A wave of planting is set to take place in the southern hemisphere within the next few months. The planting season is a very capital-intensive period in the crop cycle, and farmers frequently rely on financing to obtain necessities like seed and fertilizer. But lowered profitability and restricted access to credit threaten to suppress planting activity this season.

Analysis

In the southern hemisphere, the planting season is approaching. This is a particularly capital-intensive period in the crop cycle and usually requires farmers to rely on financing to obtain the necessities, such as fertilizer and seed. But reduced profitability and the global credit crisis threaten to reduce planting this season.

Grain prices remain near the lows set in October as the global financial crisis and simultaneous recessions in major economies continue to sap demand. Additional pressure due to commodity speculators moving from buying to selling has more or less ensured stagnation at relatively depressed prices.

Wheat currently trades for about $5.25 per bushel, a drop of about 55 percent from its March highs of around $11.60 per bushel. Soybeans are trading for about $9.05 per bushel, down about 45 percent from a high of $16.60 per bushel in June. The price of corn has been halved to $3.75 per bushel, from about $7.55 per bushel in June. Rice enjoyed a brief rally to near $16.00 per hundredweight (cwt) in the first days of November, but it has since fallen to around $14.60 per cwt, down about 39 percent from its April high of $23.80 per cwt.

Although these prices have fallen precipitously, it is notable that they are still well above 2006 prices, and in some cases higher than prices seen in 2007. Thus, while falling prices certainly hurt farmers, even lower prices probably are not forgotten.

Lower prices are only part of the problem farmers face. With costs for inputs (e.g., fertilizer, seed and fuel) stubbornly high, many farmers now find that their profits — normally thin — have disappeared entirely. Fertilizer in particular remains problematic. Prices for the chemical components of fertilizers have not retreated nearly as impressively as grain prices have, and while they are projected to decline in the 2008-2009 growing season, chemical prices still present a considerable funding challenge. Reduced profitability tends to make lenders nervous as they reach for their purses — and to make matters worse, fear already pervades credit markets due to the global financial crisis.

As with almost everything related to farming, the need for credit follows a seasonal cycle. This could be a big problem as the credit crunch meets the planting season for much of the global south. Seed, fertilizer, pesticide, equipment and labor all cost money, and farmers — especially commercial operations — make ample use of credit markets to facilitate this spending.

Cotton and soybeans in Argentina and Brazil, sorghum in Australia, corn in South Africa and wheat in Mexico could all be in danger as low profitability and restricted access to credit make full plantings a tenuous prospect.

The breadbaskets of Brazil and Argentina, two of the world’s largest producers of an array of agricultural commodities, already face serious trouble as both have seen lenders shy away from the agricultural sector. Funding shortfalls have led to reductions in both fertilizer and equipment purchases, and industry insiders have speculated that 2009 production could suffer as a result.

Subject to a perfect storm of bad conditions, Australia has been especially hard hit by the credit crunch. The country’s ailing agriculture industry, already in the grip of a multiyear drought, has sustained the additional setbacks of reduced profitability and worsening credit conditions. Financial damage to the sector is extensive enough to engender fear of widespread bankruptcies. One estimate puts the number of potential farm bankruptcies in South Australia at around 25 percent by 2009.

Ultimately, the damage sustained by farmers due to the credit crunch will not stop there. If current trends continue to play out, the 2008-2009 season could see markedly reduced yields — a development that would set the stage for another round of price surges.