Farmers in US face up to credit squeeze

By Javier Blas and Esther Bintliff

Published: November 18 2008 11:07 | Last updated: November 18 2008 20:24

US farmers face tighter credit conditions as they approach the next crop season, the Federal Reserve Bank of Kansas City said on Tuesday, in the first concrete sign that the financial crisis was affecting agricultural markets.

In its quarterly survey of farming credit conditions, the Kansas City Fed said agricultural lenders were reporting tighter credit standards and warned of a further reduction in the availability of funding.

However, demand for loans remains strong as farmers require credit to pay for fertilisers and seeds. “Almost 20 per cent of respondents raised collateral requirements,” the bank said, referring to the guarantees that borrowers have to provide.

The bank also forecast a reduction in agricultural capital spending, owing to higher input costs and lower crop profitability.

On Tuesday Chicago Board of Trade December corn traded 3 cents lower at $3.82¾ a bushel, down 50.6 per cent from its record high of $7.75 in June.

CBOT December wheat gained 3¼ cents at $5.37 a bushel, down almost 60 per cent from this year’s peak of $13.34¾ in February.

CBOT January soyabeans lost 11 cents at $8.95½ a bushel, down 46.2 per cent since hitting an all-time high of $16.63 in July.

JPMorgan said a contraction in supply would help agricultural commodities outperform energy and base metals markets next year.

Lewis Hagedorn, JPMorgan analyst, said: “Even allowing for a more conservative demand estimate in light of slowing global economic conditions, corn and soyabean supplies will struggle to meet demand, keeping inventories low.

“Lower prices could even prompt a contraction in production.”

The comments from the Kansas City Fed underscored a warning delivered this month by the United Nations’ Food and Agriculture Organisation, which said the world might face a repetition of this year’s food crisis as the credit crunch hit agricultural markets, forcing farmers to cut production.

The FAO said: “Under the current gloomy prospects for agricultural prices, high input costs and more difficult access to credit, farmers may cut their plantings, which might again result in a tightening of world food supplies”.

In oil trading, US crude prices hovered round $55 a barrel amid continuing concerns about the outlook for demand.

Nymex December West Texas Intermediate touched a low of $54.13 before recovering to trade 55 cents higher at $55.50 a barrel.

ICE January Brent gained 37 cents at $52.68 a barrel, recovering from a low of $51.25.

The Centre for Global Energy Studies, based in London, said a year-on-year decline in global oil demand in 2008 and 2009 was now “a very real possibility for the first time for 25 years”.

It said: “With people fearful for their jobs and income prospects, a 25-30 per cent fall in gasoline prices will not change their new driving habits.”

The CGES poured cold water on the prospect that Opec could stabilise the market by agreeing further supply cuts when it meets on November 29, saying there was “little point in pledging new output cuts until those already agreed are implemented”.

Gold rose 0.6 per cent to $740 a troy ounce.

Make way for the economic power of Generation A

They may earn only about £2,000 a year but they are 400 million-strong, scattered across the globe and have just bought themselves a fridge.

Meet Generation A, who soon could become the most important economic force on Earth.

Aged between 30 and 40, their per capita income is rising fast and their numbers are forecast to hit one billion within the next two decades. And it is a group whose consumerist aspirations (the “A”) are not about to stop with that fridge.

The emergence of Generation A coincides with a tipping-point reached this year, in which the world's urban population equals its rural population for the first time. The concept of Generation A has been developed by analysts at Macquarie to explain and track many of the “mega trends” holding the global economy in their sway.

The entire future business of investment, Macquarie analysts argue, would make sense only through reference to the activities and spending patterns of Generation A.

Soaring prices of hard and soft commodities, energy and transport are symptoms of what the economist Stewart Ferns describes as a “silent revolution” - an inexorable shift of economic power from the old developed world (Generation Z) to the growing, aspirational middle classes of emerging markets in Asia, Africa and Latin America.

“The increasing per capita income and the huge lifestyle changes of the stereotype we are calling Generation A is what is going to drive the global economy over the next decades,” he said - and as Generation A increases in wealth and numbers, the financial map of the world would have to be changed, along with all the tools used by investors to understand it all.

Generation A's increasing share of global income would irreversibly change world demographics, Mr Ferns said, pointing to the looming demand explosion that will occur when large numbers of people - particularly in China - hit the “magic” annual income levels that cause consumption to soar.

Analysts believe that the figure is reached when a country's per capita GDP reaches $3,000.

The shape of things to come? Generation A's next immediate purchases include not only a wide range of meats and processed foods to put in their new fridge, but a car to go to the shops in and a mobile phone.

Soon Generation A will be thinking about a first holiday, looking for decent financial services, considering healthcare needs and wondering about investing in higher education.

The term spread (10yr-2yr) and Japanese Yen gains have both picked up a lot recently, both are above two standard deviations level.

If you look at the nagative relationship between the two during historical crisis periods (in other words, as the term spread widening, Yen tends to be strengthening), it tends to be much stronger during stress periods than normal periods. (See charts below).

Also, just before the market crisis, the Yen tends to be strengthening at a faster than normal pace. And that trend tends to be reversed in an after-crisis periods.

Therefore, until the current strengthening trend for Yen reverse, we are still not out of the wood yet.

Prepare for more panics to come.

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鞍钢股份 sz000898
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