The Irish Independent reports that homeowners looking to the European Central Bank for relief were dealt a blow yesterday when eurozone inflation hit its highest level in 16 years.
The March inflation figure of 3.5pc was well above the European Central Bank's target of just under 2pc, and effectively rules out any near-term ECB interest rate cut.
Meanwhile, new figures show that Irish homeloan lending grew at its slowest annual pace in 14 years in February, as rising borrowing costs and falling property prices put off house buyers.
Homeloans increased 12.3pc from a year earlier, the least since 1994, the Central Bank said.
And economists warned that there was a desperate need for a cut in European Central Bank (ECB) interest rates to revitalise the softening mortgage market.
Alan McQuaid of Bloxham Stockbrokers warned: "We are unlikely to see an easing of monetary policy from the ECB until well into the third quarter of 2008 at the earliest, if at all."
This meant that overall credit growth and residential mortgage lending growth in Ireland would continue to fall over the next three months or so, Mr McQuaid added.
Record
But the case for interest rate cuts took a blow when the EU's Eurostat Agency yesterday showed the annual rate of inflation in the eurozone hit a new record of 3.5pc in March.
Eurozone inflation rose from 3.3pc in February and was also slightly above economists' expectations of 3.4pc.
ECB officials have repeatedly warned about high inflation recently, indicating that the bank is unlikely to cut interest rates any time soon.
Yesterday the Central Bank in Dublin said the pace of mortgage lending growth came back from 12.9pc in January, and the monthly increase of €712m was the lowest in five years.
The average monthly increase in 2008 to date is €768m, the Central Bank said yesterday.
Increased
This was similar to the average monthly increase in 2002, when residential mortgage lending increased by just €8.9bn over the year.
However, with the exception of 2007, in general the months of January and February have recorded the lowest increases in residential mortgages every year since 1997.
Overall, private borrowing increased at an annual rate of 15.6pc, the lowest since September 2003.
The monthly increase was below the €1bn mark for the first time since 2004, though the Central Bank said the figure was affected by the early repayment of a large loan.
Non-mortgage credit growth fell to 19pc. The amount of money owed on credit cards was 8.2pc higher than in February last year, though the growth rate has now fallen for six months in a row.
Payments received have exceeded new spending during the last two months, bringing outstanding indebtedness on credit cards down to €2.9bn in February.
The Irish Independent also reports that the euro again targeted record highs against the dollar and sterling after higher than forecast euro zone price data reinforced expectations that the European Central Bank will not start cutting rates soon.
Annual euro zone inflation jumped to 3.5pc in March, a record since the inception of the euro, according to Reuters data, and out-stripping the 3.3pc consensus.
The euro scaled all-time peaks at 79.73p, with sterling depressed by soft housing and service sector data.
ECB Governing Council member Erkki Liikanen said there were rising price pressures in the euro zone, echoing the tone of fellow policy-makers.
Money markets are now pricing in around a 90pc chance of a 25-basis point ECB rate cut from the current 4pc by year-end.
The outlook for euro zone rates contrasts with the US, where the Federal Reserve is widely expected to continue to cut the benchmark rate.
While the euro zone data points to some deceleration of growth, elevated prices remain the ECB's main concern, said Marc Chandler, currency analyst at Brown Brothers Harriman. As the euro's growth appears to be fading just below the high reached a couple of weeks ago, the market seems vulnerable to another bout of euro profit-taking.
Retreating
The euro rose as high as $1.5834 after the data, before retreating a little to around $1.5806 in early New York trade.
The Federal Reserve has slashed rates by 300-basis points since September to restart flagging growth and is expected to cut them again soon.
The contrasting interest rate and growth paths have pushed the euro 8.3pc higher against the dollar since the start of the year. The euro is on track for its biggest quarterly percentage gains since the fourth quarter of 2004.
Down 6.5pc, the dollar index is also targeting its worst performance since the fourth quarter of 2004.
Investors shied away further from relatively risky carry trades in which low-yielding currencies such as the yen are used to fund investment in high-yielders.
