Agriculture finance experts at the South Dakota Corn Growers Association's annual meeting Saturday predicted a volatile year in agriculture in large measure because the U.S. economic recovery is not built on sustainable growth.

Federal stimulus money and corporate profits resulting from cutting labor costs are "sugar candy," David Kohl told about 1,000 participants at the corn growers' meeting. Kohl is an emeritus professor at Virginia Polytechnic Institute and State University.

Agriculture has bene- fited this year from lower fuel and fertilizer costs. But because most oil comes from the unstable Middle East, fuel and fertilizer costs would quickly rise if petroleum prices do, Kohl said.

Neither Kohl nor market analyst Richard Brock think real estate has recovered enough to propel new economic growth. Kohl said that makes the U.S. less credit-worthy and could drive up interest costs.

Brock worries that the new supply of federal stimulus money in the economy could lead to inflation.

There are potential opportunities in agriculture, Kohl said. But he and Brock said farmers should be disciplined and cautious with money.

While grain farmers still are enjoying a multi-year boom that looks even better when compared with the downturns in livestock and dairy during that time, Kohl thinks grains might be headed toward a cyclical decline.

Brock had a more specific worry. Index funds that began in 2003 to hold set percentages of an array of commodities have bought huge amounts of corn, soybeans and wheat as they continually rebalance to maintain their percentages.

In the short term, it has driven up grain prices. But it also might have created a speculative bubble that could explode this year, Brock said.

He added that grain prices artificially held up by index funds are responsible for failures in the livestock and ethanol industries.

"If it wasn't for index funds, a lot of livestock people would probably still be in business. VeraSun might still be in business," he said, referring to the the ethanol giant that declared bankruptcy after purchasing high-priced corn.

He wondered whether the federal government would try to limit the influence that index funds have on commodities markets.

The Commodities Futures Trading Commission might impose new regulation this year, said Rep. Stephanie Herseth Sandlin, who attended part of the corn growers' meeting. She also said that if predictions of a volatile year come true, farmers increasingly will rely on the farm bill safety net and that it will be crucial for Congress to extend expiring tax credits for biofuels such as ethanol.

Ethanol is regularly praised at events such as the corn growers' meeting. The third speaker to address the SDCGA, Robert Zubrin, brushed aside warnings about short-term volatility in farming.

Instead, he held out biofuels as the agent that can transform the U.S. economy. The author of the book "Energy Victory" said simply that "all new cars sold in the U.S. should be flex-fuel vehicles."

That would lead the U.S. away from dependence on Middle East oil, especially oil from Saudi Arabia, he said.

As the leader of the Organization of Petroleum Exporting Countries, Saudi Arabia controls global oil production and keeps prices artificially high. OPEC members earned $1.5 trillion in oil profits in 2008, according to Zubrin. If even $600 billion of that was available for economic development in the Third World because countries such as the U.S. were using biofuels instead of paying OPEC for oil, "we could create an enormous engine for world development."

source: argusleader

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