Country Corner

Running with the bulls

In the waning days of 2010, when Rabobank released its commodities forecast for this year, the authors tacked on a subtitle: agri bull market clouded by macro uncertainty. That sums up the springtime outlook of farmers since man first took up the hoe. It’s always high hopes and uncertainty.

The analysts at Rabobank point to tighter world stocks for most grain commodities, high use rates, continued strong demand and a strong La Niña cycle as a basis for commodity prices to trend higher this year. Combined, these issues will make for interesting times come harvest in the United States.
Along with those fundamentals, the forecast spelled out what we’ve begun to recognize as a commodity-outlook chorus in the past few years: 

China commodity short. An aspect of the emerging market demand theme is the impact Chinese demand is having in reshaping a number of agricultural commodity markets. 

Political risk heightened amid tightening food supplies. We have seen a muted re-emergence of world governments intervening in agricultural markets in 2010, following widespread intervention in 2007/08. Further supply shocks may see a return to widespread government intervention in 2011. 

Fundamentals only part of the story. With agriculture and agricultural futures markets increasingly being viewed as an attractive asset class by investors, the role of outside market macro drivers, including currencies, energy correlations and speculative money, is becoming more important in shaping agricultural price movements. 

Sustained heightened volatility. The combination of tightening fundamentals and increased macro influence and uncertainty which resulted in increased price volatility across most agricultural markets in 2010—likely to be sustained at high levels into 2011.

At the front end of the year, we’ll have a hard time knowing which commodities will win the battle for planting acres worldwide, but we do know as a result of the bullishness in the ag markets, U.S. acres are growing more dear on the real estate market.

In the Chicago Federal Reserve Bank’s fall Ag Letter, the writers pointed out that farmland prices have scored double-digit value increases throughout much of the Corn Belt.
According to that report, “Values in Iowa were up the most, with a year-over-year increase of 13 percent for the third quarter of 2010. Indiana and Michigan followed closely with year-over-year increases of 11 percent and 10 percent, respectively. Illinois had a slightly smaller increase of 8 percent.”

Prices in Today’s Farmer country might not tip such robust average increases, but anecdotal reports show that good crop acreage is pushing or setting local per-acre price records.

The Chicago Fed’s report was enough to spur the Wall Street Journal’s editorial board to ask, “Is this boom rooted in genuine economic gains, or is it another Federal Reserve-induced asset bubble? We lean toward the bubble view.”
That’s something that is on many landowners’ minds but has yet to slow investor-class money from stocking up on farmland.
Meanwhile, less heralded in the general press, but noteworthy to the farm press, is the continued increase in cost to produce a bushel of grain.

Iowa state extension economist Mike Duffy has been tracking input costs over the years and said he needs a Ouija board to make estimates for production costs this year. But he figures it will fit the trend.
According to Duffy’s work, corn input costs rose 111 percent from 2003 to 2010. Soybean input costs showed an increase of 87 percent over the same time period.

All of these things combined show us that it’s not just high hopes and uncertainty this spring. It’s high stakes, too.
Duffy points out that this is all according to economic textbooks.

“In a competitive market when there is an increase in revenue (higher yields and/or higher prices) the costs of production will tend to follow. Land is the residual claimant after the increase in costs and the increase in the gross revenue. In other words, the input costs and other costs will increase when there is excess profit, what is left will be bid into the land in the form of higher rents or land values,” reports the economist.
Ever see a bull on a treadmill?

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