The dollar has also taken on low-yielding status as the Fed's easing has taken the policy rate to 2.25pc -- the second-lowest among major economies after Japan.
The Irish Times reports that the demand for residential mortgages is now growing at its slowest annual rate for 14 years, according to statistics released yesterday by the Central Bank. The weakening demand for mortgages has been mirrored in a decline in housing sales.
In the year to February, mortgage lending increased by 12.3 per cent. At the height of the housing boom in 2006, the annual rate of mortgage lending growth averaged 27 per cent.
New mortgage lending for residential purchases amounted to just €712 million during February, the lowest monthly increase in home loans for five years. At the end of February, the outstanding stock of residential mortgages amounted to €141 billion.
The data sits well with figures issued by Permanent TSB and the ESRI last week, which showed that house prices have fallen in each of the last 12 months. Prices dropped by 0.8 per cent in February, following a 0.7 per cent decline in January.
The weakening tenor of property-related lending has dragged down the annual rate of growth in private-sector credit over the past year. Property-related lending includes credit extended to construction and real-estate development, as well as mortgage lending to households.
The annual growth in private-sector credit peaked at 30.3 per cent in the year to June 2006. Since then, the pace of credit expansion has fallen almost continuously. In the year to February 2008, private-sector credit increased by 15.6 per cent.
Thus, over the past 20 months, the pace of private-sector credit expansion has virtually halved. Private-sector credit growth in the year to February 2008 was the lowest annual rate of increase seen since September 2003.
During February itself, private-sector credit growth fell below €1 billion for the first time since April 2004. In February, private-sector credit - total lending by credit institutions in Ireland to non-Government Irish residents - increased by €914 million or 0.2 per cent to reach €379 billion.
The easing of private-sector credit expansion in recent months is not due solely to a weakening growth in the demand for loans. It also reflects tighter lending conditions, a product of the global credit crunch. Demand and supply conditions are working in concert at present to cause a rapid deceleration in the pace of private-sector credit growth in the Republic.
As confidence in the future wanes, consumers are keeping their credit cards in their wallets. In the first two months of this year, some €70 million has been paid off outstanding debts on the 2.176 million personal credit cards currently in issue.
In aggregate terms, personal credit card indebtedness increased by just €200 million or 7.8 per cent in the year to February 2008. This contrasts sharply with the 18.5 per cent rise in personal credit card indebtedness seen in the year to February 2007.
However, consumers have been even more conservative than these aggregate figures suggest. Over the past year, 123,000 new personal credit cards have been issued. As a result, the amount of debt on the average personal credit card has increased from €1,255 to €1,276 over the past year, an addition of just €21 or 1.7 per cent.
Deposits placed with all credit institutions declined by €6.3 billion during February. The largest part of this decline was accounted for by a decrease of €4.9 billion in overnight deposits. While there was some slight reduction in deposits placed with the retail clearing banks, it appears the primary cause of the decline during the month was a movement out of IFSC banks by foreign depositors.
The Irish Times also reports that Britain's larest commercial radio group, GCap Media, looks set to pass into the hands of a consortium backed by a number of wealthy Irish businessman, including JP McManus, John Magnier, Dermot Desmond and Denis Brosnan.
GCap's board yesterday revealed it had accepted a £375 million offer from Irish-backed Global Radio yesterday, ending a three-month courtship between the two parties.
The deal values each share at 225 pence, an 86 per cent premium to its value on January 4th, the day before Global's announcement that it had approached GCap's board.
GCap's stations include Capital Radio and Classic FM. It has about 17 million listeners a week. Its heartland is London and the south of England but the company has struggled in recent times due to a tougher advertising environment. It has revenues of about £200 million annually and employs about 1,400 staff.
Global, which is backed by the Irish businessmen along with racehorse owner Michael Tabor and his son Ashley, already owns Chrysalis Radio in the UK, which it bought for £170 million last August.
Chrysalis's stations include Heart, Galaxy and LBC, and it is the third-biggest commercial radio player in the UK.
Global is incorporated in Jersey and led by former ITV chief executive Charles Allen.
