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11 April, 2008 - Good times, Bad times

Indeed, this is an interesting time in the world of agriculture, the most interesting I have seen in my 52 years of covering this industry. Over the past several months, at every agricultural meeting I have attended and covered, it took only a matter of minutes before the subject of prices and market volatility worked its way into the conversation.

Depending on where you are in the agricultural food chain, these are either the “best of times” or the “worst of times”. For corn, soybean and wheat producers, record high prices that we couldn’t even think about a couple of years ago, say the “best of times.” If you are a livestock or poultry producer, the higher cost of your feed says these could be the “worst of times”. There is no question that volatility is part of our lives everyday, and if you are a trader in the marketplace, one day you are limit up, the next day you are limit down and if you are on the wrong side, you are in trouble.

There are many reasons for the volatility, but to me the underlying basic reason is a law that has been part of marketing forever...the law of supply and demand. Supply of food and feed grains lower than we have seen in several decades; in the case of wheat 60 years, and demand increasing rapidly for corn and soybeans to produce alternative fuels. Remembering that change is with us constantly, it is interesting to note, however, that USDA in its last three monthly supply-demand reports has lowered the use of corn for ethanol by a total of 300-million bushels.

Then there is the challenge for country elevators. Several producers have told me recently they wanted to forward-price some of their corn and soybeans for 2010 to take advantage of what they feel are good prices two years down the road. But when they make the request to the elevator manager, the response is brief and to the point...” We can’t do that anymore”. I talked to several large and small country elevator managers at the National Grain & Feed Association convention in Arizona recently and they told me that market volatility has pushed their line-of-credit needs to cover margin calls beyond the lending capacity of their local bank and they can no longer forward-price contracts two years into the future. A North Dakota manager told me his line-of-credit requirement two years ago was $2-million; today it is $18-million and his banker said he can’t go any higher.

Add to all of this the increased cost of inputs like fertilizer, energy and transportation and the financial landscape of rural America has been dramatically changed. But there are some basic rules we need to remember...”The cure for high prices is higher prices and the cure for low prices is lower prices” and “Prices never go the same direction forever”. Whatever side of the market you find yourself, just know that this period in agriculture will be discussed and debated in agricultural economics classes for decades!

My thoughts on Samuelson Sez.


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