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Financial Crisis Delivers Indirect Blow to Agriculture

August 12, 2011
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Agriculture, with the exception of livestock, has been more resistant to recession, said Mike Boehlje.   
 
 

By Jennifer Stewart, University of Purdue

 
While the uncertainty on Wall Street directly affects the financial sector, a Purdue Extension agricultural economist says it's the indirect consequences coupled with weather concerns that has the agriculture industry on edge.
 
Agriculture, with the exception of livestock, has been more resistant to recession, said Mike Boehlje. Much of the demand for U.S. grain comes from the mandated use of ethanol and in exports, which have recovered more quickly in recent years than has domestic demand.
 
"The Chinese economy is growing, and that has increased demand for U.S. grains, especially soybeans," he said. "We've also had short supply problems with grains.
 
"Going forward, the key concerns for agriculture are less in the capital markets and more in what the U.S. debt problems might do to put us in a recession. The Chinese economy also is important because should it take a hit, export demand would decrease."
 
Should the United States end up in a "double-dip" recession, Boehlje said, livestock producers could potentially face higher feed costs, reduced domestic demand and lower export demand.
 
"A situation like that certainly has the potential to take the profitability out of livestock production," he said.
 
One bright spot is that when the markets become unstable, investors are more likely to put their money into real assets rather than financial assets. Real assets include agricultural commodities, metals and land.
 
Boehlje also said because now is not the time grain farmers borrow, they're unlikely to see much increase in interest rates. However, livestock producers could see higher rates if they have to borrow to buy feed.
 
While farmers should not ignore the capital markets, Boehlje said the current financial turmoil's effects are more indirect and focus mostly on demand adjustments.
 
"When there is long-term instability there tends to be a flight to real assets," Boehlje said. "People move away from financial assets. Agriculture is a real asset industry, so that does offer some protection."
 
Weather, however, could do more harm than the financial crisis. Grain farmers could take the hardest hit with yield losses from this year's extreme weather.
 
It also could cause financial problems for famers who forward-marketed crops that may not make it to harvest.
 
For consumers, Boehlje said, oil prices have come down in the last few days and food price increases may slow down some. Although that may seem like positive news, it might not be.
 
"An early response to the economic uncertainty has been a decrease in energy prices," he said. "If we go into a double-dip recession, it could take some pressure off of retail food prices, as well. But we certainly don't want that to be the reason for a reduction in price pressures."
 
Despite all of the seemingly bad news, Boehlje said agriculture is still strong relative to other industries.
 
"Other industries are downsizing, some even permanently," he said. "Relatively speaking, agriculture is a good place to be."

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