Mr Allen welcomed the news that GCap's board had recommended its offer. "We believe that this is a very strong business with brands and assets that are highly complementary to those of Global Radio,"he said. "We are excited by the opportunity to build on GCap's position as the leading commercial radio player."
Global Radio said the acquisition of GCap would allow it to create a "stronger competitor" to the BBC, which "dominates the UK radio landscape" in terms of listenership.
The deal will require the consent of GCap shareholders at an extraordinary general meeting. GCap's board, which owns 2.48 per cent of the company's shares, has undertaken to vote in favour of the deal.
Global had made two previous bids for GCap this year. It offered £1.90 a share for GCap in early January, before following it up with a £2.02 a share bid.
The Irish Examiner reports that householders are reportedly turning their back on the internet for selling unwanted goods, despite Ireland being home to website auction giant eBay.
New figures show the numbers of consumers using the internet to sell goods and services over the past three months tumbled almost 10% to 92,900 compared with the same period in 2006.
Dublin is home to the European headquarters of the world’s biggest internet auction site, eBay, which employs 1,200 staff in Ireland.
Figures released yesterday indicated the most popular online activities among Irish consumers last year included researching goods and services, along with spending money.
Flights and holidays were the most popular online purchases, followed by tickets, films and music.
Last year consumers bought 529,700 flights and holidays online — with the total number of purchases up 17.7% on 2006.
The number of online purchases of tickets for music and sporting events rose 11% to 303,200 transactions last year.
Consumers went online to purchase films and music on 262,900 occasions in 2007 compared with 221,000 the year before.
Ireland’s most popular online activity was emailing, with 1,277,100 consumers saying they had sent or received emails within the past three months.
Almost all online activities, including liaising with public bodies, showed an increase in popularity within the past three months. The only exception was the “selling goods and services” category, which saw a 10,200 dip in the number of householders shifting unwanted goods online on auction websites like eBay.
The figures, published yesterday by the Government’s Central Statistics Office (CSO), show lots more householders have a broadband line, which allows computers to send and receive information faster on the internet.
In 2006 just 13% of homes had a broadband connection yet last year the percentage jumped to 31% while the numbers of businesses with broadband rose from 61% to 68%.
Overall the percentage of Irish households with dial-up, broadband or other internet connection was 57% last year. This put Ireland marginally ahead of the European norm of 54% but way behind table-topping Holland at 83%. The figure for Britain and the North was 67%.
Of Ireland’s 1,525,100 households, 65.4% have a home computer and of these nearly 87% are linked up to an internet connection.
The CSO also found 1.92m men and women — or more than half Ireland’s 3.38m adult population — have used a computer during their life.
Almost three-quarters of men and women in the 25 to 34 age bracket had used a computer, compared with 25.9% of those aged 65 to 74.
Almost 63% of adults residing in the southern and eastern regions had used a computer at home, at work or elsewhere compared with 56% in the border, midland and western counties.
The Financial Times reports that radical strategies to fight the credit crisis including temporary suspension of capital requirements, taxpayer-funded recapitalisation of banks and outright public purchase of mortgage-backed securities are being actively discussed by governments and central banks.
These were among possible next steps discussed in Rome on Friday at a meeting of the Financial Stability Forum, the body co-ordinating the global response to the market turmoil.
The discussion highlights the fact that global policymakers remain deeply concerned about the financial outlook and willing to explore extreme measures in spite of the stabilisation of markets following the rescue of Bear Stearns, the US investment bank.
The steps are set out in an options paper prepared for governments, banks and regulators by the FSF, led by Mario Draghi, the former governor of the Bank of Italy, a copy of which has been obtained by the Financial Times.
Among the ideas floated was getting a large group of the most important banks simultaneously to disclose their financial positions based on a “common template” including information on the prices attributed to different securities and the methodologies used to derive them.
This would include standardised disclosure of exposures to collateralised debt obligations, residential and commercial mortgage-backed securities, leveraged finance, exposure to off-balance sheet entities and capital and liquidity resources. One party present said there was widespread interest in this idea.
