By NANCY VORIS
Indiana Correspondent

FRANKLIN, Ind. — With references to his occasionally lean childhood Christmas gifts of underwear, socks and an orange, Purdue University economist Chris Hurt told farmers these are “uncertain times at best.”

“Something has to give, crop prices have to rally, costs adjust to the downside,” he said at one of Purdue’s Ag Outlook meetings held throughout the state.

He showed corn and wheat prices in the same pattern as other commodities such as crude oil, coal, gold, cocoa and rice – steadily rising until late spring and early summer, then falling sharply. Hurt said four factors created this environment:

•Rapid world economic growth and income growth;
•The falling value of the U.S. dollar: “Instead of spending money on a fancy, $5 coffee, people are getting their coffee at McDonald’s;”
•Ethanol and biodiesel are using one out of three bushels of corn:
“The current estimate is that 32 percent of 2008 corn will be used for fuel,” Hurt said. “Biofuels link the energy and corn markets and link ag to energy. Corn is priced proportionally to oil. It’s great when the energy price is high;” and

•Expectations were too high. Ethanol plants are closing and new plant construction grinding to a halt because additional financing is not available. “The bloom is clearly off of ethanol,” he said.
Damages to the world economy are real and consequences over the coming months and years will be felt, Hurt said, citing recent financial crises with mortgage lenders, AIG and most recently, the auto industry, where workers’ pensions and new car warranties are at stake.

“By law, we as taxpayers have an obligation to pick those up,” he said. “ There are lots of implications if we let automakers go under.”

In the area of biofuel, farmers can now add the instability of global energy to their list of risk factors such as weather and insects. The Renewable Fuels Standard (RFS) gradually raises the guaranteed market for ethanol to 15 billion gallons by 2015.

But in the past few years the ethanol industry raced into production and could be up to 14 million gallons as early as next summer. Hurt calls it the “gold rush.”

“Fields were full of gold called corn, and the expectation was that it will always be cheap and energy will always be high,” he said. “It was the ethanol bandwagon, and the industry overbuilt more than the guaranteed market.”

The good news is that with the RFS, ethanol is here to stay. Hurt estimates corn will be in the $4.25 range, and maybe built up in spring and summer to $4.50.

“USDA is using $4.75 for ’08 corn, and I would take that right now,” he said.

The farm price for soybeans is $10.45 and the demand is good with China buying supplies. He said $ 9.50-$10 was reasonable.
Hurt admitted with volatile markets, even Purdue is having trouble keeping up with changes in input costs and returns. Wholesale nitrogen was down 70 percent in October and “we clearly see drama with the nitrogen prices.” The 2009 forecast for anhydrous is at $345, and $236 for urea.