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Fed stimulus boost to revive flagging ag markets

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The Federal Reserve's decision to delay withdrawal of emergency support for the US economy will inject new life into the flagging farmland market, besides boosting the potential for crop prices.

Friday witnessed a waning on agricultural commodity markets of an initial boost from the Fed's decision two days ago to stick with its bond market purchases of $85bn a month, which are aimed at keeping US borrowing costs low.

However, Ernie Goss, Creighton University economist, reassured farm investors that the implications of the US central bank's move would be felt longer term, terming it "definitely bullish for agriculture".

"Most economists, including me, expected the Fed to begin tapering [bond purchases]," Professor Goss said.

"Thus, the Fed's lack of action in September will be supportive of agriculture commodity prices, farm income and farmland prices in the weeks and months ahead."

'Weighing on farmer confidence'

US agriculture has been facing a decline in prosperity, with the drop in crop prices prompted by expectations of huge harvests already spreading through the sector.

The farm equipment industry is seeing a decline in sales, according to a monthly Creighton survey of major US agricultural states which showed an index figure of 48.3, below the 49.2 seen in August, and with any figure under 50.0 indicating contraction.

"Lower agriculture commodity prices are weighing on farmer confidence and their willingness to purchase big ticket items such as agriculture equipment," said Professor Goss.

The weaker crop markets have also been "slowing growth in farmland prices", with the market showing an index figure of 54.0, the Creighton survey showed, indicating expansion, but at a slower rate than in August, which saw a figure of 55.8.

Indeed, the rate of land price growth has declined in nine out of the past 10 months, and Professor Goss has previously issued cautious comment over prospects for the farmland market, whose fortunes are strongly influenced by borrowing costs.

Currency factor

Separately, Deutsche Bank flagged a positive to agricultural commodity prices from the dollar weakness encouraged by the Fed's decision, with ultra easy monetary policy viewed as encouraging risks of inflation and currency devaluation.

"Generally a weaker US dollar is a net positive for agricultural commodities as US exports become relatively less expensive," Deutsche said.

The bank also flagged the impact on crop markets of a recovery in currencies of countries such as Brazil which, as the major exporter of commodities such as sugar, orange juice and arabica coffee, has a large impact on New York futures.

In sugar, the impact of a stronger real is reflected not just in upward pressure on dollar values, but in the relative appeal of making the sweetener, an export commodity, rather than ethanol, used largely domestically in Brazil, from cane,

"A weaker dollar, accompanied by a stronger Brazilian real, is positive for sugar as it increases the attractiveness of ethanol relative to sugar for Brazilian producers," Deutsche said.

The initial move in the real to R$2.20 to $1, from $2.40 to $1, "added 1.50 cents a pound to hydrous ethanol parity, by our calculations".

Tapering timetable

Deutsche added that, while the prospect of a Fed withdrawal of asset purchases remained on the horizon, it was not likely for now.Although taper uncertainty "may return for the October Fed meeting", the bank forecast that December looked a more likely month.


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