Tuesday, March 17, 2009

"Farming is very strange right now"

Back in the late 70s when I was organizing farmers' markets in the Greater Boston Metropolitan Area, one of the things that impressed me most was how this form of direct marketing allowed local farmers and community residents talked to one another. Not just about the weather and Boston Red Sox (although that happened too), but about the practice of farming. In some cases communities organized winter meetings and invited farmers to come in and talk about the upcoming growing season. The more they got to know each other, the greater the resonance between what the farmers planted and what their customers wanted. Some of the farmers altered their plantings based on what they heard. I like to think that this was a preview of what eventually evolved into community supported agriculture (CSA).

On the other hand, according to the story below, farmers in America's Midwest "Heartland" and California "Breadbasket" aren't listening to you and me but to Wall Street. Upon receiving signals that commodity prices are due to drop, they have decided to cut back on their production. That means that food prices for you and me will certainly rise.

Grain Costs Down, Groceries Not

Farmers to Cut Back on Planting Amid Market Weakness, Pressuring Consumer Prices

By Scott Kilman and Lauren Etter
Wall Street Journal
March 13, 2009

Commodity prices are down, but the bad news for consumers is that U.S. farmers are responding by cutting back their planting and production, reducing the chances of lower prices reaching the supermarket.

Clay T. Mitchell of Buckingham, Iowa, said he will reduce his corn acreage 26% when the planting season starts in mid-April. The 930 acres of corn that the 35-year-old farmer plans to grow would be his smallest effort ever, even though corn has long been his most profitable crop. He is planting more soybeans, which don't need expensive nitrogen fertilizer.

Farmers are planning to cut production of corn, shown here at harvest, and other high-cost crops as lower commodity prices squeeze the industry.

"Farming is very strange right now," said Mr. Mitchell, who had some of the best years of his farming career in 2007 and 2008 only to see the recession deflate commodity prices.

Across the nation, farmers are making plans to cut their production of corn, wheat, rice, peanuts, beef, pork, poultry and milk. In addition to growing more soybeans, farmer are also planning to grow crops more cheaply, such as by using less fertilizer and pesticides. Also, some farmers plan to grow just one crop on land that normally produces two each year, and to let some land lie fallow throughout the year.

Farmers are expected to plant the fewest acres of cotton since 1983, the Agriculture Department estimates. The USDA expects the production of meat from every major category of farm animal to drop for the first time since 1973.

"Farmers are very nervous," said Craig Rowles, general manager and part-owner of Elite Pork, which raises 145,000 hogs annually near Carroll, Iowa. With hog prices down 28% since the summer, he has shrunk his output about 7% and cut his feeding costs by selling his animals a week or two sooner for slaughter.

The magnitude of the farming retreat won't come into focus for several weeks. The USDA releases its prospective plantings report on March 31 and the usual start of the Midwest planting season is in April, weather permitting. But orders for seed and fertilizer are already giving clues to grain traders that the acreage of some crops, including corn, might drop by a few million acres.

[Lower Commodity Costs Won't Ease Grocery Bills]

Commodity prices dropped late last year when the thickening global recession helped to drain demand for everything from juicy steaks to the corn used to fatten the steers they come from. Prices of corn, soybeans, wheat and rice have fallen by half or more from last year's highs. The price received by dairy farmers for milk this year is heading toward the lowest levels since 1978.

The USDA is predicting that net farm income, a rough measure of profitability, will sink 20% this year to $71.2 billion.

"The recession is now catching the farm sector," said Jason R. Henderson, an economist at the Federal Reserve Bank of Kansas City, which is detecting the first quarterly decline in farmland prices in a decade. The Federal Reserve Bank of Chicago said fourth-quarter farmland values in its district dropped 4% from the trailing quarter, also its first quarterly decline in a decade.

Outside the farm belt, the drop in commodity prices in recent months is easing the financial pressure on food manufacturers, the biggest of which saw their input costs jump by hundreds of millions of dollars last year. However, consumers aren't seeing lower grocery prices and aren't likely to. Michael Swanson, an economist at banking giant Wells Fargo & Co., said he expects retail food prices to climb 2.5% to 3% in 2009, on top of the 5.5% rise in 2008.

The scope of the production retreat by farmers is fueling concerns among food makers that the costs of their ingredients won't fully recede to the low levels to which they had grown accustomed before 2007. After trading around $2 a bushel for a decade, the price of corn -- the nation's biggest crop -- jumped above $7 a bushel last summer, then fell by half as the recession cooled demand.

"Corn is not going back" to its low levels of earlier this decade, C. Larry Pope, president and chief executive of pork producer Smithfield Foods Inc., said Thursday in a conference call with analysts after reporting a loss of $103.1 million, or 72 cents a share, for the fiscal third quarter ended Feb. 1. Corn, which is fed to hogs, is one of Smithfield's biggest expenses.

In trading at the Chicago Board of Trade Thursday, the corn-futures contract for March delivery rose 20.75 cents a bushel to settle at $3.7675.

Supplies of crops such as corn and soybeans are relatively tight. Wheat farmers across the Southern Plains, in states such as Texas and Oklahoma, who planted their crop in the fall, are now beset by a drought. According to the USDA, two-thirds of the wheat crop in Texas is in very poor to poor condition.

At the same time, the consumption of corn and soybeans from some quarters is continuing to grow despite the global economic slowdown. China, stung by high food prices last year, has bought 600 million bushels of U.S. soybeans since September, about one-fifth of the entire U.S. harvest, according to Dan Basse, president of Chicago commodity-forecasting concern AgResource Co.

Although hamstrung by overbuilding and bad hedging decisions by its executives, the U.S. ethanol industry will consume about 3.7 billion bushels of corn, or 30% of the fall corn harvest. Federal mandates for alternative fuels will help increase the ethanol industry's appetite to 4.1 billion bushels of corn next year, USDA economists figure. On top of this, ethanol executives are lobbying federal regulators to allow more ethanol in gasoline.

Robert Moskow, a food-industry analyst at Credit Suisse Securities, is already concerned that food manufacturers will face commodity-price spikes as early as next year if the ethanol industry gets more help from Washington. "We are setting up ourselves again for unintended consequences," he said.


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