The business of farming has become just as much an operational profession as any other corporation. This year, the Associated Press reported that farm profits are expected to spike 28% to just over $100 billion. The rapid appreciation of agricultural investments was confirmed by research at several Corn Belt universities, including Ohio State, Indiana University, University of Illinois as well as the U.S. Department of Agriculture. Unfortunately, 2011 may have set the high water mark for farmers for some time to come.
The combination of high grain prices, low interest rates and tight global supplies combined to create farmland appreciation north of 7% per year compounded over the last ten years. That’s right, the average price of farmland has doubled in the last ten years. Much of this is due to the income generated by the rising price of crops. Soybeans were trading just over $5 per bushel in January of 2001. They peaked at $14.65 this year and are still above $11 per bushel. Furthermore, yields have continued to improve through bioengineering from an average of 38 bushels per acre to nearly 45. The same general trends are reflected in other grain markets as well.
Unfortunately for U.S. farmers, the time for making hay may be coming to an end due to increases in global production and the domestic housing market implosion. Much of the profitability has been tied to the global demand for U.S. crops and the rest of the world’s production centers are working hard to increase their market share.
The United States’ soybean production is estimated at 90 million metric tons for this year while Argentina and Brazil will combine to produce approximately 125 million metric tons. By comparison, Brazil and Argentina combined to produce less than 50 million metric tons in 2001. Developing countries simply have more, high quality farmland to develop and fewer governmental restrictions in seed types, fertilizers and production techniques than us. This is allowing them to close the production gap at a rapid pace.
Rising grain prices have helped carry profits higher even as the housing bubble collapsed. Previously, the low interest rates that fueled the housing boom were also responsible for taking farmland offline. Housing developments and golf courses have expanded the civic boundaries of townships and cities across the country. This was prime acreage that was easily accessible and typically close to transportation infrastructure. Over the last ten years, it was taken off faster than appreciating yields could compensate for. This also pushed newly developing farmland into less productive and less efficient areas.
Profitability always attracts attention. Increasing global production should put a ceiling on the record prices received over the last two years. Furthermore, a technical study of market bubbles by Steve Briese, also lends a cautionary tone. His study looked at markets that double in price in less than two years and peak at a new five year high. His research shows that the market gives back, on average 86% of its gains within the same time frame. The price of corn more than doubled between June of 2010 and June of 2011. This was also an all time high. Soybeans also followed suit between February of ’09 and ’11.
The United States is still the, “breadbasket to the world” but the rest of the world is catching up. American farmers are facing more complex crop insurance equations with each passing year as weather patterns and commodity prices fluctuate at extreme rates making it harder to predict year-end prices and yields. Insurance companies and the government are less inclined to payoff at recent rates and contribute to enhanced agricultural economic gains. I fear that this may mark the end of the low hanging fruit in the U.S. farming industry.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
