Most of us knew there would be a hangover from $6 corn, but who would have thought that subprime lending might cause it? Or did it?

Our interconnected world has some growers wondering where Wall Street ends and Main Street begins. “It’s one long street, and always has been,” says Michael Swanson, agricultural economist, Wells Fargo Bank. “The farm economy has never been an island, but it used to take longer for the waves to reach distant shores.
“As margins compress, farmers will have to compete with other segments of the economy for operating capital. Capital is like water; it flows to the best return.”

Crop farmers’ credit risks are “pretty good, and the Farm Credit System has its own source of funds,” says Gary Schnitkey, University of Illinois farm management specialist. He doesn’t think that Wall Street’s credit crunch will alter farm businesses much. “Farm Credit has agency status, so it can float its own bonds, and they might look like an attractive alternative.

“Investors are fleeing traditional investments, making farmland look even more attractive. I don’t anticipate that farmers will have much problem with the credit side of things; most crop farmers are in pretty good financial shape,” Schnitkey says.

“Where I see the risk in agriculture is that operating costs have doubled, increasing operating loans. If we have high loan costs and a drop in crop prices, growers are stuck with $4 average corn breakeven costs, in Illinois for example. Corn prices below $4.50 will become a problem for many growers.”

A global recession could dampen oil prices, which could drag other commodity prices with them. And lower oil prices also reduce ethanol prices, which weaken demand for corn. The good news is that lower oil prices could also lower fertilizer prices as well.

“The real driver of the ag economy is energy prices,” Swanson says. “The big question is what kind of floor energy prices will put under crop prices. Every $10/barrel drop in crude price reduces corn’s value by 90 cents/bu. (Based on each $10/barrel drop in crude oil drops gasoline by about 30 cents/gal. Since we get 2.8 gal. ethanol from one bushel of corn, then this 30-cent price swing in gasoline price creates a 90-cent drop in the market value of corn.) These are general rules of thumb,” Swanson says.

The whole credit crunch on Wall Street “is really undercutting expectations about demand,” explains Darrel Good, University of Illinois ag economist. “If it negatively affects global economic growth, then this robust increase we’ve seen in meat consumption will slow, weakening demand for grains. It could possibly lower crude oil prices, which reverberates through the biofuels market. The oil and ethanol link is very strong. Reduced demand across the board is an overall negative for the crop market.”

Ethanol prices drive corn prices these days more than export demand, Swanson says. “The U.S. is only exporting 16% of its corn crop because we’ve made policy decisions to channel more corn into ethanol. “Not long ago, we exported in the high 20% range of our corn crop -- a drop from 2.4 billion bushels in the 2007-2008 marketing year to 2 billion bushels this year (2009-2009),” Swanson says. “And we’ve gone from using 1 billion bushels corn for ethanol to 4.1 billion bushels this year.”