Posts Tagged ‘farmers’

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Future Commodity Production Trends

Thursday, September 2nd, 2010

Agricultural economists and weathermen have the same challenge in their careers – they are expected to make predictions as part of their job, but realize that if they aren’t correct then some people will be really upset.  Recently, the Food and Agriculture Policy Research Institute at the University of Missouri provided their estimates for commodity production trends through 2015 (Baseline Update for Agricultural Markets).  This type of information can be critically important to everyone from the smallest farmer to the largest agricultural company, not to mention a multitude of government groups.   Why so important?  Many organizations (both private and public) create business plans and budgets that reach out at least 5 – 10 years into the future, and they are betting and committing billions of dollars in investments on the accuracy of an economic forecast.

Even though this report does not specifically address farmland value trends, the information contained within each commodity area might give us some hints.  Specific to the Midwest, corn prices are expected to average just under $4 per bushel while soybean prices are just under $10.  Yields are expected to rise each year as new seed technology is integrated into the marketplace.  Of course, all of this is still subject to what the weatherman might say.  Regardless, I think these predicted price levels and yields can help sustain the current level of land prices. In the absence of $6.00 corn, or $2.50 corn, I don’t anticipate a huge movement in farmland values either direction.  This relative stability is what makes farmland such an attractive investment.

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Impact of New Financial Regulation Bill

Friday, July 23rd, 2010

Another week has gone by and another 2,300 page government reform bill (sidebar – that no one really understands) has passed.  While most of the press has focused on changes to the banking industry and Wall Street, there are some provisions that will affect agriculture.  The Des Moines Register recently discussed one change (Financial Bill Could Ease Commodities’ Volatility) that many farmers and end users of commodities may appreciate. It’s designed to reduce and discourage much of the speculative trading that is thought to create violent swings in prices.  This was especially apparent in 2008 when corn prices rose to as high as $8.00 per bushel.  It should be duly noted that most farmers did profit from the speculator’s actions.  But some argue that the price swings were too extreme to be justified from what was truly happening in the marketplace.

I do believe that when a market or industry is inherently broken and can’t fix itself, then the government should step in.  However, as we’ve seen the past few months, Washington is bypassing what may be simple solutions with major, new, untested regulations.  And to be honest, I find this trend to be frightening.  Overhauling large parts of the U.S. economy, often considered the most stable and efficient in the world, will create many unforeseen problems, many of them unintended.  Yet the public is told by our politicians to “trust us, we know what’s best for you.”  Isn’t that a scary thought.

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Corn Price Rally May Support Land Market into Fall

Friday, July 9th, 2010

The USDA recently released a commodity report detailing the current inventory of grains along with their plantings estimate for 2010.  To say it was a shock, especially for corn, would be an understatement.  Many traders and nearly all farmers were pleasantly surprised when the government cut their estimate of corn stocks on hand and the number of acres that actually got planted this year.  In fact, Rabobank believes the cut in current inventory will leave the U.S. at 9.1 % of consumption, or the lowest ratio in 15 years.  Yes, even lower than when the corn market began its rally in 2006.  As this article in Agrimoney points out (US corn supplies ‘to prove tightest for 15 years’), many now believe that the summer lows for corn have already been established and that price volatility will be more extreme until this year’s crop is better known.

As we saw beginning in 2006, higher grain prices typically transcend into higher land prices.  Not that I’m ready to predict another big jump in land values, but if farmers are making money they typically take their extra earnings and invest in farmland.  This potential rally may actually help support prices for “B” and “C” quality tracts which have languished the past year while “A” tracts have sold well.  

As an aside, I’ve always been skeptical and somewhat cynical regarding government reports.  Most farmers I talked with last fall across the Midwest had worse yields in 2009 than they did in 2008, yet the government reported larger stocks (even taking into account the acreage differences).  And now, they seem surprised that the bushels aren’t there.  Some might call it a conspiracy to keep grain prices low.  I tend to think that the blame may be a result of faulty reporting or incompetence.  Regardless, since so many people depend on the accuracy of these reports for their livelihood, you would hope that the bureaucrats would find a way to make their information a little more accurate.

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The Appeal and Challenges of Irrigated Farmland

Thursday, June 24th, 2010

Recently, I’ve had the opportunity to work with several investors who were looking at purchasing an irrigated farm in the Midwest.  The attraction was multi-faceted… A.  The tax benefits of depreciating the equipment; B. Lower real estate taxes stemming from the less productive soils; C. Increased rents and yields; D. The opportunity to grow specialty crops; and E. The abundance of cheap available water.  In addition to these benefits, irrigated land has also been appreciating at a rate that matches, if not exceeds, dryland tracts as reported here… Federal Reserve Bank of Minneapolis newsletter. 

These benefits are appealing to many farmers and investors, even though most areas of the Midwest have productive soils and enough rainfall to produce good crops without any added water.  All that said, in other parts of the country, “water wars” are breaking out.  In the western plain states, there’s a fight brewing between landowners in Nebraska and landowners in Kansas over the amount of water that can be pumped.  A recent article in the Omaha World Herald (Work Continues on Water Compliance) outlines the problems that landowners face when too much water is taken for irrigation use, thus deplenishing the aquifer that the units source.  And worse yet is the tug-of-war in California where agriculture must fight the urban demand for water on a daily basis both in the courtroom and in the field (Water Managers Weigh Implications of Order).

So will irrigation become more popular throughout the Corn Belt?  I think it can but farmers and investors need to learn from their western cousins and be prepared for the fresh water fights that may be on the horizon, especially near large cities (think Chicago) where clean water is becoming more scarce.  And don’t be surprised when governmental authorities from the local county health department to the Environmental Protection Agency or the Army Corp of Engineers try to take control of this resource.  In many parts of the world, water is a more precious commodity than oil. Fortunately, this hasn’t been the norm in the Midwest and with wise use and foresight, it hopefully never will be.

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More Facts on Organic Agriculture

Tuesday, June 8th, 2010

In previous articles and blogs, we have discussed the growth of the organic food market.  In certain parts of the country, this segment of agriculture has expanded rapidly.  A recent article in Amber Waves, Organic Farmers Faces Issues and Opportunities, provides more details of the size and scope of this industry. 

As can be expected, organic farming varies significantly across the different types of crops.  For example, nearly 9% of all U.S. berries are produced organically, while only 0.2% of all corn is.  Interestingly, the demand for certain organic products is so great that we’re now importing some of these goods to meet the needs.  This is in addition to the imports of organic crops not typically grown here like tea, cocoa, and coffee.

Unfortunately, the organic industry still faces many challenges.  One of the biggest at the present is the public confusion from other food labels such as “locally grown”.  The two methods should complement, not compete, with each other.  The locally grown label simply tells people where the product is grown, not how as in the case of organic farming.

I believe that the continued demand for organic products and the price premiums they command will ultimately lead to a price premium for land that has met the certification criteria.  The market has been so small in the past that at the present almost no one (including most appraisers) knows what that premium to a non-certified farm might be.  That said, I’m convinced that within 5 – 10 years there will be enough sale data to prove what we inherently know – a specialized asset will ultimately command a premium price in the market place.

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