THE LORANDA GROUP, INC

It’s widely known that Midwestern agriculture has generated record profits the past few years.  The obvious beneficiaries have been operating farmers and absentee landowners.  Yet, others have benefitted as well. For example, rural businesses frequented by farmers (both ag and non-ag) have seen greater success, primarily because farmers have more money to spend.  And as might be expected, larger agricultural companies have flourished, e.g. equipment manufacturers, seed and chemical producers, and grain processors.  A recent article on the University of Illinois farmdoc web site (Performance of Publicly Traded Agricultural Firms) points out that while plenty of money is being made at the country level it is also being made at the corporate level as well.

To help track profits and performance of these larger firms, an index of 21 publicly traded agriculturally related companies was created.  The returns from this index were then compared with the returns from the S & P 500.  Except for 2008 (when commodity prices and farm income was down), the ag index has greatly exceeded the S & P. Part of this can easily be attributed to fact that farmer will upgrade equipment and increase fertilizer usage when excess funds are available, especially since these expenses are typically a great way offset income for tax purposes.  Yet, many have also speculated that there may be some “price gouging” from certain companies, especially those that farmers must buy from every year in order to plant a crop. Regardless, when money is being made in an industry, everyone wants a little (or big!) part of the pie.

As land prices have risen beyond the reach of many investors, I think that buying stock in agricultural companies may be the best, and easiest, way to ride the food wave.  Demand for agricultural products will continue to grow in the future, and the companies that are heavily involved in the industry should continue to be profitable.

With land prices, land rents, and other input costs now sharply higher than a year ago, many experts are wondering if farmers can still make money in 2011.  If you believe a recent article by Purdue University economists (Crop Returns Growing As Production Costs Rise), then the answer is yes.  Great news for farmers and landowners alike! 

As with most forecasts, some assumptions have to be made: 

           The weather has to cooperate so that the crop yields  meet or exceed the 5 year average. Some will argue that reduced yields will increase grain prices, thus offsetting the lower production. This is true if the weather problems are widespread.   An isolated drought, however, presents the scenario where there are fewer bushels to sell at the same or lesser price.  Not a good situation to be in, which is why in this high risk – high reward environment farmers are scrutinizing and utilizing the crop insurance products that can best protect their investment.

            Grain prices need to stay at, near, or above current levels.  I’ve talked to numerous farmers this winter who have been pre-selling more grain than normal – partially to lock in good prices, but mostly as a hedge to protect their profits (andthe higher rents) in 2011.  The people who pre-sold little grain in 2010 crop look pretty smart today.  And there are those who are still grumbling that pre-selling what they thought was 50% of the 2010 crop actually was closer to 75% due to lower than expected yields.  Unfortunately, because of the increase in production costs this year, the stakes are higher and simply waiting until harvest is over to price grain may be the best way to lock in a loss. 

Farmers talk about increased costs but the absentee landowner often doesn’t know what true expenses might be.  To assist in understanding the numbers, Purdue also releases a publication that estimates both income and expenditures for the year (2011 Crop Cost and Return Guide).  Keep in mind that they are using average numbers, which may not be 100% accurate for any given farm. Other land grant universities also publish similar cost guides that may better reflect the differences between geographic regions. 

In summary, if the predictions hold true, then there should be a lot of happy people at the end of 2011 – farmers, landowners, farm suppliers, and lenders.  And don’t overlook the money that is ultimately spent in the local communities by these people.  Remember – it’s not just the farmers who benefit when agriculture is making money.