Posted on 03/16/2008 9:28:25 PM PDT by TigerLikesRooster
Sat March 15, 2008
Farmers in fear
By Jim Stafford
Business Writer
Prices paid to Oklahoma wheat farmers for their grain have surged to historic highs, but the prospect of $12-a-bushel wheat at harvest has yielded a surprising side effect, said farm economist Kim Anderson: Fear.
The July wheat contract on the Kansas City Board of Trade closed at $12.21 Friday, down 44 cents from the previous day, but still hovering near historic levels.
So, what is to fear from wheat priced at three to four times what it was just five years ago?
"They are scared to death because their risk is so much higher than it has been,” said Anderson, a professor and extension economist at Oklahoma State University.
"The story here is not just that farmers are receiving three times higher prices than they did three years ago,” he said. "His cost of production is two-and-one-half to three times higher than they were three years ago, and when the cost of production goes up, his risks are three times higher.”
The inputs that have contributed to the rising cost of production include fuel, transportation and fertilizer, said Mark Hodges, executive director of the Oklahoma Wheat Commission.
"All of those are at record highs, as well,” Hodges said.
The rising commodity prices — most other grain prices are at historic prices, as well — have created a fragile bubble in the agricultural community, Anderson said.
Grain elevators are facing the prospects of opening wider lines of credit to make cash payments for the 2008 crop when it is sold in July. Elevators that permit farmers to "forward contract” their crop must meet margin calls — or interim payments — until the crop is harvested.
A major crop failure like the last two years would be catastrophic, said Mike Cassidy, president of Cassidy Grain in Frederick.
For instance, Cassidy grain is going to need a $10 million to $12 million line of credit this year after operating on a $2 million line of credit for the past quarter century, Cassidy said.
"You stumble your toe these days and you are out of business,” Cassidy said. "These historical high prices are going to radically change the way the grain merchandising industry operates.”
If farmers have forward contracted their wheat, meaning they have sold their crop in advance at a predetermined price, but can't deliver it because of a poor harvest, it will cascade throughout the industry, he said. Grain elevators will demand payment from farmers, who have nothing to pay. Banks will demand pay"It's a financial market,” he said. "There are billions and billions of dollars being invested (in grains). It's Las Vegas. It's not the wheat market.”
Despite all that, wheat growers are not exactly cowering in their fields, said Tim Bartram, a Logan County wheat farmer and executive director of the Oklahoma Wheat Growers Association.
"From a grower's perspective, we feel like (prices) are getting where they need to be or getting close to have a chance of making any money,” Bartram said. "I hear some rumblings from an elevator point of view, but if we stay (at these price levels) for a period of time, those issues will straighten themselves out.”
Farmers are more concerned with drought conditions and the health of their wheat than they are with $12 wheat prices, Bartram said. The financial situation leaves farmers more "nervous” than scared, he said.
So, has the industry said "so long” to $3 per bushel wheat for good?
"I certainly hope so,” Bartram said.
"If we haven't, then the price of fertilizer is going to have to come way down and the price of fuel has to come way down and we are going to have to say goodbye to a lot of wheat farmers if we get back down to that level.”
Hmmm. I wonder why this analogy isn't used to support higher oil company costs? Is it because oil companies are considered evil?
This is what futures trading is for. If they’re happy with $12 wheat, farmers can lock in that price by selling futures at that price. If they want to risk a $12 price on the hopes that the price will be even higher when they deliver this fall, they can do that instead.
I hope farmers do not go for toxic deal which promises phenomenal payout. That would be the undoing of all of us. They can still make good money by playing safe.
What’s he supposed to do? Go out prospecting for oil?
“You stumble your toe these days and you are out of business,” Cassidy said.
Did the author go to the Yogi Berra school of journalism?
Speaking as an actual farmer, I can say that almost everything you just wrote is wrong and has been not true since the “Freedom to Farm” act of 1996. There are no more subsidies to “bring up commodity prices.” There are marketing loans, loan deficiency payments, support for conservation/wildlife purposes, etc, but there are no more price supports for maintaining minimum commodity prices.
As to sheep numbers: imports of lamb from Australia and NZ increased throughout the 90’s. There are no limits on lamb imports from either Australia or New Zealand. Their below-cost exports to the US are a large factor in what has effectively killed the US sheep industry. When the US dollar was strong and the NZ/Aussie currencies were weak, they undercut the US sheep producers with meat prices that could not be matched. US Sheep numbers have increased slightly since 2004, in part because Australia/NZ’s currency started to strengthen against the US dollar.
During the Clinton administration, US sheep producers filed a WTO damages claim against the Aus/NZ sheep producers. By 2001, the WTO had ruled in the vast majority for the Aus/NZ producers and the US had to remove all the quota restrictions placed in 1998 by the Clinton administration.
And while commodity prices are higher than they have been in years, they still are at least 50% lower than they would be if you took commodity prices at the point we left Bretton Woods and adjusted those commodity prices for inflation.
What is difficult to contract is the basis.
And with $5 diesel around the corner, the basis is going to swing wildly.
I suppose you’re saying this from the perspective of being a farmer and looking at your books, right?
No? Golly, why doesn’t that surprise me?
OK, here’s some facts:
In 2001, I paid less than $1.00/gal for dyed fuel. Actually, now that I think about it, I paid about $0.87/gal.
In 2003, it was about $1.80+/gal, depending on when during the year I was buying it.
This spring, dyed diesel is about $3.40/gal last I checked. And you can’t lock in a price for more than a few days.
Fertilizer: In 2001, I paid $245/ton for 11-52-0. This spring, the quoted price was $850/ton. That’s if you can get the fertilizer. China is buying fertilizers by the boatload as fast as they can.
