct future business with the company under its terms.

After trying to explain VeraSun’s issues, Moline did take some time to discuss input purchase issues.

According to Moline, prepayment for inputs places the producer in the role of an unsecured creditor.

“Analyze all of the risks,” said Moline.

Moline said he expects more production contracts in grains to begin, much like there have been for years in hog production.

When asked what producers should do about low commodity prices and high land rents, Moline said renters are obligated to honor signed contracts; however, as a landlord, he added, “it’s never a good idea to come out ahead by busting your tenant.”

The remainder of the Agricultural Outlook and Management Seminar featured Chad Hart, Extension grain marketing specialist on, Corn and Soybean Market Outlook” and John Lawrence, Extension livestock marketing specialist on, Swine and Beef Outlook.”

Contact Kriss Nelson at jknelson@frontiernet.net.

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