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  • From: "Tradingpost" <tradingpost@lobo.net>
  • To: livingontheland@lists.ibiblio.org
  • Subject: [Livingontheland] Sizzling commodities market puts the heat on farmers
  • Date: Sat, 19 Apr 2008 22:22:40 -0600



Sizzling commodities market puts the heat on farmers
http://seattlepi.nwsource.com/business/1310ap_farming_futures.html

By BECKY BOHRER
ASSOCIATED PRESS WRITER
photo
Carlo Sampere stands on the step of a delivery truck and pulls a
Leidenheimer Po-Boy loaf of bread from the paper bread sack at the G.H.
Leidenheimer Baking Company, Wednesday, April 9, 2008, in New Orleans. (AP
Photo/Judi Bottoni)

NEW ORLEANS -- Farming has always been a risky business, at the mercy of bad
weather, wars and drought. Now farmers' profits face a new and surprising
enemy: speculators that some believe are driving prices up so fast that
growers are getting locked out of top dollar for their crops.

Shoppers are feeling it, too, as investors pump billions of dollars into
agricultural commodities and, insiders say, help push up the price of the
most basic of foodstuffs, a loaf of bread.

"It's been very stressful for all of us to manage marketing this crop," said
George LaCour, a grain farmer near Morganza in southeast Louisiana.

LaCour sold more than half his 2008 crop before planting it, hoping to cash
in on soaring prices. Selling the rest will have to wait until after the
harvest since he has limited bank-borrowing power to hedge his future crops
against price swings and he doesn't want to risk the money.

"Nobody wants to take the risk," he said.

Agriculture interests nationwide are edgy about what they see as a flood of
speculative money into the market and they want action, fearful that it is
throwing the markets into chaos and making it harder for farmers to manage
their risks.

"We want the government to investigate, and if there are significant issues,
we want them to work through what should be done," said Chad Hart,
agricultural economist at Iowa State University. "Right now, I don't think
anyone has a full grasp on what's going on."

The Commodity Futures Trading Commission, which regulates U.S. futures and
options markets, will make an attempt with a hearing April 22.

The panel can expect to find a sizzling market, some say too hot to handle,
stoked for two years by profit-hungry cash from index funds and speculators
and rocketing prices for in-demand corn, soybeans and wheat.

There has also been a rise in planting: The Agriculture Department said wheat
production, for example, grew from 1.8 billion to 2.06 billion bushels from
2006 to 2007, and more than 63.8 million acres of wheat will be planted in
2008, up 3.4 million acres from 2007.

And there is nervousness. Some grain buyers, wary of the market volatility,
are limiting contract dealings with growers, effectively cutting farmers off
from top prices at a time when production costs have soared, insiders say.

Consumers, too, are feeling the impact.

Sandy Whann, owner of Leidenheimer Baking Co. in New Orleans, said rising
wheat flour costs have been driven the rise of the French bread the bakery
produces. "The entire market for wheat, over the past decades, has had its
ups and downs, but nothing as dramatic as this," he said.

According to the American Bakers Association, flour prices are up 50 percent
since January, 173 percent since last May. The average price of a 1-lb. loaf
of white bread rose 16 cents from February 2007 to February 2008, according
to the Bureau of Labor Statistics.

Money, it seems, is seeking more money.

Investment funds looking to fatten returns are putting money in crop futures
to spread the risk in their portfolios. The mortgage market is weak and other
commodities such as oil and metals are moving too wildly.

Analysts say traditional spikes, driven by supply and demand, have been
pushed up. Corn traded at about $2.60 a bushel in early 2006. Earlier this
month, the May contract reached a record $6 a bushel.

Richard Brock, Milwaukee-based commodities analyst, said index funds are
"literally running the market" with billions of dollars in play. "It's
absolutely obscene," he said.

Index fund managers see free-market economics at play.

Daniel Raab, managing director for AIG Financial Products Corp., said funds'
share of the market has been near 25 percent since early 2006. Funds'
investments rose to $55 billion in early April from $23 billion in the same
month two years ago, due to a mix of new money and gains on funds invested.
Meanwhile, total futures and options markets for major commodities like corn,
wheat and soybeans grew from about $85 billion to $222 billion.

"Ultimately, if these aren't fair prices supported by the fundamentals, then
the prices won't stay at these levels," said Raab.

Michael McGlone, director of commodity indexing for the S&P index, said
global trends are making a bullish case for agricultural commodities in the
long term.

"Free, open markets will provide the best price discovery there is," he said.

Speculation, sometimes called "hot money," has long been a part of the
business, and few farmers can quibble with $9-plus wheat when not long ago
$4-a-bushel turned heads.

But major market runs have meant wider margin costs for grain buyers, who
have in some cases limited the bids they offer farmers to nearer contracts,
like 60 days out, to hedge their risk. Cargill Inc. is among those that have
limited their forward contracting. A spokesman for the company said the move
isn't common but reflects the company's evaluation of its current market risk.

A farmer hedging for himself would have to cover his own margins. A margin is
a good-faith deposit with a broker to secure a contract to sell a crop at a
specified date and in a specific quantity. For example, a broker might
require 10 percent of the total value of the contract deposited up front
months before the crop is delivered. The farmer's goal is to ensure that if
prices fall, he can still sell at the higher price. If prices rise beyond his
agreement, the farmer can sell the contract on the spot market and pocket the
higher profit.

It's a nail-biting process for some.

"The average person out there thinks farmers are making a killing when the
price of soybeans goes to $14 and corn goes to $6, but there's an inherent
risk that nobody knows about," LaCour said. Some farmers, he said, have more
capital tied up in margin calls than their crop is worth. "And that's kind of
scary."

Jerry Slocum, a farmer and small buyer in Coldwater, Miss., said he's been
forced to triple his line of credit to cover margins on the same volume of
grain. "The volatility is simply to the point of being ridiculous," he said.

Bing Von Bergen, a farmer in Moccasin, Mont., and a policy chair for the
National Association of Wheat Growers, said farmers have fewer marketing
options and higher costs for their crops, and profit is being squeezed.

Regardless of whether it's just a temporary blip, the situation is sending a
ripple throughout the industry. An NAWG official said local elevators in
Kansas are closing, and Brock said some cattle and swine herds are being
culled due to high grain prices.

"It's a brand new game," said Slocum.





  • [Livingontheland] Sizzling commodities market puts the heat on farmers, Tradingpost, 04/20/2008

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