FAYETTEVILLE (AP) Grain elevators are the most vulnerable among Arkansas agricultural interests during the crisis in the credit markets, according to University of Arkansas economists.
"Elevators play a crucial role in getting food from the farm to the grocery store," said Andrew McKenzie, associate professor of agricultural economics and agribusiness. "That role has been compromised."
Elevator operators rely on futures markets to hedge their commodity contracts with farmers, and they serve as "middlemen" in the agricultural market system, McKenzie said. Elevator companies buy grain crops from farmers and hold them in storage until selling them for livestock feed, or to food processors.
When crop prices are favorable, farmers enter into contracts with elevators as much as two or three years in advance so they can sell their crops at those higher values even if current prices fall, McKenzie said. But elevators face losses.
As elevator companies hedge, they seek to offset losses from lower crop prices by higher prices from futures holdings, McKenzie said. Conversely, losses from changes in futures will be offset when crop prices rise higher than contract prices with farmers.
Credit is essential in futures trading, McKenzie said. Investors are required to pay a percentage of the current futures prices for their holdings, or positions, usually 5 percent or less, a sum that's known as margin money. For companies dealing in large volumes of grain, the commitment can be a lot of money and it is money that is usually borrowed from banks.
When futures prices go up, McKenzie said, futures brokers issue margin calls demands that futures investors pay the difference to maintain the same percentage of the going prices. Those margin calls are often in the millions of dollars, and that means going back to the bank.
McKenzie said loans for futures investors are now hard to obtain. He said holding futures positions will become increasingly difficult and may cause smaller elevators to get out of the futures market.
"Most elevators are hanging in there, operating in the traditional manner," McKenzie said. "But it's becoming increasingly expensive to do so."
He said some will only offer six-month contracts or no advance contracts at all. Charging additional fees is another option. The negative impact of the credit crunch backs up all the way to the farmer, who is squeezed between rising production costs and the inability to lock in high crop prices.
McKenzie said elevators have to look at new ways to market grain. But he added that the system is still delivering food to consumers.
"Elevators across the board have done a heroic job of maintaining our market system," McKenzie said.
"Consumers may be seeing higher food prices, but there have been no food shortage scares. Food is still getting to the stores," McKenzie said. "That's at least in part because of the remarkable job the elevators have been doing."
Bruce Ahrendsen, professor of agricultural economics and agribusiness, said farmers and most other agricultural concerns are withstanding the downturn because they have land as solid assets. But they could start to feel the effects come planting season next year.
Grain elevators rely on loans to invest in commodity futures, and in the livestock and poultry sectors.
Bruce Dixon, also a professor of agricultural economics and agribusiness, said meat prices have not risen as much as food from row crops, leaving livestock and poultry producers more susceptible to economic difficulties.
"Banks are not lending to each other, something that banks normally do all the time," Dixon said. "That restricts money available for loans to individuals and businesses."
Ahrendsen and Dixon said farmers may find that it is tough to get a loan when they apply next spring, when they'll need the money for fertilizer, fuel and other production inputs.
"The balance sheet has been strong for farms, particularly those owning farmland," Ahrendsen said.