The FSF proposed temporarily suspending capital and reporting rules that tie prudential requirements to market values of securities.
Regulators could temporarily change capital rules under Basel II to allow trading assets to be treated as available-for-sale, reducing their impact on capital calculations.
Alternatively, regulators could temporarily relax regulatory capital minimums wholesale, the FSF said. It noted that an alternative approach would be to suspend accounting rules for some assets, but said this could“damage market confidence.”
Authorities could organise a consortium of long-term private investors to buy mortgage assets from banks, possibly with state “co-investment” or governments could buy assets outright.
The FSF argued that there were “signficant private and collective benefits to assisting financial institutions in remaining as going concerns” – rather than allowing them to fail and then running down the remaining book of business.
The FSF said supervisors could require that regulated banks “conserve financial resources”.
The FSF raised the possibility that governments might want to “announce a coordinated operation to boost capital simultaneously in a number of institutions” with the help of public funds, to avoid stigma problems.
Central banks could further expand their liquidity support operations, including expanding the eligible collateral and providing emergency liquidity support to troubled institutions.
Many of the FSF’s ideas are likely to encounter resistance from governments and central banks, but the fact they are being mooted points to policymakers’ concern about the outlook and willingness to explore unorthodox solutions.
The FT also reports that UBSis poised to reveal further writedowns of up to $18bn and seek a capital increase of about SFr13bn ($13.1bn) only weeks after shareholders approved a similar-sized injection from outside investors.
Switzerland’s largest bank, which wrote off $18bn last year as it became the most serious European casualty of the US subprime mortgage crisis, has suffered from further falls in the value of mortgage and other credit securities during the first quarter, especially in March.
Details of the latest writedowns and capital-raising are expected to be released alongside the agenda for the bank’s annual meeting on April 23, which is to be published on Tuesday or on Wednesday. The revelations will compound the pressure on the bank’s chairman and former chief executive, Marcel Ospel. He has resisted calls to resign, arguing that he needs to stay in place to steer UBS out of the crisis.
The annual meeting schedule includes a motion from a Swiss pension fund calling on UBS to raise SFr10bn via a rights issue. UBS is expected to recommend that shareholders reject it and propose a broader resolution giving maximum flexibility to raise new funds, probably via a traditional rights issue and further cash from strategic investors.
UBS officials declined to comment on the content of the letter to shareholders with the agenda.
In the US, meanwhile, Lehman Brothers said on Monday it would sell at least $3bn of convertible preferred shares to US institutional investors to help bolster its balance sheet and dispel persistent rumours that it could face liquidity problems similar to those that sank Bear Stearns.
In February, UBS shareholders voted at an emergency meeting for a capital increase involving an SFr11bn injection from the government of Singapore and SFr2bn from another investor, believed to be Saudi Arabian.
The latest writedowns are thought to be about $15bn to $18bn. Analysts had forecast that they could be as high as $25bn, within expectations ranging from $11bn to $26bn.
UBS shares have fallen heavily in anticipation of this week’s announcement but have recovered slightly from last month’s nadir. The shares closed down 0.41 per cent at SFr28.86 after falling as low as SFr27.60.
Analysts at Merrill Lynch said on Monday they expected the bank to announce a first-quarter loss of SFr8.2bn following writedowns of $11bn. They encouraged UBS to be more aggressive in marking down its asset portfolio.
“The market is sick of the ‘death by a thousand cuts’ approach UBS has taken to marking down its legacy assets,” they wrote. “We would welcome a healthy $21bn writedown announcement from UBS. Further, at that level we think UBS would be able to sell some of its legacy assets.”
The New York Times reports that as Treasury Secretary Henry M. Paulson Jr.laid out an ambitious plan to overhaul the regulatory apparatus that oversees the nation’s financial system on Monday, lawmakers and lobbyists from an array of industries opposed to the plan predicted that most of it would be dead on arrival.
While the plan promotes a long-term goal of reducing an alphabet soup of regulatory agencies, in the shorter run it may actually do the opposite. One of the blueprint’s few short-term goals is the creation of a mortgage commission that would set new minimum standards for mortgage brokers and otherwise unregulated financial institutions that sell mortgages. The new commission could be formed only by Congress, and some lawmakers predicted it might be adopted this year.
