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Unlike Before, Ag Profits Unlikely to Carry MN Economy

June 24, 2009 By Lee Egerstrom, Economic Development Fellow
In one week's time, the state, national and global economies have bounced from looking like the recession's end was in sight to woeful responses to economic news. Both temporary assessments are correct.

Economies don't move in straight lines up or down. Capital jumps from markets to markets rapidly, from liquid New York securities to Chicago commodities, and back again with the slightest nudge from news or weather reports.

More damaging is when economic conditions move horizontally, spreading or retracting to broader parts of the populace. That is clearly happening now to agriculture-an actual strongpoint in the Minnesota economy for the first 18 months of the current recession. 

Corn prices have fallen below $4 a bushel, likely below the cost of production on most Minnesota farms. Soybean prices still look profitable but are weakening, and traders at the Minneapolis Grain Exchange offered various reasons on Monday why wheat markets are generally flat but way off the highs set in spring a year ago.

Day to day responses to news are mere blips. That should prove true of the World Bank forecast on Monday that foresaw a deeper and longer global recession than previously thought. It sent stock markets tumbling and dropped commodity market prices because traders feared the impact the recession will have on buying and selling raw materials.

More blips up and down are on the way. The old saying that traders "buy the rumor and sell the facts" is too often true. At the same time, liquid markets don't respond quickly to longer-term market fundamentals that are a threat to the future health of our economies.

The latter is the case now as state and local governments scale back employment and programs to cope with under-funded budgets, thus negating the stimulus efforts of the federal government to boost us out of the recession.

And while we are piling on to recession pressures at the state and local levels, the impact of the down economy is spreading more widely through the countryside. Policy makers should watch this closely because state and local governments have far fewer tools to impact agriculture than they do with public sector employment.

That being the case, let's pause to look at field conditions in Minnesota agriculture as of this past weekend, and then look at current market conditions.

Erik Gerlach and Douglas Hartwig of USDA's National Agricultural Statistics Service office in Minnesota found that 80 percent of the state's corn crop and 73 percent of the soybean crop were in good to excellent condition at the start of this week. Wheat and sugarbeets, the two other large field crops in Minnesota, were also in generally good plant health for producing strong harvests this year.

For people in the Twin Cities metro area struggling to keep dry lawns green, moisture conditions across the agricultural regions of Minnesota are in surprisingly good shape. The NASS statisticians found that 66 percent of Minnesota farmland has adequate moisture to support plant growth, while 21 percent is short, 9 percent of the land has surplus moisture, and only 4 percent is classified as "very short" for sustaining plants.

With rain forecast for the current week along with high temperatures, Minnesota farmers appear to be heading towards another successful growing season.

The downside comes from market reports rather than field reports.

Jean Wynn, a trader with CHS' Country Hedging brokerage, said in a market commentary at the Minneapolis Grain Exchange on Monday that agricultural commodity trade volume is down. Some of this is spillover from weakness in equity markets and a stronger U.S. dollar that discourages exports.

Meanwhile, Joe Victor of Allendale Commodities forecast that a June 30 USDA report on this spring's plantings will show less corn and more soybeans were planted than previously forecast. If so, more soybeans could drop those prices down to unprofitable levels on the farm, depending on export trade conditions, even though corn prices could strengthen from fewer acres planted.

How this all plays out before year's end will be influenced by summer weather conditions and by how badly the global recession stifles trade. Prices will have bounced up and down as traders buy rumors of trades or untimely weather, and sell contracts on news of exports and crop progress.

Regardless, there are few signs of large agricultural profits this year to help carry the Minnesota economy.

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