Best farm economy comes with fuel, fertiliser risk

Aug 27 | Updated: Aug 29 2008, 05:17am hrs
US agricultural income is the highest in three decades after corn and soybeans rose to records. The risk for farmers is that costs are rising even faster, increasing concern of a profit squeeze.

A US Department of Agriculture report on Thursday may show costs are accelerating as revenue growth slows, similar to a pattern that led to a 1980s farm crisis that was the worst since the Great Depression, said Gary Schnitkey, a University of Illinois farm economist. Corn, wheat and soybean prices are all at least 18% below their peaks.

Fertiliser costs doubled from a year ago, while fuel increased 62 %, USDA data show. Expenses probably will surpass the $279.2 billion that the USDA estimated in February, eroding net income the government pegged at a record $92.3 billion for 2008, farmers and economists said. Income peaked this year,'' said Kurt Line, who owns or manages more than 6,800 acres of farmland near Momence, Illinois. We should see a significant drop in 2009. For the number of dollars we will be risking the next two years, profit margins are not going to be robust.''

The department's first forecast of farm income for 2009 will be made in November. While income is up from last year, the price rally that began in 2006 for the nation's biggest crops has sputtered since late June and early July, on signs that Midwest flooding may have caused less damage to corn and soybean plants than analysts had predicted. Corn, the most-valuable US crop at a record $52.1 billion last year, dropped 26 % from its June 27 peak of $7.9925 a bushel on the Chicago Board of Trade. Soybeans, after jumping 78% in 2007, plunged 18% from a high of $16.3675 a bushel on July 3. Wheat, up 77% in 2007, slumped 37%from its record $13.4925 a bushel on March 12.

Growers will probably spend one-third more to plant their fields next year, Schnitkey estimated.

Fertiliser, the second-biggest expense for corn and soybean farmers after land, is tied to spiraling energy costs, said Bob Young, chief economist for the American Farm Bureau Federation. It will take $5 corn next year just to break even,'' said Young, who represents the largest US farmer group. People think they're standing at the edge of a chasm.''

Corn futures for December delivery closed at $5.94 a bushel on Aug. 26 on the CBOT, and the price of grain for delivery a year later fetched $6.31. The lower price outlook may trim funds available for purchasing new farm equipment, threatening a two-year jump in sales for agricultural manufacturers, Young said. Moline, Illinois-based Deere, the largest US maker of farm equipment, said Aug 13 agricultural sales in the US and Canada will rise up to 25% this year. No. 2 supplier Agco Corp., based in Duluth, Georgia, said July 29 that second- quarter North American machinery sales increased 36%.

Deere said it will raise prices for large, wheeled tractors by as much as 7% and combines by as much as 10.5 % next year to cover rising materials costs. Spokesman Kenneth Golden declined to comment further. Diesel fuel is up 46% in the past year at $4.283 a gallon on Aug. 25, according to the American Automobile Association.

Ammonium used as fertiliser sold out at $750 a ton for the rest of this year is now being sold at $1,000 a ton next year, said John Lipinski, chief executive officer of CVR Energy Inc., an oil refiner and fertilizer company based in Sugar Land, Texas, during a conference call with investors Aug. 13.

Falling crop prices coupled with higher costs would create a situation similar to 1980, when expenses fell 1% while income fell 9.2%, Agriculture Secretary Ed Schafer said on Aug. 6. Adjusted for inflation, farm profits fell 46%, beginning a decade in which annual agricultural net income averaged less than half what it was in the previous 10 years, according to USDA data. We don't want to get into a situation in which farmers are squeezed,'' Schafer said.

What may help this time around is that many farmers have less debt than they did three decades ago, the American Farm Bureau's Young said. Farmer debt-to-equity and debt-to-asset ratios are both at their lowest levels since statistics began being kept in 1960, although the data doesn't adequately reflect the finances of farmers who rent land, Young said.

Bloomberg