Officials said that, as part of the Paulson plan, President Bush was preparing to issue an executive order soon to expand the membership and reach of an interagency committee called the President’s Working Group on Financial Markets. The group was created after the stock market plummeted in 1987. The group is also expected to consider ways to broaden the authority of the Federal Reserve to lend money to nonbanks as needs arise.
The Working Group, headed by the Treasury Secretary, consists of the top officials from the Federal Reserve, the Securities and Exchange Commission and the Commodity Futures Trading Commission. Under the proposal, it would be enlarged to include the heads of the three other agencies, including one, the Office of Thrift Supervision, that the plan proposes eventually to abolish.
But other than those relatively modest provisions, most parts of the plan are not likely to be adopted any time soon, if at all. The calendar of a Congressional election year seldom favors complex pieces of legislation.
Key lawmakers have signaled that they want to take their time in weighing ideas for broad changes. They are already hearing from state regulators and consumer groups who say that the proposal would do little to curb risky behavior by financial institutions, and from industry groups that say it goes too far.
The plan, produced by a lame-duck Republican administration facing a Democratic Congress, would drastically expand the authority of the Federal Reserve to oversee financial markets. It would consolidate federal agencies that regulate the nation’s securities and commodities futures markets. And it would allow insurance companies, which have long been regulated by the states, to choose instead to have a national charter and be supervised by a new federal agency under the Treasury Department.
Mr. Paulson said on Monday that he did not expect the bulk of the plan to be adopted during the current administration — and he said Congress should not even consider adopting most of it until after the current housing and credit crisis ended.
“Some may view these recommendations as a response to the circumstances of the day,”Mr. Paulson said. “That is not how they are intended.”
Senior lawmakers, while praising the administration for raising important points for further discussion, said the odds were long for a major overhaul before Congress all but shuts down for the elections in the fall.
“Since this is opening day in baseball, I might as well make a baseball metaphor,”said Senator Christopher J. Dodd, the Connecticut Democrat who heads the Senate Banking Committee. “This is a wild pitch. It is not even close to the strike zone.”
Mr. Dodd and Senator Harry Reid of Nevada, the majority leader, said in a telephone conference call with reporters that overhauling the regulatory structure was not a high priority. Instead, they said, they were hoping to quickly move legislation that would help homeowners facing higher mortgage rates and foreclosure.
The Democrats’ bill would provide an additional $200 million for counseling for homeowners in danger of foreclosure, would authorize $10 billion in bonding authority for housing finance agencies to refinance subprime loans, and provide $4 billion for local governments to purchase foreclosed properties.
The bill would also change the bankruptcy laws to allow judges to modify mortgages on primary homes — a provision opposed by Republicans who say it will only increase mortgage rates.
“In time, we will hold hearings on reorganizing the regulatory structure,”Mr. Dodd said.
In a statement later in the day, Mr. Dodd indicated that he had reservations about the plan’s proposal to expand the authority of the Federal Reserve.
“On the one hand, it would allow the Fed to examine all financial companies — not just banks — to be sure they are not posing a risk to the overall financial system,”Mr. Dodd said. “On the other hand, it fails to realize that the Fed helped create this crisis by ignoring the red flags as far back as five years ago. It does not make sense to give a bigger shovel to the very people who helped dig us into this hole.”
In a speech at the Treasury Department, Mr. Paulson disputed critics who have complained either that the plan was deregulatory or would impose greater regulation.
“Those who want to quickly label the blueprint as advocating ‘more’ or ‘less’ regulation are oversimplifying this critical and inevitable debate,” he said. “The blueprint is about structure and responsibilities — not the regulations each entity would write. The benefit of the structure we outline is the accountability that stems from having one agency responsible for each regulatory objective. Few, if any, will defend our current Balkanized system as optimal.”
