Wednesday, March 12, 2008

Grain Boom May Spark Rural Revival

I've said in the past if there was an easy instrument to purchase farmland, I'd like to be in it. Even more so in the former Soviet satellite nations where farmland is much cheaper than the American heartland. While I am becoming concerned that SO many people have now jumped on the agriculture bandwagon, I still like the trend for the "very long" term. But I feel much more comfortable in the early stages when very few talk about a trend. Now that it is becoming 'conventional wisdom' the volatility of all things agriculture continues to increase, and short sighted hedge funds have the potential to cause major short term havoc at some point in the future. Remember, as with all things on the Street - until Barron's or the Wall Street Journal start pumping a story it doesn't matter to the herd. [Feb 15: It Finally Matters - Wall Street Journal Print Edition Front Page: Heartland Sees Boom with Grains in Demand]. Of course the NYC suits missed 12+ months of "boom" by the time these things became apparent.

Supporting my view of a REGIONAL US recession, I found this random article from an Indianapolis newspaper.
  • Jon Castongia can't keep enough farm equipment in his John Deere dealership. "I've got nothing that's not sold," he says. "Across the board, new and used, everything's popular right now." Castongia's business boom is evidence of a new golden era for farmers.
  • All-time high prices for soybeans and wheat and near-record high prices for corn and other farm goods have pumped up farm incomes by 50 percent since 2006 in Indiana and other Farm Belt states.
  • The value of Indiana farmland has soared from an average of $3,500 an acre to more than $4,000 in the past two years.
  • The boom is expected to plow billions of dollars of extra income into Indiana's economy in the next few years. Big beneficiaries range from co-ops and ag suppliers to rural restaurants and retailers. (this is the multiplier effect I talk about so often; the rest of the country was enjoying it from overpriced homes and house ATMs over the past half decade; but this version in the Heartland is a genuine thing unlike the credit mirage)
  • But consumers could have something to lose -- disposable income as they face higher costs for food staples such as flour, poultry, milk and beef, all increasing because of the rising cost of grain.
  • Still, Indiana has much to gain from the grain boom because it's the nation's fifth-largest producer of corn and fourth-largest soybean grower.
  • The higher grain prices, if they last, should firm up the state's rural property tax base, adding to the tax revenue streams of local governments and schools. At the same time, prices are so high that crop farmers don't require the heavy federal commodity subsidies they collected in the past, saving the nation's taxpayers about $6 billion a year.
  • Exports of grain and other agricultural products will hit a record $79 billion this year, much of it going to the developing economies of China and India. Adding to the demand are dozens of new ethanol plants that this year will convert 25 percent of the U.S. corn crop into fuel.
  • "This is one of the biggest opportunities for Indiana agriculture and U.S. agriculture for maybe a century," says Andy Miller, Indiana agriculture director.
  • The boom isn't happening without some pain -- for both farmers and consumers. Though grain prices make up just a fraction of the overall cost of processed foods, they helped fuel a 5 percent inflation rate on food last year that hit everything from bread and cereal to soft drinks and cookies.
  • Farmers, with more cash to spend, are facing inflated costs for many of the materials they need to farm. In the past two years, prices of nitrogen, potash and phosphate fertilizers have roughly doubled. Values of farmland last year jumped about 17 percent, the largest annual increase since 1977, according to Purdue University. And land rents have shot up as well.
  • "It's all about yield now," says Allen Baird, who farms several thousand acres with a brother and two nephews in Tipton County. He marvels at how much his crops are worth. "I've never seen it in my lifetime, never seen anything like it," says Baird, who has farmed since 1964.
  • Long mired at less than $2 a bushel, corn now trades at more than $5. Soybeans have jumped from less than $6 a bushel to more than $15, while wheat has spiked from under $4 to more than $10. The last time grain prices jumped across the board so dramatically was in the early 1970s when the former Soviet Union began massive grain purchases on the world market.
  • Demand for grain is running so strong that the nation's wheat supply is almost gone, while soybean and corn inventories by August should hit their lowest levels since 1973-75, says Chris Hurt, a Purdue ag economist. "The cupboard is almost bare. It's too tight for comfort. It'll be until (the) 2010 crop before we can catch up and rebuild these inventories."
  • The upshot: grain markets in the next two years could see "enormous volatility in prices," Hurt said, as traders react to weather scares, droughts and scarcity. Adding to the uncertainty is the low value of the dollar relative to the euro, which makes U.S. grains cheaper for foreign buyers.
  • Ronnie Mohr, a Hancock County crop farmer who is a director of the 50-state farm co-op Land O'Lakes Inc., says although he reaps the benefit of high grain prices, he worries they'll cripple his main customers: hog farmers and other livestock operators who buy more than half of each year's U.S. corn harvest to feed to their animals.
Takeaways: Again, I have been focused on fertilizer and crops for the past year. I will continue to be, for many years, although we will have ebbs and flows as hedge funds come in and create havoc [The Hedge Funds are Coming! The Hedge Funds are Coming!] - all those ebbs caused by "hot money" should be bought. Corn ethanol is going to be seen one day as badly a boondoggle as the Iraq war. And look for a spike in your meat prices not only from the grain inputs but the fact that at some price point, hog and cow operators will slaughter parts of their herd because it simply is getting too expensive. Which creates more shortages. This will only exaggerate the high costs of meats. I expect this to play out within 12-18 months. But don't worry - the Fed says inflation is contained.

Long fertilizer and crops

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