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Weak crop prices end feast in farm states

AP
April 9, 2009
By JOSH FUNK

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WAHOO, Neb. (AP) — Farming communities that were largely insulated from the recession last year by high crop prices and other factors are now feeling the nation's economic chill more acutely as corn, wheat and soybeans become cheaper, and land values fall.

Farmers across the Midwest and Plains states are increasingly cautious about spending on new equipment and land, and that is threatening businesses that until recently had been spared serious financial hardship.

At the John Deere dealership in Wahoo, combines and tractors farmers ordered last year with proceeds from $7 per-bushel corn are still being delivered — despite the fact that corn prices are now closer to $4 per bushel. The activity doesn't yet reflect how frugal many farmers have become because of falling crop prices, dwindling land values and burgeoning problems in the ethanol industry.

About 30 miles south of Wahoo, farmer Steven Althouse is bracing for what could be a tough year because the price of fertilizer and fuel remains relatively high compared with plummeting crop prices.

"Overall, I think conservative is probably the word that would best describe where we're at on things," Althouse said. Limiting costs is one of Althouse's top goals this spring on the roughly 5,000 acres he farms with his cousin.

The U.S. Department of Agriculture predicts that farm income will fall some 20 percent, or $18.1 billion, to $71.2 billion this year. The lessons of the 1980s farm crisis — when farmers learned the dangers of assuming too much debt when times are good — are about to be tested.

"People that took on a lot of debt — these are the ones I think are going to be in some trouble," said Iowa State University economics professor Mike Duffy.

But Althouse says that even when corn and soybean prices soared to their highest levels in decades last year — pushed higher by a burgeoning ethanol industry that has since retreated — he avoided making big purchases that didn't fit within his normal replacement schedule.

"Things did look good last year, but I kind of had a feeling that those type of things don't last long," Althouse said. "I don't think you want to get yourself into a position where you expect that those kind of prices are going to be there for any long period of time."

Last year's strong corn, wheat and soybean prices benefited farmers and everyone they buy from, keeping unemployment rates low in states like Nebraska and the Dakotas.

"The strong farm economy has been a partial insulation from the effects of the recession," Federal Reserve economist Jason Henderson said.

The Midwest and Plains states also missed most of the housing-related problems in the economy over the past year because home values didn't boom or bust. And area economists have said rural bankers tended to be more cautious when lending, and were unlikely to invest in the risky mortgage-backed securities that have hurt several major investment banks.

But not every agriculture business has excelled recently. Many livestock businesses, especially feedlots, suffered losses last year because the high grain prices raised their feed costs at the same time the recession curtailed demand for meat.

Henderson, who monitors the rural economy within the 10th Federal Reserve District, predicts farm-dependent regions will see slower economic growth in 2009 because farm profit margins will be thinner. He said it's hard to forecast how much of a hit agriculture might take over the next year because there are big questions about how the recession is affecting demand for commodities, food and exports.

Farmland values had soared as countries such as India and China bought more corn and soybeans and the ethanol industry expanded rapidly. Both those economic forces have shifted dramatically in the past year, and now values are in decline.

The recession has undercut demand for crops worldwide and the stronger dollar makes U.S. exports more expensive. Falling oil prices in the last nine months also forced several major ethanol producers into bankruptcy and raised questions about how quickly that industry should grow.

But if farmers nationwide start pulling back on purchases, farm-dependent states in the Midwest will lose a key factor that has helped shield them from the recession.

At Platte Valley Equipment in Wahoo last year, farmers had to order John Deere equipment about nine months ahead of when they needed it because there was a backlog of orders. That delay has shortened up some, service administrator Dave Ibsen said, but it has not been eliminated.

Business still looks good in 2009 for the equipment dealer — just not as good as the last couple years.

"I think it will be a more-normal year," Ibsen said.

Creighton University economist Ernie Goss said the health of the farm sector in 2009 will be determined by how weak the global economy becomes and how strong the dollar remains.

"It's going to be more challenging than 2008, but I'd much rather be in an area relying on farm income than an area relying on automotive and manufacturing," Goss said.

The USDA predicts farmland and farm building values will still rise about 2 percent nationwide in 2009, but that's significantly less than the nearly 7 percent growth seen in 2008. If farmers borrowed heavily against inflated land values, that may create problems.

Iowa State's Duffy says most farmers still remember the lessons of the 1980s farm crisis, so they've kept their debt at manageable levels.

"About three-fourths of our land (in Iowa) is held without debt. So if it drops in value, it isn't like they're going to have to dump it," Duffy said.

Keeping his debt level low is one of the strategies that have helped Jim Ehmen continue farming near Paxton, Ill., for more than 40 years.

"We're surviving out here. The key has been watching our debt and keep track of where our money goes," Ehmen said.

Farmer Doug Nelson says he's not sure what will happen this year because of the ongoing economic turmoil and the way agriculture relies on world markets today.

"I'm approaching this year with exceptional caution," said Nelson, who raises corn and soybeans near Wayne in northeast Nebraska. "I wouldn't be afraid to make a big purchase, but I'd want to have most of the cash to do it."

Copyright © 2009 The Associated Press. All rights reserved.

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