But in fact, the fine print of the 218-page plan features both regulatory and deregulatory elements. The creation of a new mortgage origination commission, for instance, was expected to result in higher nationwide standards to encourage mortgage brokers not to promote unsuitable or abusive loans.
On the other hand, other elements of the plan are clearly deregulatory. The plan proposes, for instance, to reduce the enforcement authority of the S.E.C. in a variety of ways and hand that authority instead to industry groups. The plan recommends that investment advisers no longer be directly regulated by the commission, but instead be supervised by an industry regulatory organization.
The plan was sharply criticized by state regulators as being a big gift to the nation’s largest financial institutions.
“The Treasury Department’s blueprint is designed to boost Wall Street’s competitiveness, not Main Street investor protection,”said Karen Tyler, president of the North American Securities Administrators Association and the securities commissioner of North Dakota.
Consumer groups also criticized it.
“Rolling out this plan in the middle of the current crisis is like telling Hurricane Katrina victims stranded on their rooftops in New Orleans, ‘Don’t worry, if you can hold for a few years, we’ve got a really great plan to restructure the federal emergency response system,’ ”said a statement issued by the Consumer Federation of America.
“This plan,” the group said,“had its genesis in Secretary Paulson’s conviction that overregulation and inefficient regulation were hurting the global competitiveness of U.S. markets. In fact, experience has repeatedly shown that regulatory failure, not overregulation, is the greatest threat to the health of our markets.”
Major elements of the plan face fierce resistance from powerful industry groups that prefer their current regulators.
The American Bankers Association attacked a provision to eliminate the Office of Thrift Supervision, although it applauded the proposal to create a new federal charter for insurance.
Dan Mica, president and chief executive of the Credit Union National Association, said he was “astonished and angered” by the plan, which he said would “add up to more choices for Wall Street and less for consumers — and turn credit unions into banks.”
Several features were also criticized by regulators appointed by the Bush administration.
John M. Reich, the director of the Office of Thrift Supervision, said that the savings and loan industry regulated by his agency remains vibrant in large part because of the effectiveness of regulators. In an e-mail message to agency employees, he said regulatory overhauls similar to the one made by Mr. Paulson have been floated throughout history, and been rejected.
“Although none of these proposals became reality, many of you might be wondering whether financial services restructuring is an idea whose time has finally come,” Mr. Reich wrote. “I don’t think so, at least as it pertains to the four federal banking agencies.”
Some business groups hailed the plan. John J. Castellani, president of the Business Roundtable, which represents chief executives at many of the nation’s largest companies, said the plan “represents a timely response to the current state of our country’s aging regulatory system.”
And T. Timothy Ryan Jr., president of Wall Street’s biggest trade group, the Securities Industry and Financial Markets Association, said the plan was “thoughtful” and“very wise.”
“Our present regulatory framework was born of Depression-era events and is not well suited for today’s environment, where billions of dollars race across the globe with the click of a mouse,” said Mr. Ryan, who earlier in his career was a director of the Office of Thrift Supervision, an agency the Paulson plan proposes to eliminate.
The NYT also reports that faced with strong worldwide food demand and the accompanying higher prices, American farmers are beginning to respond to the signals of the market. In a new government report, farmers said they would make significant cuts in corn acreage this year in favor of soybeans.
If they carry through with their intentions, the resulting additional soybean oil could help alleviate global shortages of cooking oil that have led to sharply higher prices, hitting poor countries hard.
But a smaller corn harvest would most likely raise prices for that crop, which could also increase the prices Americans pay for meat. Most corn is used as animal feed. Higher corn prices may also compound the difficulties of companies that use corn to produce ethanol as a motor fuel. Despite government mandates for the use of ethanol, those companies are struggling. They expanded so rapidly in recent years that an oversupply of ethanol depressed prices, even as the cost of their main feedstock — corn — was rising.
The release Monday morning of the Agriculture Department’s report on farmers’ plans, based on interviews with growers during the first two weeks of March, caused the price of corn in the commodities markets to rise past $6 a bushel for the first time, before falling back. Soybean prices, meanwhile, fell 70 cents to $10.89 on expectations of a greater supply.
