October 2008 Archive for On the Udder Hand

Obviously the headlines lately about doom and gloom on Wall Street, and Main Street, have been impossible to escape.  Imagine how much worse it would be if we didn’t have the elections as a distraction.

But amidst the Hooverville talk, there was an underlying assumption that the Farm Belt was faring far better, and in fact was one of the very few bright lights in the current U.S. economy (lower gas prices being the only other obvious one).

That assumption was shattered Wednesday when I saw this big story in the Wall Street Journal that the proverbial glory days for farmers are at their end.  For those who can’t access the WSJ subscription link, here are a few excerpts:

“The Midwest faces plunging crop prices and stubbornly high production costs. Corn prices have dropped from $7.54 a bushel around July Fourth in central Iowa to just $3.81 a bushel on Tuesday. But growers are hearing from suppliers that fertilizer and seed costs could rise by more than 40% each for next spring's plantings”

“U.S. growers clearly face a riskier, more volatile environment in which to make bets on what to grow and how much. "I was finally enjoying farming, but it's real scary right now," said Keith Richert, a 38-year-old York, Neb., corn and soybean farmer who is shelving plans to replace his eight-year-old harvesting combine, a purchase that would cost more than $300,000”

“For many growers, their breakeven costs have climbed so high that they could lose money next year even if crop prices are above the levels long thought to be too strong to warrant subsidy checks from the U.S. government. Farm trade groups and Farm Belt politicians already are pressing the Bush administration to interpret the newly adopted five-year farm bill generously”

The article also makes a point that I made in this blog just last month, namely, that if you were a crop farmer, 2007 and 2008 have been golden years, but if you were in livestock production, these have already been dark days indeed – and that lower grain prices are actually good news for a significant number of farming operations.

At a time when farm-level milk prices have been dropping steadily, seeing corn return to the $4/bushel level, and dropping soybean and oil prices to boot, is like having a prayer answered just in the nick of time.  It just goes to show you that few trends are ever entirely good or bad; it just depends on who’s playing which angle.

 Which brings me to a related topic in the news lately, and that is whether USDA will be helping ethanol distilleries cope with the changing economics of grain production.  USDA Secretary Ed Schafer has created a kerfluffle with his comments last week that ethanol plants may be able to access a USDA rural development loan program to help their economic situation. 

A number of livestock and taxpayer groups, including the National Milk Producers Federation, have raised a stink about the fairness of such an approach, given that USDA wasn’t overly concerned in the past year about the economic plight of cattle, swine and poultry producers having to compete with those ethanol plants for corn back when it was over $8/bu.  Again, few things are every entirely good or bad.

[UPDATE NOTE:  I see that by some great cosmic coincidence USA Today had essentially the same story Wednesday as the WSJ journal did the same day, also lamenting the decline in crop prices].

Back in March around Easter time, I posted an item about how the reduction in people’s equity in their homes (below 50% for the first time ever) represented a soft spot in the economy – what I referred to as “the Hollow Chocolate Easter Nest Egg.”  I was right in direction, but wrong in degree.

Seven months later, just in time for another choco-loving holiday, it’s become apparent that this financial hollowing-out of the real estate business has led to the virtual collapse of the entire global financial system.   Just like the proverbial butterfly’s wings can flutter momentarily, only to cause a subsequent hurricane elsewhere, the real estate bubble has incited a tsunami effect of insolvency for too many people, and even entire countries like Iceland and Ireland (if I lived in Italy, I’d be worried that the fiscal grim reaper was proceeding alphabetically…).

I love this picture taken recently in London’s financial district; it about sums it all up (scroll down a bit):

In farm country, the deflating of the global excessive credit/real estate/financial leverage bubble is also bound to have an effect, as this story indicates.  The roller coaster of grain and oilseed prices rose, and sure as the combines are rolling through corn country right now, those prices have dropped back down (assuming of course the combines are going to bring in a bumper harvest commensurate with expectations – still no sure thing).

I don’t believe our global grasp on prosperity was illusory.  Real money was made, and spent, by billions of people in the past five years.  But too much of that was borrowed, and indeed, too much was hocked to the hilt.  Leverage works great on the way up, but on the way down, it’s a…real pain.

As I mentioned in my previous posting, life will go on, for most of us.  Job losses will be concentrated in places that are, or were, either related to industries facing serious decline, like automotive production, or those tied to the epicenter of this credit bubble, such as real estate, mortgages, and finance.

But we’re surely all to feel poorer in the months ahead.  I just looked at my 3Q 401k statement, and it was nasty…and it didn’t even reflect the seven days in a row of stock market drops in October.  A little trick or treat chocolate may soothe the pain come Oct. 31^st, even if the sugar crash is a trick we could see – shouldn’t we always? -- coming.