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Why does THAT affect the price of grain?

05/21/2013 @ 8:15am

We've all said it. We've all wondered it. "Seriously? Why does what's happening in Europe's economy affect the price of corn in my backyard?" Or perhaps you've heard an analyst on TV talk about the economy in China, the value of the U.S. dollar, interest rates, or any number of outside market factors that have swayed the price of a commodity higher or lower. 

If only things could be simplified. But in a global marketplace, simplified just does not seem possible anymore.

Over the past few months in this column, we have been examining possible scenarios regarding outside market influences that could drastically affect the price of commodity futures; things other than general supply and demand factors.

We have suggested that by looking at and understanding how these outside market factors can shape and influence the price of grains or livestock, you can ultimately assist your own awareness and develop long-term plans, which ultimately leads to your successful commodity pricing. At Stewart-Peterson, we call this "market scenario planning." It's our way of preparing for whatever may influence the market.

We will wrap up the series today by remembering some important lessons from the '80s, as well as reviewing the current global market situation.

Remember the '80s

The '80s and farming; I remember high interest rates, families struggling to get by, and farm policy. In the 1980s we had a farm crisis. It began during the Carter administration and continued into the Reagan years. Between 1981 and 1986 it has been estimated that one-quarter of the assessed valuation of America's farms, based on land primarily, simply disappeared.  

The '80s crisis was preceded by a lucrative agricultural export market and cheap money in the '70s, with farm family incomes above the national family income average. Farmers and nonfarmer investors bid up the price of land. (Sounding eerily familiar?)

In 1981 the large harvests, the closures of some export markets, and a more valuable dollar compared to other currencies meant farm product prices sank. Farmers couldn't make their land payments and began losing their land. Farming community banks and other businesses failed.

Now, 30 years later, we have to face the reality that high interest rates will come again. (In my opinion, sooner than we think.) Farms that just took on debt to buy acreage or machinery will have quite the battle ahead if those interest rates are not locked in as low, long-term interest rates.

Why is this scenario a real possibility? For one, the U.S. Federal Reserve has been printing a lot of money lately to stimulate the economy, and this will likely lead to inflation in the coming years. Don't get caught with a big loan balance in an environment where interest rates go to 7%, 8%, or 9% (or higher) after inflation kicks in. Couple inflation with the chance of lower commodity prices or any major changes in the Farm Bill, and watch out; it could be the 1980s all over again. And that farm economy lasted a decade.

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