The commodities markets have been extremely volatile recently, with prices swinging more widely in a few days than they used to move in a year. Overall the trend has been sharply upward, making for an uneasy winter.
Consumers are confronting sticker shock at the grocery store, while farmers insist they are not getting rich because their own costs, like diesel fuel, are up. Wheat and soybean stockpiles have fallen in the last year, the government said in a separate report, meaning there is little buffer if the weather is not favorable this year and harvests are disappointing.
“We’re hoping for good yields,” said David Orden, a senior research fellow at the International Food Policy Research Institute in Washington. “If we get bad yields and tight commodity markets are pushed even tighter, we’ll get food prices skyrocketing, inflationary pressures and food riots in developing countries, and countries cutting off their exports.”
Many of those unfortunate trends, Mr. Orden said, are happening already.
Soybean producers told the government they would plant 74.8 million acres, up 18 percent from last year and just below the record high in 2006. Corn growers said they would plant 86 million acres, down 8 percent from 2007.
The soybean number was a little higher than analysts had been predicting, while the corn number was a little lower. The 2007 corn crop was the biggest since 1944 as growers rushed to capitalize on the government-mandated demand for ethanol. Three years ago, before the ethanol mandates, the price was less than $2.50 a bushel.
“In February, we were thinking farmers would plant as much as 90 million acres of corn,” said the Agriculture Department’s chief economist, Joseph Glauber. But the relatively high prices of soybeans might have caused some of them to switch. Soybeans also require less fertilizer, another commodity whose prices have been breaking records.
Mr. Glauber cautioned that the planting report not only reflected the intentions of farmers, but could affect them too. Last year’s report underestimated actual corn plantings by three million acres. A rise in corn prices and a drop in soybean prices might inspire other farmers to change their minds.
That is what the ethanol industry is hoping. “We do certainly use corn and it is going to have an impact,” said Bob Dinneen, president of the Renewable Fuels Association.“But I’m sure the marketplace will respond to this signal.”
Joe Victor, an analyst with the market research firm Allendale, said he expected corn to rise as high as $7.50 by summer.
Farmers are not necessarily planting less corn for economic reasons, Mr. Victor said: “They’re going back to a more normal crop rotation. They needed to give their corn acres a bit of a rest.” Next year, he predicted, the ratio will shift again, and farmers will cut back on soybeans in favor of corn.
A handful of farmers, principally in Texas and California, told the government they were planning to grow more corn. But in the heart of the Corn Belt, it was a different story. Indiana is projected to be down 800,000 acres, Illinois 600,000, Nebraska 600,000, Iowa 1 million.
Ray Gaesser in Corning, Iowa, said he would devote about 48 percent of his 6,000 acres to corn, down from 52 percent last year. The rest would be soybeans.
“Last year, the price ratio of corn to soybeans was telling us we should plant more corn,” said Mr. Gaesser, a former president of the Iowa Soybean Association. Now the ratio is more in line with historical norms. The result is that “many of the increased corn acres in 2007 are going back to soybeans,” he said.
Mr. Gaesser sells his corn to the local ethanol plant, where he is an investor. “If corn prices get low, we make money at the plant,” he said. “If they’re high, we make money in our core business, which is agriculture.” He had already contracted to sell his corn, he said, which meant he would not benefit from any further price rises.
For bakers worried about the price of flour, the plantings report offered a little relief. Wheat farmers said they planned to plant 63.8 million acres, up 6 percent, about what the commodities markets had been expecting. Cotton plantings are expected to fall 13 percent to 9.39 million acres. Cotton farmers have been abandoning the crop for corn and wheat.
The Agriculture Department said farmers would devote 323.8 million acres to 19 principal crops this year, up 3.8 million acres from last year and 7.8 million acres from 2006. Some of the increase has come from land pulled out of conservation programs, some from pasture, and some from the double-cropping of wheat and soybeans.
Despite the back-to-back increases, the number of acres under cultivation is still about six million below the level of a decade ago. The government is not entirely sure why that is happening, but one possibility is that some land has been swallowed up by suburban construction.
