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Illinois Farm Economics Update

The recent turmoil in financial markets is very large by any reasonable standard of comparison. The farmdoc team prepared the following articles to illustrate the impact of the current financial crisis on the agricultural economy and decision-making. Focus is devoted to five main topics the nature of the financial crisis, impacts on the short-term availability of credit, the connection between the financial meltdown and commodity prices, crop insurance decisions, and land rental and lease negotiations.

The Current Financial Crisis: How Did We Get Here?

Nick Paulson

The Dow Jones Industrial Average (DJIA) fell by more than 18% during the trading week of October 6 th 2008, the largest one-week decline in the history of the index. News reports of the failures of large mortgage lending institutions in the U.S. have become commonplace. In short, we are in the midst of a massive financial crisis. So how exactly did we get here?

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Financial Markets in Agriculture

Paul Ellinger and Bruce Sherrick

The unprecedented events of the past two months have severely shaken global financial markets. Spillover effects from declining housing prices and increased subprime delinquencies eventually led to a freezing of global credit markets. Impacts on many large financial institutions included substantial liquidity and capital problems which in turn led to large-scale reorganizations among major banks and others in the financial services sector. Moreover, major stock indices have year-to-date declines exceeding 35%, the worst annual decline on record since the great depression. A resulting concern relates to the impacts of these events on the firms serving the financing needs of the agricultural sector. This article provides an overview of major events affecting the health of the finance sector and identifies issues of importance to the related financial markets in agriculture.

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Implications of Credit Market Problems for Crop Prices

Darrel Good and Scott Irwin 

The price of many agricultural commodities has declined markedly from the highs reached in the spring/summer of 2008. There are a number of factors that have likely contributed to the sharp drop in prices. For crop prices, these include larger U.S. crop prospects than feared when flooding peaked in June; record large wheat, feed grain, and soybean crops outside of the U.S.; and larger than expected September 1 inventories of corn and soybeans. For livestock, those factors might include a continuation of record large production and some weakening of export demand beginning in July. Price declines since early September, however, have coincided with the severe problems in U.S. and global credit markets. Is the timing of the price declines and credit problems a matter of coincidence or is there a cause and effect relationship in these markets?

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Increased Probabilities of Crop Insurance Payments

Gary Schnitkey and Bruce Sherrick

Recent commodity price declines have increased the probability that crop insurance products insuring revenue will make payments. Revenue products include Crop Revenue Coverage (CRC) and Revenue Assurance (RA), and Group Risk Income Plan (GRIP). CRC and RA insure revenues using farm-level yields to establish guarantees and payments. GRIP uses county yields. Potential payments from these products are described.

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2009 Rental Decisions Given Volatile Commodity Prices and Higher Input Costs

Gary Schnitkey and Dale Lattz

Turmoil within the financial sector has caused concerns about the performance of economies around the world. These concerns have lead to dramatic declines in commodity prices with current cash bids in the $3.50 per bushel range for corn and the $8.50 range for soybeans. Moreover, there is a great deal of uncertainty concerning the level of prices in 2009. Will corn prices average in the $3 range, $4 range, or $5 range? Arguments can be made for a continuing softness of commodity prices or a return to prices near levels experienced in the summer of 2008.

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Department of Agricultural and Consumer Economics    College of Agricultural, Consumer and Environmental Sciences
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