Generic glyphosate had gotten down to about $12/gal for a 4lb product two years ago. Now it is about double that - for no reason that one can find.
On top of these prices, for many farmers the price of clear diesel is crushing their profit margins. If you want to haul product to markets, the cost of trucking is going up very rapidly for two reasons - first, the obvious cost of fuel. Second, because there are more and more truckers simply parking their trucks. They can’t raise their prices fast enough, so there are fewer truckers out there to haul inputs and outputs, so the fewer that are left are passing on their increased costs rapidly. It used to be that the haul on our dairy hay into California was $40/ton. Now it is $85/ton. The price that the dairymen will pay isn’t going up that quickly, so if dairyman will pay only $200/ton for the hay, and the trucker’s per-ton shipping charge has gone up from $70 to $85/ton, guess who is eating that increase? The hay farmer.
Same deal with grain farmers. Their shipping costs are reflected in the basis on grain contracts.
And this doesn’t deal with the increases in lube oil (I used to get a 55gal drum of 15W40 engine oil for $245 - now it is $650 and going up every week), lubes, greases, etc. Steel costs have gone up, so steel tillage parts have about doubled in cost in the last 5 years. Parts that use specialty steels like bearings have gone up substantially in the last five years.
Tires: If you can get them, they’ve more than doubled since 2003. I used to buy a 18.4R38 tire for $550 or so. Now that tire costs $1400+, IF you can get it. Farmers are down to only two tire companies that make ag tires in most sizes. The surge in the mining industry has made tire manufactures chase the big industrial tire market. Why screw around with a farmer complaining about paying $1400+ for a tire, when you can charge a mining company $80,000 for a tire?
Last time I had to order a tire, I waited a month for it to arrive.
Farmers have been seeing inflation for a lot longer than you consumers have. Farmers first started seeing input costs go up seriously in 2004.
It’s good to hear from a grownup.
My stories also come from actual farmers, and in both countries. What makes NZ an interesting comparison is that it represents the only country in which agriculture is totally unsubsidized. This forced farmes to become businessmen, and to push technology in innovative ways. They milk cows on giant carousels and have modified California pine trees to grow to maturity in half the time of their American counterparts. Even their research is private.
As of fall 2005, US import limits on NZ lamb were strict enough that NZ had to sell most of its production to the Middle East.
$12, $25 or $50 wheat is not a disaster ~ for farmers.
Yorkie, I am like you. Not only stocked up, but when I use something up, I try and replace it quickly,before the price rises, if possible. If the price is really great and I have the storage, I will buy extra the first time. Transportation slow downs is also one of my concerns.
Cherry: the prices vary store to store, area to area, day to day. We try to do a quick run through of the shops when it is convenient and do not make special shopping trips to do so. We keep a list of things we like/use and we know where they can be marked down or where the store routinely makes great buys, but doesn’t advertise them.
Rice, flour, pasta, dried milk, reduced-for-quick-sale meat and produce are our usual targets. I have found almost everything is on sale at some point somewhere, but I don’t run around wasting gas and time to find them. We have a high mpg car, but we live in the country, so it is better to coordinate shopping trips.
You can replace most cleaning products with white vinegar, baking soda, ammonia, rubbing alcohol (not mixed, of course, unless you are cleaning drains or have checked for bad chemical reactions) and a little soap. Rags replace paper towels. Cold water washes, lower water levels and shorter washing machine time will help energy bills. Hanging clothes when possible and using the dryer for shorter times at lower temperatures is another savings.
Friends of ours picked up several electric heaters at the end of the heating season last year and put them in their most used rooms, turning them off/on as they are needed. They chose energy-efficient heaters and found their heating/electric bills for a big, drafty Victorian did not rise much during the coldest portion of the winter.
Cooking from scratch, of course, is cheaper than buying processed foods.
I am contemplating getting out my sewing machine (I hate to sew) again, but I use the same buy-it-when-I-find-it technique for clothing that I mentioned for food/cleaning supplies. I keep some cash available at all times for this and I can stretch it fairly well.
When you have time, google through the thrift sites for various tips. I learn something new each time.However, it would be interesting to run such a list on FR. Maybe someone with the time could post various articles here and then we could post our own knowledge on the thread.
No, there is no inflation. BurnYankee needs to slash the Fed funds rate to 0.1% now. /s
I look on the bright side. That leaves more cereal grains for ethanol and livestock.
One of the recent discoveries about ADD and ADHD is how much of it is caused by diet. Some people just flat out aren’t ruminants; anything that’s a refined carbohydrate seems to be the problem, specifically yeast and wheat gluten. Curiously enough, flat rye cracker bread (sometimes called hard tack as it has no leavening) doesn’t cause problems, nor does old fashioned oatmeal.
About corn tortillas - I love “tacos pollo al carbon” made with corn tortillas. But do I suffer later. If I scrape and eat everything off the tortillas and don’t eat “los frijoles refritos y arroz”, no gastrointestinal distress or acid reflux strikes me down later. Weird, huh?
OK, let’s contract at $12.
Now a drought comes on, or similar problem, and you’re left with a shortfall on your contracts.
Worse yet, you contracted at $12, you have a significant event that cuts your yield and the cash market at your contract settlement time has gone to $15/bu.
Ain’t so easy now, is it?
I listened to Senate debate on what is called a farm bill. It was enlightening as there was not much farm in the bill. All sorts of rural programs, in fact anything with the word “rural” attached was tossed into the stew.
When the farmers’ costs start eating into grain prices who is going to complain about low farm income?
Not prospecting but any kind of political activity geared to increase US oil production would be a sign of life.
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