As our leaders in Washington work through ways to reduce our budget, agriculture and the upcoming Farm Bill are being looked at as possible places to trim expenses. A recent blog post on DTN/Progressive Farmer (Ag Cuts Would Wait on Farm Bill) takes a look at some of the recent discussions currently taking place regarding agriculture. The main focus of Congress appears to be on the direct payments to producers. When congressmen look at the direct payment system, and then look at headlines talking about near-record profit predictions for farmers, their initial reaction is, “Why are we supporting an industry that is flourishing and appears to be able to support itself?” It’s true, 2011 is shaping up to be very profitable for the ag industry. To think that there is nowhere to go but up is foolhardy, however. We saw a similar run-up in the commodities markets in 2007, followed by corn and beans futures being sliced in half not long after. The price supports were put in place for a reason – to ensure that America produces the highest quality and most abundant grain in the world. It would be dangerous to assume that the income stream that farmers should see in 2011 will be there every year. Past history has shown us it won’t be.
Posts Tagged ‘government’
Agriculture Not Immune To Budget Cuts
Wednesday, April 6th, 2011Nationalistic Concerns and the Importance of Food
Thursday, March 17th, 2011The world’s population is expected to reach 9 billion people by 2050. That’s a lot of people to feed and some countries, possibly fearing future unrest, are beginning to take a strong look at who they want (or don’t want) to own their most precious resource. A recent article by Shanghai Barbie Farewell (Brazil Sets Up New Roadblocks for Agricultural Investments – Especially From China) that was posted on the Knowledge @ Wharton Today web site discusses the steps that Brazil is taking to ensure control of their land in the future.
Restricting the ownership of agricultural property is not a new concept. Some countries outright ban it; some place restrictions on the number of acres that can be owned; and others simply require registering and reporting foreign ownership on an annual basis. That said, for years many countries encouraged outside investment capital and know how in order to develop their farming industry. They realized that owning millions of acres did not necessarily mean a vibrant agricultural economy… infrastructure needed to be built; modern seed, fertilizer, chemicals, and irrigation that could adapted to local growing conditions were necessary; and the most important requirement – the knowledge/education to make the entire system work.
Nationalistic politics (“we don’t want others owning our sacred ground”) and ensuring future food supplies (“we don’t want others producing food on our land and shipping it elsewhere”) are probably two of the biggest drivers in this trend. Plus, there’s a fairness issue. Many countries still need capital and expertise to continue their agricultural growth but they want to structure their arrangement as a partnership and not give up total control (similar to what the oil industry is now utilizing).
I personally believe this trend in outside ownership restrictions will continue to expand. Some distinctions will likely be made between the investments made by foreign citizens and those made by foreign governments. Regardless, politicians know that they can’t let their citizens go hungry for fear of de-stabilization. And that’s one thing they want to avoid at all costs.
2011 Farmland Outlook
Wednesday, December 29th, 2010As we’ve discussed on this blog numerous times, farmland values are a function of several different factors – interest rates, commodity prices, returns on alternative investments, government policies, etc. Of all these variables, typically a large movement in grain prices will have the most immediate impact on land prices. Landowners (both farmers and investors) can quickly determine that a $1.50 jump in corn prices (like we’ve seen in 2010) will lead to higher than anticipated income, which can be used to fund a farm purchase. Conversely, a drop in corn prices (like we saw in the fall of 2008), make large capital purchases nearly impossible.
Farm Journal magazine recently held a marketing rally where they invited several top commodity analysts to provide their outlook for 2011. Their remarks (Even the Bears Are Bullish) have been summarized on the AgWeb.com website and as the title suggests, there is plenty of optimism looking forward into next year. Numerous opportunities to lock in profitable grain prices are likely, though volatility will likely be high.
Assuming the commodity professionals are correct, land prices next year should remain strong. A good job marketing grain (assuming normal yields) will mean that farmers should again have enough excess income to purchase land if they so desire. Fortunately, this demand will be driven by excess profits and not just mere speculation. And as long as there is enough cash flow to make the land payment, then a farm purchase will remain an excellent long term investment.
The 2012 Farm Bill
Monday, December 13th, 2010Though it still seems a long way off, discussions on the new farm bill are already under way. Jennifer Stewart and Roman Keeney at Purdue University recently wrote an interesting article that highlights what the major issues/discussions/arguments might be: (Watch Three B’s in the 2012 Farm Bill).
The first “B” is Brazil. In 2009, the World Trade Organization (W.T.O.) allowed Brazil to impose sanctions against the U.S. arguing that American cotton subsidies were illegal under W.T.O. rules. Changes must be made in the 2012 farm bill so that the U.S. is in compliance with global trade rules. While the total dollars involved may not be significant, the principle issue will be as changes may have to be made to other program crops in order to avoid possible sanctions later.
The second “B” is the federal Budget. As the elections in November reflected, people in this country are tired of government overspending. The campaign theme of many of the newly elected senators and representatives was reducing the federal deficit and all programs are potentially on the chopping block. And since the farm part of the U.S. economy has been one of the few profitable sectors the past several months, many politicians will be taking a hard look at the programs closely related to agriculture.
The final “B” is baseline spending. Though a part of the overall budget process, this concept would hopefully allow the farm bill to move quickly through the house without being subjected to larger reform budget procedures. The goal is to hold spending in the new bill close to previous levels, thus avoiding an extended discussion on the costs and benefits of each the programs. Unfortunately, this may be much more difficult to achieve than is hoped.
Yes, it does seem like only yesterday when Midwestern farmers were trying to understand the nuances of the ACRE program passed in the last farm bill. One can only imagine what surprises Congress may have in store for the next go-around as the give-and-take world of politics will likely determine the final outcome.
The Possible Farmland Bubble
Thursday, October 21st, 2010FDIC chairman Sheila Blair sparked some discussion earlier this week when she warned that farmland could be the next bubble to burst, following the residential real estate market and the stock market (Farmweeknow – FDIC chair warns of possible farmland bubble). While I agree with Ms. Blair’s comment that an eye should be kept on the market, that is something any savvy investor would do in any economic environment. I disagree with Ms. Blair that the farmland market is being set-up for the same downturn it experienced in the early 1980’s. First, the amount of farm purchases being fully leveraged in the early 1980’s was much more significant than in today’s market. Second, the fact that agricultural lenders and buyers went through the tough times 30 years ago caused the ag credit lending system to re-evaluate and correct itself…something residential lenders are now going through. Finally, buyers are by and large still seeing favorable returns from the purchase of agriculture properties.
With worldwide demand for US produce remaining strong, prices for commodities will remain strong, which will continue to drive the farmland market. A shift in demand, an increase in interest rates, years of consecutive poor yields and other variables could have a definite negative impact on the farmland market in the future. However, simply saying, “The bubble burst in the 80’s and it is the farmland market’s turn again” is not enough evidence for me.
