Cornbelt farmers have their fingers crossed. Crop inputs have been purchased, some at painful prices. Corn prices are holding their own because of planting delays. Beans are going up because of several market fundamentals. But there are miles of farmland that remain too wet to plant with uncertainties about what, if any, crop will be planted. But since the financial failures in the rest of the US economy have whip-sawed agriculture, many farmers have learned their market and the rest of the economy are too close for comfort.

“The agriculture sector is not an economic island.” That is what Iowa State economist Neil Harl told Congress recently, and is telling farmers in the June issue of the Ag Decision Maker newsletter. But he says the bulk of the world’s economic troubles have sped past agriculture. However, Harl says the longer the recession lasts, the more likely there will be devastating issues for farmers, including diminished credit availability for production, land purchases, and trade.

Harl says the high commodity prices of 2007 and 2008 allowed agriculture to build a financial foundation and gain insulation from the global financial meltdown. But he says falling prices, the lack of profitability in the ethanol industry, and reduced demand for US commodities abroad have been felt in rural America.

The first of Harl’s Danger Signals is found in the commodity market. He said the high grain prices of last year were capitalized into farmland purchases and cash rent leases, only to have prices decline with reduced income per acre. He believes commodity funds played a role in the up and down movement of oil, but their involvement in the up and down move of grain prices “is less well accepted.” Harl notes the initial declining trend in land values, but does not expect a repeat of the 1980’s.

A second Harl danger signal is the economic fortune of the ethanol industry. He says the demand for ethanol pushed corn prices higher, along with beans and wheat which had to compete for acres, but since the fall of oil prices, more than 20 ethanol plants are in bankruptcy court, with 30% of the capacity in park. Harl contends the future of the industry depends on US energy policies, the price of corn, and emerging technology. He says ethanol will be in the spotlight for several years, and then become one of several alternative energy sources, but must remain economically competitive with or without federal subsidies.

While farmers are experts at production, Harl’s third danger signal is the demand side of the equation, which has also experienced a meltdown. Globally, incomes were growing, particularly in developing countries where increased income is used for more and better foods. But the global recession dampened that demand dramatically, and Harl says only China has been a buyer of US commodities, which he predicts will also fade as Chinese unemployment rises.

The fourth danger signal to Harl is tighter credit, not just for the general populace, but for agriculture as balance sheets weaken. He says the number of non-performing loans has dramatically increased in rural areas, making rural banks unprofitable. Although that is not reflective of the current agricultural economy, Neil Harl says lower commodity prices and higher costs of production will cause farmers to become problems for lenders in the future.

Harl believes agricultural profitability and financial strength will be heavily dependent on the direction of the world economy. Deterioration in financial systems will contribute to a decline in the agricultural economy, because of how the economy considers debt. He says the downshifting economy that began late in 2007 resulted from a shift in the way consumers think about debt, corporate strategies to curtail debt, and governments living beyond their means. After the bubble burst, Harl says there has been a more cautious use of debt and that will affect the general economy in the near future.

Summary:
Agriculture has been somewhat insulated from the economic downturn, but it may only be a matter of time before that changes. There is a danger to the farm economy that results from a cost-price squeeze, lack of profitability in the ethanol industry, a global decline in demand for US foods, and growing restrictions on credit. The farm economy will possibly feel more of a pinch from the global recession, unless it quickly turns around, and then there may be some delays before agriculture regains its growth trend.