 "Last year, both production costs and commodity prices doubled and
then plunged," said Nick Paulson, who is an assistant professor in
the Department of Agricultural and Consumer Economics, a farmdoc
team member, and an affiliate of the U of I Center for Economic and
Financial Education."Despite the recent decline, both prices and
input costs are still well above their long-term averages for corn,
soybeans and wheat," he said.
This means, he added, that farmers "have twice as much money at
risk due to higher volatility in the market."
Sound risk management practices are more important than ever, he
added.
Paulson pointed out that the agricultural economic sector faces a
different set of challenges than those associated with the national
and world economies.
"The ag economy is certainly affected, but not necessarily in the
same way," he explained. "The overall economic challenge being
highly cited for the broad economy is the availability or lack of
credit.
"The biggest challenge for the agricultural sector is the run-up
in both production costs and commodity prices, followed by their
sharp (decline) coinciding with the recession in the general
economy. The combination of these events has led to interesting and
challenging positions for input suppliers, grain handlers and
producers in terms of tight margins," he said.
An additional problem facing producers is that government
programs that once provided a safety net have been undermined by
market volatility.
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"These programs are based on price levels that are now basically
irrelevant," said Paulson. "Programs no longer guarantee break-even
prices or even prices close to break-even for producers."
It will become increasingly important in this volatile
environment, he noted, to lock in input costs when they are
favorable.
"With price volatility, it is crucial to control to whatever
extent possible the costs of production," he said.
Paulson is currently working with fellow professors Bruce
Sherrick and Paul Ellinger, as well as a group of researchers from
industry and other universities, in preparing an invited session
devoted to the impact of the financial crisis on agriculture. This
session will be presented at the upcoming meetings of the
Agricultural and Applied Economics Association.
[Text from file received from
University of
Illinois Extension]
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