There are few winners in a market meltdown like the one we’re experiencing, although we hear rumours that hardware stores are doing a booming trade in shovels.
It seems folks figure digging a hole in the backyard and burying their savings is now a safer bet than mutual funds.
That’s about the only consolation we can offer farmers watching helplessly as the short-lived boom in commodity prices goes bust: at least your retirement funds are already in dirt and not on paper.
Land and gold are about the only commodities that have so far remained immune to the market downturn. But with interest rates rising, land values might be the next to come under pressure.
George Brinkman, a retired University of Guelph agricultural economist warned in an article last year that Canadian farmers are running much higher debt-to-equity ratios than their American counterparts. He calculated they are four times more vulnerable to interest rate hikes.
“With a two to three percentage point rate hike, I would expect the rise in land prices to suddenly halt and then slide as the number of overextended farmers forced to sell land starts to rise and the number of farmers able to overpay for land drops,” wrote Brinkman. “In fact, once land prices begin to slide, prospective buyers will have a very good reason not to buy, but to wait and see how much lower prices will go.”
Interestingly, he wrote that during last year’s market meltdown. Did anyone listen?
The American farm belt is experiencing tighter credit. Thinking this will not spill over into Canada is about as absurd as Prime Minister Stephen Harper characterizing the onset of a global recession as a “good opportunity to buy,” one week before a federal election. You could almost hear a Homer Simpson-like “D’oh” from the Tory strategists.
By the way, where are all those market analysts who told us last winter that high grain prices are here to stay?
Last week, Chicago Board of Trade corn futures were down to US$4 a bushel, about 45 per cent lower than the record high of $7.65 set in June.
Soybeans dipped below $10, down from a record peak of $16.07-1/4 in June. Wheat prices were just above $6, well off their record high of $13.34-1/2 set in February.
Now the chorus among market analysts is variations of “I don’t think we’ve seen the bottom yet.”
As for food prices, the latest word from the USDA’s chief economist is that food price inflation will slow from a rate of five to six per cent annually to four to five per cent.
Farm prices tank; food prices rise more slowly. At least some things never change.
However, for agribusiness, this is a dismal turn of events.
What else could Mosaic CEO Jim Prokopanko do but put on a brave face after Wall Street hammered the company’s share values by 40 per cent after its first-quarter earnings fell short of analysts expectations? (Its first-quarter profits had only tripled.)
“We’ve looked at historic data going back 40-plus years. There are only three or four years, where we’ve seen grain and oilseed consumption reduced year over year,” said Prokopanko in response.
“We see that growth could possibly slow, but we just don’t see grain and oilseed consumption going backward.”
Then he shared this little tidbit. The company plans to sharply reduce phosphate production over the next several months, due to high inventory levels. “We might not have to cut back a million tonnes, but we will do whatever is necessary to balance the (inventory) pipeline,” he said.
This at the same time that farmers worry how they will afford the fertilizer they need to maintain yield levels in next year’s crop.
The fate of agribusiness companies vital to farmers’ ability to operate, in fact, vital to the world’s ability to feed itself, are tied to a stock market gone – quite simply – mad.
Otherwise viable companies are fighting for survival. At the start of 2008, Deere and Co. biggest challenge was keeping up with demand for new equipment. Instead of a banner year however, the company has seen more than half its market capitalization – about $23 billion – simply evaporate.
And we’re supposed to take this so-called open market seriously? We actually trust it with our retirement savings? Global food security?
In this environment, Mosaic’s plan to “balance the inventory pipeline” is a reasonable business response to unreasonable market pressures – albeit one that is morally corrupt.
We’re talking about food. Phosphate is necessary to grow it. Shorting the pipeline in order to drive up the price of a nutrient necessary to meet growing demand means people will starve.
As this year’s World Food Day Oct. 16 zeros in on the impact high food prices have on the world’s 923 million hungry, it seems farmers are left alone to carry the ethical burden of “feeding the world.” It is a lonely calling indeed. [email protected]