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U. S. farmers remain hopeful even as profits erode

“With that kind of volatility you just lose track of fundamentals.”

–Illinois farmer Garry Niemeyer

Iowa farmer Gordon Wassenaar says he is optimistic about 2009, displaying a sometimes puzzling “glass half full” mentality needed in a profession in which Mother Nature can wipe out months of work overnight.

He and other U. S. farmers notched record profits in 2008 as crop prices soared to all-time peaks, but economists say they may be lucky to break even this year because grain prices have plunged 50 per cent while farm costs remain high.

“We’re cautiously optimistic, but nobody thinks that prices are going to go anywhere near as high as they were in 2008,” he said from his 1,500-acre farm at Prairie City, about 30 km east of Des Moines.

“Realistically, unless you have an exceptionally good crop, you’re going to have to have (corn) prices over US$4 a bushel to make any money at all,” said Wassenaar (all figures US$).

“For soybeans, we probably need somewhere between $8 and $9 a bushel, but we’re in an area where we normally get pretty good soybean yields.”

As of Jan. 6, corn futures prices are near $4 a bushel, an historically high price for corn but still down 50 per cent from the record high of $7.65 posted last summer. Soybeans are around $9.80 a bushel, down 41 per cent from last summer’s all-time peak of $16.63.

Scorching demand for grains and oilseeds from livestock and poultry producers, exporters and the rapidly expanding biofuels industry helped drive the historic bull run in 2008.

An influx of investment fund money into grains and other commodities further fuelled the advance to record highs. But markets turned sour by the fall as the housing market bubble burst, credit markets seized up and financial markets dived, sending investors fleeing the traditionally volatile commodities markets.

“Farmers are certainly nervous about where the general economy is going. The umbrella that’s making everybody a little nervous is how deep the recession will be and how long will it last,” said University of Illinois agricultural economist Darrel Good.

Demand questions

The export market is a concern as the global recession drags on. Domestic demand for feed grains is also off.

Producers of beef and dairy cattle producers and hogs reduced herds in response to the summer’s soaring feed grain costs, while poultry producers scaled back flocks.

Pilgrim’s Pride Corp., the largest U. S. chicken producer,

filed for bankruptcy protection in December, citing high feed costs and low meat prices.

The ethanol industry remains a bright spot for corn growers despite struggles after fuel prices tumbled. But many producers remained locked in high-priced contracts with corn suppliers.

The turmoil prompted some ethanol producers to shelve new plant construction. Verasun Energy Corp., the No. 2 U. S. ethanol producer, toppled into bankruptcy in October.

St i l l , U. S. Agriculture Department data projects ethanol makers will consume 3.7 billion bushels of corn in 2009, roughly 31 per cent of U. S. production – up from about three billion bushels in 2008, about 23 per cent of production.

Farmers view the new administration as supportive to renewable fuels such as ethanol and soy biodiesel.

Production costs

Farmers across the U. S. Midwest are watching grain prices closely as they buy seed, fertilizer and farm chemicals in preparation for the upcoming 2009 crop year.

Economists at Iowa State University estimated production costs for the average farmer in Iowa at between $4 and $4.50 a bushel for corn and up to $10 a bushel for soybeans.

But actual costs will range more widely than usual from farm to farm because prices of inputs have been as volatile as crop prices, said Iowa State agricultural economist Chad Hart.

According to the American Farm Bureau, the wholesale price of anhydrous ammonia fertilizer has fallen from more than $1,000 a ton in the summer to around $500 while diammonium phosphate dropped from $1,100 a ton to $600.

Grains markets appear to have detached themselves somewhat from the wild swings in outside markets like crude oil at the moment. But the extent to which another energy market rally would take grains along remains uncertain.

Crude oil peaked at over $147 a barrel in July but has since fallen back to around $48 a barrel.

“If the crude oil rises again with a potential war in the Middle East and the fact that OPEC is going to reduce production, will the price of corn increase as well?” said Garry Niemeyer, a corn and soybean farmer at Auburn, Illinois.

“When corn got above $7 a bushel it was probably too high and when it got to $2.80 it was probably too low. With that kind of volatility you just lose track of fundamentals. How do you know where these markets are going now?”

About the author

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Karl Plume is a reporter for Reuters.

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