Archive for October, 2011

2012 Farm Bill Discussions Heating Up

Wednesday, October 26th, 2011

Work on the new farm bill is beginning to move forward.  As with similar legislation in the past, various farm groups are submitting their proposals to Congress trying to protect and promote the specific interests of their constituents.  There is one big difference this time around… any bill that gets passed will be closely scrutinized for its impact on the federal budget.  Or better stated, there’s a lot less money to pass around now and there will be a special emphasis on making sure that funds are being spent wisely.

Earlier this week, U.S. Agricultural Secretary Thomas Vilsack outlined his priorities for the 2012 bill in a speech to workers in Ankeny, IA, as outlined in this abcnews.com article (Vilsack Says Farm Bill Must Improve Disaster Aid).  Aid to farmers affected by natural disaster, increased funding for agricultural research, and support for conservation projects were at the top of his list.  He admitted that USDA programs will need to be streamlined and easier to understand – a common complaint in the past.

I think that it is important to point out that nearly 75% of the existing $284 billion bill is used for nutrition, e.g. food stamps and school lunch programs.  Not that I don’t deem this programs worthy… they are.  But I think there are many people that believe that the Farm Bill only rewards the producers of agricultural products, without realizing that many of their friends and neighbors are also probably benefitting.

One important provision that likely will be eliminated in the new bill – direct payments to farmers and landowners.  While conceptually the idea of direct payments seemed like a reasonable way to transition farmers away from government support, the reality (especially with record high commodity prices) bordered on a public relations disaster – “rich farmers are earning record profits and still receiving government subsidies.”   This program is likely to be replaced with an improved insurance program that will protect producers when a true natural disaster strikes, as we’ve seen in Texas this year.

If history is a good indictor, then the final bill will likely be somewhat different than the pre-bill discussions.  And as mentioned earlier, the impact on the budget may be what ultimately decides the program’s fate.

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Pension Funds Still Heavily Invested in Farmland

Friday, October 21st, 2011

Pension funds investing in farmland is not a new trend.  They have long valued the steady income and long-term appreciation of the asset.  However, with farmland’s recent explosion into the mainstream as a “hot” investment, people have taken notice how heavily invested into agriculture pension and hedge funds really are.  A recent article posted on Financial Times (The Real Bull Market) takes a closer look at what is fueling the interest of these investors.  The main point that the article makes is that as world population grows, someone is going to have to grow the crops to feed the world.  Considering that US contains some of the productive and fertile land in the world, it stands to reason that investors would take long-term positions in US farmland.

This is not a new opinion.  We’ve seen numerous forecasters predicting that over the next 50 +/- years farmland would continue to be viewed a a desirable asset as the demand for food increases.  If it’s one thing that history has taught us, though, it is that nothing is a given.  For the short-term, meaning the next 12-18 months, farmland continues to appear to be a strong market.  However, the variables that help play into farm prices (commodities prices, interest rates, weather patterns, etc.) can change at any time and slow this market down considerably.  The buyers that are taking long positions, such as pension funds, have less risk than the buyers who are looking to buy a farm and flip it for a quick profit.  There are owners of vacant condos in Miami and Las Vegas than can tell you that the quick buck in real estate is sometimes easier said than done.

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Ethanol Still in the Crosshairs?

Monday, October 17th, 2011

It seems like only yesterday that ethanol was the darling of many in the energy, environmental, and agricultural sectors of the U.S., not to mention the U.S. government itself. Having a home-grown alternative to oil (and more importantly – to the whims of OPEC) was a very attractive idea, even if it did require subsidies and mandates to get the industry off the ground. Corn-based ethanol plants were being built all across the Midwest and the future of the business looked extremely bright.

As with any new business, there were many unforeseen consequences and the ethanol industry was no different.  The first came in the fall of 2006 when the demand for corn to supply the ethanol plants forced prices sharply higher.  This was a boon to the grain farmers… not so much for livestock farmers who saw a substantial rise in their feed costs.  A couple of years later, with the demand for corn growing even stronger, the first “food-vs-fuel” debate surfaced as many believed that ethanol production was driving food prices higher.  More issues surfaced – the water and energy required to produce ethanol was higher than expected; and the amount of money the government was spending to subsidize and protect the industry was excessive, especially in times of huge budget deficits.  Slowly but surely, the attractiveness of this wonder fuel was beginning to fade.

Earlier this year, Congress voted to end the direct subsidies to ethanol producers as they deemed them too expensive.  Just recently, the livestock and food stuff industries took their swing at the piñata.  As reported in the Des Moines Register (Lawmakers Seek to Cut Ethanol Mandates), a bill has been proposed in Washington that would lower the mandated amount of ethanol to be used in gasoline during periods of high corn prices.

Theoretically, this sounds like a good idea – put a mechanism in place that will protect the livestock and food producers during short crop years.  But I’m skeptical -  corn production is almost totally dependent on the weather and I can’t see the “trigger” working fast enough, or accurately enough, to truly smooth out prices.  The result… corn prices will become even more volatile to benefit of no one.  While I personally believe that ethanol has a place at the energy table in the U.S., I don’t think that it will be of the size and scope that the enthusiasts hoped for just 5 years ago.

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Suburban Land Owners Returning to Their Roots?

Monday, October 3rd, 2011

Ten years ago, when residential and commercial building projects were moving at break-neck speed, it was quite common for landowners with properties “in the path of development” to be offered incredible prices for their farms – $30,000, $40,000, $75,000 per acre.  Though some owners were reluctant to sell (most farmers buy land for future generations, not sell what they already own), many eventually chose to seize the opportunity and sold out… sort of.  What they essentially did was use the sale proceeds to reinvest in farmland in rural areas via a 1031 tax-deferred exchange (a method of deferring capital gain taxes).  Depending on the type of land they were trading into, in many cases they were buying five to ten acres for every one they were selling. The 1031 buyer was a major player driving ag land prices during the early part of the last decade and, in fact, many ag organizations were so concerned that they tried to develop strategies to limit their rights.

Fast forward to 2011.  With development in most parts of the Midwest at a virtual standstill, the development premium many builders were paying for farms has disappeared (along with many of the builders themselves).  Land prices in the path of progress are now back to levels supported by what the farm can produce from growing corn, not growing houses.  And in an interesting twist, the 1031 buyers of 10 years ago are now selling (at record prices) what they bought previously and are reinvesting the proceeds back home where they started.   As one such person recently quipped – “we’re buying land back in our home area with the idea of repeating the process in another 10 – 20 years, or when the economy has fully recovered and building is again at a frenzy”.

Everyone who invests in real estate knows that location is an important determinant of value, but many overlook how important timing can also be.  When you have both of those factors working in your favor, then the resulting profits can be staggering.

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