<b>By DOUG SCHMITZ<br>
Iowa Correspondent</b> </p><p>

WEST LA FAYETTE, Ind. — The high crop prices that U.S. farmers have encountered this year would pose considerable risks that some aren’t in a financial position to take – especially with the rising costs of crop production, according to two university economists.<br>

“Even though high prices might infer higher profits, they actually have the potential, at the same time, to create higher risk,” said Mike Boehlje, Purdue University agricultural economist. <br>

“We’re now seeing some fairly significant increases on the cost side in agriculture,” he said. “It isn’t unusual when you get better prices that you may be more willing to pay a little bit more cash rent for land and more for fertilizers, seed and chemical products.”<br>

The USDA’s Jan. 11 Crop Production 2007 Annual Summary stated that corn for grain production in 2007 was estimated at 13.1 billion bushels, down 1 percent from the November forecast, but 24 percent above 2006, which is likely to spike prices. Boehlje said U.S. farmers are currently witnessing what he referred to as “margin compression.<br>

“When you combine that with the fact that we are moving our entire price structure up and we aren’t adjusting the government program on top of that, we also have more of what we call margin risk, or risk exposure,” he said.<br>

Thus, Boehlje said, corn and soybean cash prices for the market year are averaging well above $3 and $7 per bushel, respectively, which is too high for farmers to receive such government subsidies as loan deficiency payments (LDP) and counter-cyclical payments.
He said this is because higher production costs and lost government support payments are reducing the crop price gains, which would leave some U.S. farmers worse off even with higher crop prices.<br>

“With a $3 price for corn and the cash cost per bushel of approximately $2.30, margins per bushel would be approximately 70 cents,” he said.<br>

“In this situation, the potential of a negative margin is almost zero, since the government support price system of LDPs, counter-cyclical payments and direct payments provide a safety net price equivalent to almost $2.30 per bushel – assuming the farmer gets normal yields or protects the yield risk with crop insurance.”
If cash costs increase by 20 percent to $2.75 in 2008, Boehlje said average margins would decline to 25 cents per bushel, assuming $3 corn. But he said there are steps farmers can take to minimize their margin risk.<br>

“We need strong risk management strategies to accommodate those risks,” he said. “For example, we need to make sure we are taking a good look at crop insurance products and aggressively using crop insurance. We also need to do forward-pricing to lock in prices, even if we think they might go a little bit higher.”<br>

Boehlje urged farmers to carefully negotiate land leases, as well as land lease arrangements that both protect farmers and provide their landowners fair compensation.<br>

According to Dermot Hayes, Pioneer Hi-Bred International Chair in Agribusiness professor of economics at Iowa State University, U.S. farmers are facing four specific risk factors with higher crop prices – the first of which is reduced crude oil prices.<br>

“Right now, the corn and soybean markets are being driven by the use of corn for ethanol,” he said. “Ethanol is being priced at its energy value. If energy prices go up, ethanol prices go up. We tend to build more ethanol facilities in response to higher prices, and that drives up corn and, ultimately, ethanol prices.”<br>

Hayes said a second risk factor that U.S. farmers face with higher crop prices is reduced government subsidies.<br>

“We gave 51 cents per gallon of ethanol blender’s credit, which is a government subsidy,” he said. “At about 2.8 gallons per bushel, that’s about a $1.50 per bushel blender’s credit for ethanol. If you took that away, the ethanol price goes down and then the corn price goes down.”<br>

Hayes said a third risk factor for farmers regarding higher crop prices is that the whole demand for corn would collapse.
“We are producing 12 to 15 billion bushels of corn,” he said. “Ethanol will use five billion bushels, or a third. If something happened to stop the demand for corn for ethanol, it would reduce corn prices.”<br>

Still another risk factor Hayes said he forecasted is the impact this year’s higher crop prices will have on the livestock market.<br>

“A couple of years from now, after the livestock and exports have adjusted,” he said, “we could end up with surface corn back in our hands again.”