PRUDENCE, not panic, is the best response to the breathtaking correction toppling markets after more than a year of speculative excess.
It is hard to remain calm when stock and commodity prices are plunging, foreign banks are collapsing, lenders are tightening their purse strings and the staggering American economy is threatening to drag the world into recession.
The subprime credit crisis in the United States started a collapse in confidence that has spread throughout markets and the world economy.
Agriculture is not immune.
Read Also
Crop insurance’s ability to help producers has its limitations
Farmers enrolled in crop insurance can do just as well financially when they have a horrible crop or no crop at all, compared to when they have a below average crop
Little has changed to alter the perception that the dominant trend in world agriculture is one of supply struggling to keep up with fast-rising demand in Asia.
But the speculators who chased that trend by pouring billions of dollars into agriculture commodities, forcing futures prices to record highs, are now withdrawing their money to cover debts in other areas and in so doing are driving commodity prices lower.
Lower prices should spur demand, but banks around the world are tightening their lending practices, making the financing for trade harder to get.
Also, as Americans tighten their belts and spend less, the impact spreads around the world and projections of rapid growth and rising incomes in Asia and elsewhere are scaled back.
The optimists say agriculture will be all right because people have to eat.
That is true but more people will economize by leaving out meat and more expensive dishes.
Feed grain prices will weaken as the demand from U.S. ethanol producers dips in the face of falling oil prices.
The next few months will be a trial.
But prairie farmers have several strengths as they face a more uncertain global economy. The country’s banking industry is stable and farmers are coming off a profitable year and have a big crop in the bin.
Agricultural lenders appear confident in their clients, noting strong balance sheets, good equity and few problems with arrears.
Prairie farmer also have a high level of management skill. They’ll find these skills and business relationships, particularly with their bankers, more important than ever.
A critical factor in how farmers will ride out the economic storm is whether input prices fall as fast as grain prices.
So far, fuel prices have not fallen as deeply as crude oil. Fertilizer prices continued rising into the summer and only in the past couple of weeks have shown any indication of leveling off.
But while costly, inputs still can produce more yield and profit if waste is eliminated through sophisticated management.
Input price inflation has put a priority on calculating costs of production, a critical component of marketing plans.
Eventually grain market fundamentals will reassert themselves, firming grain prices but, without the excesses of speculators, at levels workable for livestock feeders and food processors.
While the market sorts things out, the superior management that allowed today’s farm operators to survive low grain prices and BSE earlier this decade should carry them through this latest challenge.
Bruce Dyck, Terry Fries, Barb Glen, D’Arce McMillan and Ken Zacharias collaborate in the writing of Western Producer editorials.
