Brent Gloy

Cornell University

February 27, 2009

Making Sense of Volatile Times

Governor’s Conference on Delaware Agriculture

Agenda

Commodity and Financial Markets Economic Situation Managing Through Volatile Times

Commodity Markets

Where we’re at Tremendous volatility Uncertainty still quite high Very difficult to predict feed grain prices

How we got here Bubbles pop – financial meltdown Severe recession

Weekly CBOT Corn Prices 2007-2009

Nearly $5 from high to low

Weekly CBOT Soybean Prices 2007-2009

Over $8 from high to low

Causes of the Volatility

Easy monetary policy (cheap money) Loose financial regulation (easy to use

cheap money) Worldwide economic expansion Tremendous run-up in crude oil prices

feeds into grain markets Biofuel policy was additional gas on an

inferno

When Will it End?

Markets are still in major adjustment Problem is worldwide Macro-economic situation is grim Worldwide economic slowdown

reduces demand for protein and grains

Bottom Line: It is unlikely that volatility will subside until macro-economic situation stabilizes

How did we get here and where are we at?

You could see this coming….

“You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise.……. As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight.”

Warren Buffet, 2007 Letter to Shareholders of Berkshire Hathaway

The Fed Apparently Adds Social Policy to its Responsibilities…..

“If we tried to suppress the expansion of the subprime market, do you think that would have gone over very well with the Congress? When it looked as though we were dealing with a major increase in home ownership, which is of unquestioned value to this society — would we have been able to do that? I doubt it.”

Excerpted quote from Former Fed Chairman Alan Greenspan. Reported in the New York Times online article “Greenspan Says He Was Mystified by Subprime Market” February 12, 2009

Financial Markets Filled with Fear

Banks have taken much more risk than their capital can support Credit markets begin to fail

Consumers no longer have access to funds to support consumption habits Structural adjustment of consumption

behavior underway

Result: severe recession

Fed Responds by Aggressively Easing Monetary Policy

Unemployment Rate Increases Rapidly

Consumers Actually Increase Savings

Consumers Have Little Ability to Expand Consumption with Borrowing

The Great Crude Oil Bubble Pops

According to RFA the current nameplate operating ethanol capacity is 10.3 billion gallons with an additional 1.5 under construction above

the current RFS of 10.5 billion gallons

Where to From Here

Feed grain prices are falling back to food demand levels

Ethanol will slow until mandate again binds This year’s plantings are very difficult to

project Operating costs are volatile as well

Corn/Soy Budgets for Central Illinois High Productivity Farmland

Corn after Corn

Corn after Soy

Soy after Corn

2009 Projecteda $187 $237 $187

2008 Budgets $621 $689 $354

Source: University of Illinois Crop Budgets http://www.farmdoc.uiuc.edu/manage/2009_crop_budgets.pdf

Per Acre Operator and Land Return

a Projections use corn = $4/bu and Soy = $8.85/bu

Will Exports Bail Us Out?

?

Where to From Here?

Feed grain stocks-to-use ratios remain relatively tight

Dollar is still at favorable levels Unlikely that prices will retest previous

all time highs in near future Higher operating costs make a return to

corn at sub $3 levels somewhat unlikely

Bottom Line: modest feed price relief

Where Does this Leave Agriculture?

Most commodities are going to experience difficult financial times in the coming year(s?)

Let’s look at the financial situation in agriculture

Very difficult timesDebt levels appear low by historical standards

The problem is that farm sector assets are dominated by real estate which declines in value during tough times

So What Has Been Happening to Land Values?

Now is the time to ask hard questions and make difficult decisions

The Financial Situation In Agriculture

Managing in Volatile Times

Sound risk management is key Focus on margins – not just price or cost Cost of risk management will be high

Cost management is critical Work on records and business

analysis – must have good information

Records Must Answer

1. What is my cost of production?

2. What is my cash flow?

3. How do the above respond to changes?

Managing in Volatile Times

After getting records in order ask: Am I efficiently using my current

resources? Are there resources that can’t be used

efficiently today? What am I willing to pay to carry these

until they can be used efficiently?

Managing in Volatile Times

Get debt to manageable levels Many farms will be forced to rely on

credit to make it through these times Build a good relationship with your lender Use credit wisely

Building a Relationship with Your Lender

Good records are a must Give lender confidence that you know your

business Give lender confidence that your plan

makes sense Most ag lenders make decisions on factors

such as repayment capacity, character, capital, conditions, and collateral

Brent Gloy

Cornell University

www.agfinance.aem.cornell.edu

607-255-9822

bg49@cornell.edu

Questions