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Falling Commodity Prices and Credit Crisis Squeeze Farmers

November 6, 2008

Submitted by c. hansen on Thu, 2008-11-06 17:56.

In both 2007 and 2008 the world grappled with global inflation in the price of food. Unfavorable weather, scant international grain reserves, increased consumption of meat by developing nations, increased conversion of food to biofuel, and rising farm input prices were mainly to blame for the sharp price increase (1). During this time, many people living on $2 a day were priced out of food as dramatic rises in basic foodstuffs sparked both international and domestic outrage which in some cases has led to food riots (2). In response to these dramatically inflating prices farmers planted near record amounts of wheat, corn, and soy.

You might expect that the record prices in agricultural commodities would mean a windfall for farm savings accounts. This, however, is not the case. The chance at record profit was being eroded by enormous increases in farm inputs. At planting time, about 8 months ago, the national average price of diesel #2 was 3.55 a gallon (3). Fertilizer prices were also sky high with the price of fertility doubling and tripling within a year (4). According to the International Center for Soil Fertility and Agricultural Development from January 2007 to January 2008 diammonium phosphate (DAP) prices rose from $252 per ton in January 2007 to $752; prilled urea rose from $272 to $415 per ton; and muriate of potash (MOP) rose from $172 to $352 (5).

However, by the time this season’s agricultural commodities reached the grain elevators and the market, global economic conditions had deteriorated into the current credit crisis and global recession. As a result, commodity prices have plunged and both food producers and consumers are directly in the path of the growing economic storm. As of November 6, 2008 wheat has fallen from a record of $13.495 on Feb. 27, 2008 to $5.225 a bushel on the Chicago Board of Trade. Corn has fallen from its peak of $7.9925.5 on June 27, 2008 to $3.38 a bushel. The price of soybeans has also declined from a record $16.3675 on July 3, 2008 to close at $9.06 a bushel (6,7). Farmers have paid large amounts for inputs, but when it comes time to sell they may be out of luck. It is not a slippery slope argument to suggest that if it is significantly unprofitable to grow food due to the contrast between selling price and increasing crop inputs then farms may go out of business and/or plant less acreage. Combine reduced production with thinning global grain reserves and scarcity-based price inflation would be likely.

Now, the icing on the cake for farmers in 2008 and 2009 may be a freeze in the credit market. As many know by now, lenders are very reluctant to give out loans (8). Unfortunately, these yearly loans are something as necessary for modern farms as sun, soil, and water. As the price of inputs keep increasing against the farmer’s collateral (land, equipment, and final crop) it makes the farmer seem like a riskier loan recipient. For those who cannot get loans it will likely mean less land will be planted, and for those farmers and corporations that can secure the loans it means higher interest rates.

As the era and expectation of cheap food and fuel appears over we are facing two competing problems.
(1)How can farmers deal with cheap selling prices while paying increasing inputs? There is so much risk for these operations and their margins are continually tightening.
(2) How can starvation and malnutrition be prevented as the world’s poor are unable to absorb price inflation? Perhaps this is a problem of distribution, poverty, and/ or a fact of limited resources?

1 http://documents.wfp.org/stellent/groups/public/documents/newsroom/wfp17…
2 http://www.energybulletin.net/node/42563
3 http://tonto.eia.doe.gov/dnav/pet/pet_pri_dist_a_epd2d_ptc_cpgal_m.htm
4 http://www.eurekalert.org/pub_releases/2008-05/i-wfp052308.php
5 http://www.roxboro-courier.com/newsnowstories/ts031208-1.htm
6 http://bloomberg.com/markets/commodities/cfutures.html
7 http://www.bloomberg.com/apps/news?pid=20601087&sid=aox4ZwDlWkvQ&refer=w…
8 http://www.bloomberg.com/apps/news?pid=20601087&sid=aox4ZwDlWkvQ&refer=w…

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