April 21, 2008

 

US grain boom may head to financial collapse, analysts

 

 

The record grain profits reaped by US farmers currently, may eventually result to financial crisis not seen since 1980s, analysts said.

 

Surging land prices, increasing debt and reliance on government subsidies for ethanol production prompted economists to warn that what may be a big boom in agriculture could come to a sudden end, the Associated Press reported.

 

Barry L. Flinchbaugh, an agricultural economist at Kansas State University, said the US agriculture industry is in a very risky time.

 

Flinchbaugh pointed that the potential problem is the strong demand for corn and other grains which drove prices to historic highs.

 

The record grain prices lured farmers to increase debts to purchase more land and invest more in equipment and fertilizer.

 

This also led to skyrocketing farmland values, analysts pointed out.

 

Flinchbaugh said that as long as robust demand lasts, farmers should be in good situation. Yet, if demand suddenly plummets, farmers may be in huge financial turmoil.

 

The agricultural economy bears a striking resemblance to that seen in the mid-1970s, when a seemingly insatiable demand for US crops drove up land values and farmers took advantage of their soaring equity to increase debt, Flinchbaugh explained.

 

When federal policy changed and demand suddenly dropped, land values and farm income plunged, forcing thousands of farmers to sell out and leading to the failure of nearly 300 agricultural banks, the analyst recalled.

 

US economists warn that farmers could be tempted to add debt due to the belief that high commodity prices would continue.