Category: Agriculture

Since the beginning of our Republic, farmers and agricultural interests have accused speculators of manipulating markets and capturing the financial gains that ought to go to producers.

The lastest chapter in this long story was played out today at the Commodity Futures Trading Commission. Regulators brought together investors, ag producers and groups representing farmers to talk over recent volatility in the markets.

The investors say they're simply trying to hedge inflation risk for pension funds and other big groups. After all, people on a pension have to buy bread and beef and gas.

Groups representing farmers and bakers complain that the $175 billion poured into commodity funds in recent years has whipsawed the market adding to price swings.

The numbers are eye-popping: Rice up 123% this year, Wheat 99%, Corn 66% and Cotton 48%.

What's happening? CFTC economists say its all about demand in Asia, ethanol demand in the US, and poor crops in Australia and Canada.

Whatever it is, prepare to pay more at the grocery store.

I found it fascinating, in the process of reporting today's story on world food prices, to learn how the impact of changes in one part of the farm economy here in the U.S. can have such broad implications for the rest of the world. Perhaps you've read or heard about some of the riots that have occurred in parts of Africa, Haiti, and Bangladesh over sharply rising prices for rice. The less-obvious aspect of this story is how U.S. rice exports factor into the equation.

The U.S. exports nearly all the rice it grows...and ranks among the top five rice exporters in the world. The interesting fact, pointed out to us by Wachovia Securities grains analyst Bill Nelson, is that U.S. rice growers have in recent years devoted less acreage to rice planting -- and more to corn. Why? Because of the high prices ethanol producers will pay for corn. US acreage has dropped by some 600,000 acres in the past few years, and that's helped play a role in whether rice supplies are adequate to meet rice demand in the rest of the world.

The Chicago Board of Trade was established in 1860 as a place where buyers and sellers could trade commodities through futures contracts. Farmers, millers, and other users of commodities traded futures to hedge risk. Speculators took opposing positions to make money on the price movements of commodities.

It's a system that has worked beautifully for 160 years, until now. A century ago, and for that matter a decade ago, few retail investors had interest investing in corn, pork bellies, or natural gas. But, portfolio diversification and rising commodity prices have encouraged many investors to wade into commodities.

One way to get exposure to commodities is through a commodity index fund. These funds track one of two commodity indices and offset risk by purchasing futures contracts. And, they are buying a lot. Dan Basse, President of Ag Resource Company, thinks the funds have been pouring about a billion dollars a week into grain futures since the beginning of this year.

Just when you thought food prices couldn't rise any higher, guess what happened today? Corn prices headed toward the roof.

The U.S. Department of Agriculture threw a curve ball of sorts today at Chicago grain traders when it released its annual report on farmer planting intentions. Responding to high soybean prices, U.S. farmers said they plan to plant more of that crop this year than last. That means fewer acres will be devoted to corn. On top of that, the government said we don't have as much corn in storage as many experts had projected.

All of this news couldn't come at a worse time for food manufacturers, ethanol producers, and importers who are all fighting for corn. And, if they're paying more for corn, so will consumers. So, what , if anything can be done?

When I began reporting on the ethanol industry a couple of years ago, many economists repeated the same warning: the U.S. is trading food for fuel. They feared corn-based ethanol would demand so much of the U.S. corn crop that there might not be enough of the grain to feed the world. That prediction, in part, may be coming true. It also seems to be coming true a lot sooner than anyone expected.

We haven't run short of food yet, but it is getting increasingly expensive. At $5.00 a bushel, corn is roughly double what it was a year ago. Since demand for corn is so strong, farmers have planted fewer acres of soybeans and wheat. Their prices are even higher than corn.

This is turning out to be one of the most bountiful years for rural America. This spring, farmers planted about 98 million acres of corn and are expecting to harvest a bumper crop this fall. On top of that, the value of their land is the highest it has ever been.

The United States Department of Agriculture says cropland values rose about 13 percent this year to $2,700 an acre. Appraisers think those values will continue to appreciate next year, although maybe not at this year's rate.

What is fueling farmland values? Ethanol for one. There are more than 100 ethanol plants in the U.S. and more are on the way. The demand for the grain-based fuel is driving up the price of corn. And, higher grain prices are helping to buoy farmland values.

Every five years or so, Congress rewrites the farm bill. It's a good chunk of change: farm supports cost some $20 billion a year. This year, the arithmetic is complicated by strong demand for ethanol. Corn prices are near record highs. And as more farmers rush to plant corn, strong demand for other crops mean higher prices for soybeans and sugar. It's a good time to be growing things.

It might be logical to assume with crop prices high, Congress would reduce subsidies. But don't bet on it. Other agricultural interests -- beef, poultry, etc -- are looking for help to cope with high feed prices. Lawmakers are also wary of voting against farm interests in an election year.

Before U.S. farmers even began planting this year's corn crop, agriculture economists and grain traders predicted it would be a volatile growing season. And, it has been. We're only about a month into the season and corn futures prices are already swinging wildly at the Chicago Board of Trade.

Traders attribute the volatility to the dreaded "D" word. In this case, "D" means drought. A severe drought that is centered over Alabama is creeping farther north, into Indiana and Ohio. Illinois is now abnormally dry.

But, the threat of a drought isn't the only reason corn prices are bouncing up and down like popcorn. Ethanol is the other. Increased production of the corn-based fuel has been nudging corn prices higher for months. With enthanol pushing demand for corn higher, economists have been warning what could happen if the nation's corn crop is threatened by bad weather or disease. That is what we are seeing right now.