Continued: Fresh worries for farmers

Guided by GPS, capable of steering itself across the land, the tractor is a marvel of technology. It cruises over loose dirt at 5 miles per hour, planting 24 rows of soybeans at once. The air-conditioned cab has room enough for Larson's two Brittany spaniels.

Yet the farming economy promises anything but a soft ride this year. Commodity markets have seen record volatility. The way farmers sell their crops is freighted with new risk. And widespread inflation has sent the cost of fertilizer, seeds, fuel and land skyrocketing, an ominous portent of perhaps broader inflation coming to the rest of the economy.

In some ways, everyone's along for the ride as farmers head into the fields this year for spring planting, delayed by an unusually wet spring and cold temperatures.

"We just can't sit back and plant the crop and hope it all works out," said Mark Nowak, a senior loan officer at Farmers State Bank in Freeborn, Minn.

High prices have pushed farm profits to record levels and lowered the government's payout of farm subsidies. But some of the same forces driving up prices -- expensive oil, increased demand for biofuels and changing diets around the world, coupled with constrained supplies -- have brought unpredictable swings to the futures markets, a place to which farmers have traditionally turned for some safety. The futures market was invented as a way for farmers to lock in prices before harvest, when prices historically drop to unprofitable levels because of the sudden oversupply.

A report issued Friday from the Congressional Research Service took note of the new risks, saying farmers no longer face a routine decision when using futures contracts to lock in high prices for corn and soybean crops, among other commodities.

Now, a farmer who makes a misstep in the wildly gyrating markets could lose. Larson has a friend in South Dakota who lost close to $1 million with a bad bet on grain prices.

"A lot of times people look at the prices and say, 'Wow, it's got to be super-profitable,'" said Al Kluis, a grain analyst based at the Minneapolis Grain Exchange. "These high prices have caused a lot of anxiety and worry, because your costs have gone up so high that your margin of error is very small."

More farmers are using options, he said, a contract that gives the farmer the right to sell some of his crop for an agreed price at a later date. The contract doesn't obligate the farmer to sell, however.

It's not just farmers fretting about what's to come. With food prices already rising, this year's harvest will affect the American economy, either easing some of that inflationary pressure, or causing more. A bad year for corn, for example, could jeopardize already tight supplies and set off broad pain across food and energy markets.

Ethanol plants could cut back production, or even temporarily shut down, said Darin Newsom, senior analyst with DTN, a subscriber news service for the agriculture industry. The federal government already predicts a corn shortfall of 635 million bushels.

The slow start to corn planting has fueled concerns. The crop is forecast at 12.1 billion bushels, down 7 percent from last year, according to a May 9 report from the U.S. Department of Agriculture.

"We could have challenges a year from now to find enough corn for feed and fuel," said Nowak, the loan officer.

He said one remedy could come from the ethanol industry itself: if plants cut their demand by 25 percent, it would lower the overall demand on corn, causing prices to drop and saving the ethanol industry the expense of buying expensive corn. The move would also help poultry and livestock farmers who rely on corn for animal feed.

The USDA forecast 4 billion bushels of this year's corn harvest going to ethanol production, a 33 percent increase over last year, but some observers now say it could drop as low as 3.6 billion by the end of the year, said Newsom.

Whispers of the 1980s

The farm economy, seen from a broad view, is starting to look a lot like the 1980s again, when strong exports, high commodity prices, and low interest rates had spurred farmers to borrow money. The 1980s farm crisis began when the federal government under Paul Volcker, the Reagan administration chairman of the Federal Reserve, sharply raised interest rates to curtail inflation. Farmers who had too much debt were sunk. Many families lost their farms.

"If you kick in inflation, long-term rates are just going to get crazy," said Kluis, the grain analyst. "We're going to have an inflation genie come out of the bottle that we're not going to have any pleasant cure for."

Larson, who farms land near his childhood home in Willmar, said he feels more comfortable than most farmers working in the futures market because he's also spent a career trading grain at the Minneapolis Grain Exchange.

"I study the markets a lot," said Larson. "Traders are always talking to other traders for ideas. I take four or five different news services. We absorb all of this information and I make all of my own decisions."

So far this year, that's meant using the futures market to sell his 2009 and even 2010 corn crops, going out much further ahead of schedule than usual. Essentially he's betting the price of corn will fall. Larson also bought more farmland recently even though the price was much higher than it would have been a year or two ago.

"That's the way it is with bull markets, you just have to know when to get off of the horse."

Matt McKinney • 612-673-7329