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UI economist predicts agricultural recession
[November 13, 2008]

UI economist predicts agricultural recession

(News-Gazette, The (Champaign-Urbana, IL) Via Acquire Media NewsEdge) Nov. 12--CHAMPAIGN -- Just as the rise of ethanol prices helped to fuel increased income for farmers over the past two years, a University of Illinois economist said the recent drop in ethanol prices may be leading to an agricultural recession that has already cut the prices of crops in half.

UI Professor of Agricultural and Consumer Economics Scott Irwin said his studies indicate that the fortunes of farmers are now more closely connected to the prices paid at the gas pumps than to changes in prices paid at the grocery stores.

"When food prices were the main trigger, recessionary impacts were much less direct and much more gradual," Irwin said. "Now, there's this new connection through energy costs that immediately gets translated to agriculture." Champaign County Farm Bureau Manager Brad Uken agreed that there is a growing connection between gas prices and farm prices.

"I believe there is a relationship between the amount of corn in ethanol and the effect it has on the price of corn," Uken said.

But Uken noted that the prices that farmers pay for materials such as fertilizer, seed and machinery (called input costs) have not fallen along with the ethanol prices, putting many farmers potentially at risk.

"You have not seen a decrease in the input costs like we are seeing in the commodity prices," Uken said. "That is a challenge for farmers in managing their risk." Irwin attributed the falling ethanol prices to the global economic problems, which have caused the demand for energy to fall. The decreased demand, in turn, has led to lower prices for crude oil, gasoline and ethanol.

As ethanol prices fell, the prices for corn also fell, making it more difficult for ethanol producers to pay for corn and still break even on their investments, Irwin said.

Corn prices increased to nearly $8 a bushel in futures markets and gasoline rose to almost $4 a gallon this summer.

But pump prices have since fallen to nearly $2 a gallon as a combination of the credit crisis and recession led to decreased driving.

According to Irwin, corn prices have mirrored the slide of ethanol prices, falling to about $4 a bushel.

On Monday Irwin predicted corn prices will likely stay at about $4 a bushel until the economy recovers from a recession.

"Over the next couple of years, with normal weather around the world, I think we'll see corn prices ranging between $3.50 and $4 a bushel, closer to the low end with good weather and the high end with bad," Irwin said. "But... even if we settle in at $3.50 a bushel for corn, that's still nearly 50 percent higher than it was for 30 years."

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