By Scott Kilman and Roger Thurow
December 30th, 2008
http://online.wsj.com/news/articles/SB123059685167541039

Benjamin Riensche has just come off two of his best years in farming. But like growers all over the globe, he is in the midst of a more turbulent era of sharply rising and then suddenly falling prices.

Now the 47-year-old, who grows corn and soybeans across 10,000 acres in Iowa, fears he will incur losses in 2009 that would be his first red ink in 16 years. His revenue is falling, but the costs of seed, fertilizer and machinery have remained high. Mr. Riensche bought most of his supplies months ago, when grain prices were still high. Many of his suppliers are still trying to pass along the higher costs they absorbed in recent years for everything from metal and chemicals to natural gas. To lower his costs, he could idle land, but figures raising a crop at least gives him a chance to benefit if prices move back up, as some predict.

“I never thought the stakes could get so big,” Mr. Riensche says. “We’ve gone from the nickel slots to world-class poker.”

All this is happening even though the world has been producing more grain than ever. Demand has grown faster than farmers could increase their production most years of this decade, helping to drain grain reserves. Unusually good weather in most of the world this year is refilling grains stocks once again. But the situation could easily change. Some economists worry that the world will consume more grain than it produces by 2010, particularly if oil prices recover enough to make the production of ethanol from corn more profitable again.

The situation is a headache for farmers even though it can mean years of big profits. Commodity prices are changing more quickly than farmers can plan which crops to grow. The price of a bushel of corn rarely varied by more than a dollar in a year’s time for most of the 1980s and the 1990s. But this year, many U.S. corn farmers have seen the price of their crop swing by $4 a bushel.

The rapid change in the fortunes for Mr. Riensche is not uncommon for farmers around the world, who are experiencing an unprecedented era of volatility. After prices of crops peaked in the summer, bumper crops recently helped reduce prices, dousing the anger behind riots in nearly 60 countries. But crop reserves remain unusually low while demand continues to grow. That means the slightest disruption — flooding, drought, disease, or extra-cautious farmers — could have a much bigger impact on prices than it would have had in recent decades.

“There’s no cushion,” said Daniel W. Basse, president of AgResource Co., a Chicago commodity forecasting concern. “It’s a very volatile situation.”

Successful farming is partly about divining future demand, which has been high as new consumers emerge around the world. Mr. Riensche’s corn and soybeans flow into a U.S. commodity sector that fattens livestock for Asian consumers, fills food-aid cargo ships to Africa, and supplies corn-fed ethanol plants in the Midwest. Just last year, his Blue Diamond Farming Co. saw its profits double into the six figures. Hearing agricultural experts predict a decade of strong crop prices, Mr. Riensche felt confident enough to build a new home on the site of the farmhouse where his father was born.

The two-and-a-half story, red-brick Georgian is roughly three times the size of the Reinsches’ cramped, 1,130-square-foot home in town, where their four children share two bedrooms. Within a few weeks, the girls and a boy will each have their own room.

“For a long time, I figured our standard of living had slipped behind where we would be if I had stayed in banking,” says Mr. Riensche, who earned an M.B.A. from the University of Chicago, then worked for Swiss Bank Corp.

He returned home in 1993 to run the family farm after his brother died in a harvest accident. For many years, U.S. farmers received about $2 per bushel for their corn, so close to their break-even point that they depended on federal farm subsidies to stay in business.

“Only in the last few years were we able to catch up,” Mr. Riensche says.

The Ongoing Food Crisis

See how grain production compares to consumption in countries around the world.

The boom hit home for him in 2006, when a new energy law forced the oil industry to blend billions of gallons of ethanol into motor fuel. Dunkerton Co-op, which buys Mr. Riensche’s crops, suddenly began supplying half of its members’ corn to the ethanol plants sprouting around the farms he works with his father, Roland, 78.

At the same time, the world’s appetite for U.S. corn, soybeans, wheat, pork and poultry was steadily expanding. Demand was so great that even the June flooding that inundated nearby Waterloo and Cedar Rapids — delaying Mr. Riensche’s planting season by nearly a month — didn’t dent the farmer’s optimism.

With grain stockpiles already perilously low, grain buyers panicked that the world might run out. Speculators helped drive prices skyward. The Dunkerton grain elevator bought some of Mr. Riensche’s corn for three times what he typically has collected: $6.24 a bushel.

In July, the weather turned ideal for growing, leading to the U.S.’s second-biggest corn crop ever. But as harvesting began in September, the Wall Street meltdown fueled fears that a global economic slowdown would chill foreign demand. Then, in October, the sibling source of demand — ethanol — took a big hit. Ethanol giant VeraSun Energy Corp., owner of a plant in nearby Dyersville, filed for protection from creditors under Chapter 11 of the federal bankruptcy code. Corn prices plummeted further.

“Who could believe prices could rise that high or fall that fast?” said Mr. Riensche as his 12-man crew raced to finish a field before a November nightfall. Every 20 minutes, a semi-trailer hauling 1,000 bushels of corn lumbered down the road to an ethanol plant paying him about $4 per bushel.

Not long ago, Mr. Riensche would have been ecstatic to get that much for his corn. But his suppliers and the owners of the land he leases jacked up their prices to cash in on the grain boom. His seed costs for next year are jumping 33%, and his fertilizer bill is more than doubling. Hog producers who used to pay to have manure removed from their barns are now making corn farmers pay for its value as fertilizer.

Mr. Riensche figures it will cost him close to $5 to grow a bushel of corn next year and about $11 to grow a bushel of soybeans — not good with prices where they are at the moment. Taking their cues from the Chicago Board of Trade, local buyers are offering about $4 a bushel for corn that farmers promise to deliver next year, while soybean processors are offering about $9.

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Ethiopia is facing a food shortage and now relief agencies are making tough choices on who gets fed. WSJ’s Roger Thurow reports.

Federal subsidy checks aren’t likely to help U.S. farmers as much as they once did. Corn and soybean prices are still above the levels that automatically trigger price-support related checks from the government.

The chance of red ink returning to the Farm Belt is prompting rural bankers to tighten their lending standards, which could force farmers to draw down their savings in order to stay in business. Bankers already expect some of their most indebted farmers to get out of the business next year.

“There’s a phenomenal change in the whole structure of the farm economy,” says Shane Tiernan, a business development officer at Grundy National Bank, Conrad, Iowa, which lends to hundreds of growers. “We’ve never seen farm incomes swing this dramatically before.”

Quitting isn’t an option for Mr. Riensche. Unlike many U.S. farmers, he has a child who wants to follow in his footsteps. “My dad is a pretty successful guy,” says nine-year-old Hans as he plays in his father’s shop with his model farm.

“We are taking a big leap of faith,” Mr. Riensche says as hunches over his personal computer, staring at commodity price charts. “We are praying for a change in the markets.”

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