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Growing pangs

Sun., Oct. 26, 2008

SPANGLE – Wheat prices are in a free-fall.

Last year’s crop was a billion-dollar boon to the region’s bottom line. This year’s harvest will fall far short of that measure as the price retreats along with prices on other commodities such as oil, corn and cattle.

The situation is especially disappointing for the region’s farmers who took a risk that didn’t pan out: They held on to much of their grain rather than signing contracts that locked in prices.

They were taking a lesson from 2007, when many farmers sold their grain early, securing modest yet profitable prices for the wheat still growing in their fields – and missing out on record-high prices later.

It was a conservative strategy widely adopted, said Tom Mick, chief executive officer of the Washington Grain Alliance. But it meant that most farmers missed the bonanza as prices zoomed past $10 a bushel after the harvest and reached all-time highs topping $15 in January – often more than double the amount farmers had contracted for earlier.

So this year more farmers held on to more of their grain rather than signing forward contracts, gambling that prices would spike again and they could sell high.

Those bets now look like busts.

Farmers are stuck with silos of grain that loses value by the day. As other American workers watch retirement funds evaporate and companies shed workers, these growers watch wheat prices plummet.

“Should they sell? Should they wait? No one is sure,” said John Jamison, a warehouse worker at the grain elevator in Spangle, south of Spokane. “There are a lot of farmers in a tough place right now.”

It was an atypical week at the grain elevator where Jamison was working last week to transfer barley from the elevator into a train car. There’s little grain arriving from farms these days.

Prices have dropped well below the break-even point. Farmers can do little but wait.

Harrington-area farmer John Wagner said the price of high-grade soft white wheat has sunk to feed-grain prices. “No one knows where the bottom is,” he said. “We might just find out.”

One solace: “People have to eat,” Wagner said.

Outside forces

Even so, how much people actually pay for what they’re eating is largely out of the producers’ hands. Farmers complain they have no control over the price of their grain.

They’ve already burned $5 diesel running tractors and combines across their fields and paid top dollar for nitrogen-based fertilizers. But the price of their product is set by an eclectic collection of outside elements: foreign buyers, market speculators, government aid programs, supply, demand and the misfortunes of farmers in parts of the world beset by drought, disease and other natural disasters.

Among farmers’ best hopes for averting a financially disastrous 2008 may be federal subsidies from the farm bill signed last year. But those are no sure thing, either, Mick said.

Last winter’s high prices were driven, at least in part, by grain speculators. One driving force was a belief that commodities prices had finally caught up with the demands of a growing global middle class who lived in cities and wanted to drive cars, buy consumer goods and eat richer foods such as meat and milk.

The rise of this sentiment coincided with crop setbacks in other countries, leading to one of the best years ever for U.S. farmers.

What’s following now is a year of price anxiety after a disappointing harvest.

‘The perfect storm’

Chris Hesse, an Eastern Washington tax specialist and accountant with LeMaster Daniels who works with farmers, said the reversal of fortune will test farmers.

“There’s a lot of factors coming together to make this … the perfect storm,” Hesse said. “We have a strengthening dollar, which is not helpful to farmers in Washington state, declining commodity prices, concerns about the availability of funds for loans and high input costs. It’s the exact flip side of where we were last year.”

Hesse advises clients to make careful tax decisions.

“Now is the time to be strengthening your balance sheet,” he said. “Get the debt load down. It is the farmers with the strong equity position that will make it through this cycle.”

Jay Penick, president and chief executive officer of leading agricultural lender Northwest Farm Credit Services, said despite the credit freeze gripping Wall Street, money will continue to flow to farmers.

“There may be some concerns with regard to people who are not strong borrowers to begin with,” Penick said. “But banks will be willing to lend.”

A bright spot for farmers, especially those in Washington and Idaho, who export about 85 percent of their crops, is that it’s at least a good time to buy their products.

From U.S. Wheat Associates, which helps market wheat to foreign buyers: “By just about any measure, it is an excellent time to purchase U.S. wheat. Prices have not been this low since mid-2007. Freight rates are at least 60 percent lower than their peaks just four months ago.”

Of the predicament facing farmers and the landowners who collect lease payments and often help share the costs, Jamison said, “Let’s hope it works out. People look at this economy and just don’t know where it’s headed.”

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