By Danny Wilcox-Frazier
The Wall Street Journal
December 30, 2008
Farmer Benjamin Riensche is being squeezed by high costs and up-and-down grain pricing. The 47-year-old former banker fears he may face his first financial loss on his family farm. His revenue is falling, but the costs of seed, fertilizer and machinery have remained high. Mr. Riensche bought most of his supplies months ago, when grain prices were still high. Many of his suppliers are still trying to pass along the higher costs they absorbed in recent years for everything from metal and chemicals to natural gas. To lower his costs, he could idle land, but figures raising a crop at least gives him a chance to benefit if prices move back up, as some predict.
All this is happening even though the world has been producing more grain than ever. Demand has grown faster than farmers could increase their production most years of this decade, helping to drain grain reserves. Unusually good weather in most of the world this year is refilling grains stocks once again. But the situation could easily change. Some economists worry that the world will consume more grain than it produces by 2010, particularly if oil prices recover enough to make the production of ethanol from corn more profitable again.
After prices of crops peaked in the summer, bumper crops recently helped reduce prices, dousing the anger behind riots in nearly 60 countries. But crop reserves remain unusually low while demand continues to grow. That means the slightest disruption -- flooding, drought, disease, or extra-cautious farmers -- could have a much bigger impact on prices than it would have had in recent decades.
"There's no cushion," said Daniel W. Basse, president of AgResource Co., a Chicago commodity forecasting concern. "It's a very volatile situation."
Mr. Riensche's suppliers and the owners of the land he leases jacked up their prices to cash in on the grain boom. His seed costs for next year are jumping 33%, and his fertilizer bill is more than doubling. Hog producers who used to pay to have manure removed from their barns are now making corn farmers pay for its value as fertilizer.
Mr. Riensche figures it will cost him close to $5 to grow a bushel of corn next year and about $11 to grow a bushel of soybeans -- not good with prices where they are at the moment. Taking their cues from the Chicago Board of Trade, local buyers are offering about $4 a bushel for corn that farmers promise to deliver next year, while soybean processors are offering about $9.
Federal subsidy checks aren't likely to help U.S. farmers as much as they once did. Corn and soybean prices are still above the levels that automatically trigger price-support related checks from the government.
The chance of red ink returning to the Farm Belt is prompting rural bankers to tighten their lending standards, which could force farmers to draw down their savings in order to stay in business. Bankers already expect some of their most indebted farmers to get out of the business next year.
"We are taking a big leap of faith," Mr. Riensche says as hunches over his personal computer, staring at commodity price charts. "We are praying for a change in the markets."