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John's World
Wednesday, August 08, 2007
Another reason land prices may not be out of line...
According to Mike Walsten at Landowner newsletter (subscription required) land prices show no signs of backing off. The highest-selling tract, totaling 165.44 acres, sold for $9,500 an acre and the lowest-selling tract, 62.31 acres, brought $4,950 an acre. That 62.31-acre-tract was only 70% tillable, says Dave Klein, vice president and managing broker, Soy Capital Ag Services, Bloomington, 309-665-0961, whose firm handled the sale. [More]The driving force, I believe is clearly ethanol. Even though its immediate impact is on corn prices, the competition for land to grow corn forces other commodities higher. Interestingly, this is occurring just when global demand is ramping up, fed by economic growth in the less developed countries of the world. For the first time, dairy farmers could threaten to sell their products elsewhere since the global dairy market is suddenly thirsty for German milk. And there's particular interest in powered whey. Prices for the yellowy stuff, which is the foundation for many packaged food products, have more than doubled within a year. Globalization has finally reached a sector that for a long time was organized regionally. While the dairy sector in Germany is still connected with the image of the quaint Bavarian farmer and his bell-wearing cows, in reality it's become an industry of multinational corporations, stock prices and commodities markets.Meanwhile, one dairy subsector is challenged by rising raw milk prices: organic. It seems consumers may be more price sensitive than originally thought, or that the organic buying public is smaller that forecast. Dean sells organic milk and soy products through its WhiteWave Foods division. The organic milk is specifically sold under its Horizon brand, a segment battling the industry-wide oversupply of raw organic milk. My goodness - supply and demand! Are they still teaching that stuff? If the EU takes this opportunity to even mildly reform its dairy quota system, it will add significant pressure to WTO calls for US reform as well. We are only beginning to measure the fallout from ethanol mandates. The results may surprise us. Thursday, May 24, 2007
The metaphor at the end of the rainbow...
I'm not crazy about Tom Friedman's book, "The World Is Flat". It turns out I'm not alone, but other critics have other reasons. Edward Leamer meticulously deconstructs the metaphor of worldly flatness and finds it unhelpful. In the process, he refreshes my memory on one agricultural example (assuming I ever knew it in the first place). The German farmer Johann H. Von Thünen noticed that farmland closer to the towns This is what I was awkwardly trying to get to when I posted that warnings of high-priced land in the path of development were meaningless. That's where high-priced land should be. Sunday, May 13, 2007
On the other hand...
I support strongly the emergence of an agrarian sector that sells not just products (beans, lettuce, eggs, beef, etc.) but process (free range, organic, local, biodynamic, etc.). It is a true market response to consumer choices propelled by entrepreneurship, passion and very little government support (which could be the reason it's thriving). But, here's the catch. I also am an enthusiastic proponent of industrial agriculture. These are farms like mine that grow products that meet every standard required, in environmentally responsible ways, and using every bit of technology I can get my mind around. These two sectors in agriculture really do not compete much head-to-head. Only our insistence on one vision for farming makes that seem the case. Still when I read articles about agrarian farming I lament the witless drivel that passes for informed comment about what I do for a living. Consider this paragraph from a paean to local agriculture: The American Farmland Trust estimates 1.2 million acres of cropland, pastureland, and rangeland are lost each year to development. Farms are increasingly being swallowed up by new houses, roads, and strip malls—86 percent of U.S. fruits and vegetables and 63 percent of dairy products currently come from areas in the path of urban sprawl. This loss of farmland combined with the shift during the past century toward industrialized agriculture has greatly extended the distance produce and meats travel. The average American meal today journeys more than 1,500 miles from where it’s grown or raised to where it’s bought—at a big cost. Green-house gases emitted during food transport contribute to climate change. Our produce is not as fresh as it would be if it were grown closer, which would improve its taste and, health experts say, possibly its nutritional value. And because our food is so heavily mass-produced and transported, the origins of outbreaks of E. coli, like those from last year’s much-reported batch of tainted spinach, cannot always be pinpointed in time to prevent human illness, sometimes even death. [More]To save make my responses more coherent, I will insert them into the original text. The American Farmland Trust estimates 1.2 million acres of cropland, pastureland, and rangeland are lost each year to development. [Wait - lost? Those acres have gone missing? Actually those acres simply have houses on them, and houses have to be somewhere. This familiar trope insinuates that the strong instinctive urge for permanent housing should be satisfied only for the affluent and that the need for food requires every acre. (See ethanol, etc.)] Farms are increasingly being swallowed up by new houses, roads, and strip malls—86 percent of U.S. fruits and vegetables and 63 percent of dairy products currently come from areas in the path of urban sprawl. [ Where exactly would you site a fruit/vegetable operation - New Mexico? Of course valuable crops like sod are grown on the outskirts of development. Transportation costs matter. Besides, if this land is developed those valuable crops will still be grown just outside urban areas. This statistic has not changed appreciably for decades, and should be recognized for what it is: an inversion of cause and effect. Farmland is valuable because it's close to people and and hence a candidate for high-value agriculture. People are the key - not land] This loss of farmland combined with the shift during the past century toward industrialized agriculture has greatly extended the distance produce and meats travel. The average American meal today journeys more than 1,500 miles from where it’s grown or raised to where it’s bought—at a big cost. [Oddly, the market will sort this out if you price in all costs.] Green-house gases emitted during food transport contribute to climate change. [Okey-doke, let's include this cost via a carbon tax] Our produce is not as fresh [Can you actually discern something 80% as fresh?] as it would be if it were grown closer, which would improve its taste and, health experts say, possibly [or possibly not] its nutritional value. And because our food is so heavily mass-produced and transported, the origins of outbreaks of E. coli, like those from last year’s much-reported batch of tainted spinach, cannot always be pinpointed in time to prevent human illness, sometimes even death. [But we did pinpoint it, thanks to industrial records/tracking. As for death, compare food contamination deaths now to truly agrarian times.]It is not necessary to have an internecine battle to address consumer wishes about food. It is also foolish to believe the agrarian model could provide a reliable food supply on the scale of industrial agriculture. On the coasts of America, around metropolitan areas and in scenic rural areas like New England or Lancaster County, these concerns can be addressed with the enormous amount of money available there. But transferring those values to my county or northwest Iowa, for example, yields no return for society and overrides Constitutional freedoms. We have room and need in America for industrial and agrarian farms. And best of all, consumers can make the choice. Friday, May 04, 2007
Is it me or are we going deeper into the woods?...
The housing market was a dependable source of painless savings for so long, and I think at the microscopic level, many citizens built futures on the premise home prices would continue to escalate reliably. This plan is being reconsidered now. But while the general economy has moved ahead without the housing sector, the jury is still out on whether we have hit the bottom of the housing cycle. One noted expert thinks not. Robert Shiller is worried about your home's value, and that's not good. A finance and economics professor at Yale, Shiller proved he could see a crash coming with his book "Irrational Exuberance," which forecast the end of the 1990s stock bubble and hit bookstores in March 2000 - almost to the day the Nasdaq started to collapse.His prediction? Brace yourself: In fact, I'm inclined to think there's a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end. [More depressing reading] On that happy note, let's consider some implications. Hardest hit in the current doldrums were housing "flippers" - amateurs working on limited capital turning properties rapidly. Since this is a risky activity in boom markets, it snowballs when prices dip even slightly. This is why investment property could be clobbered. Then there are Boomers who decided their house would be their retirement plan a few years ago. Actually many of us would have been OK if we had cashed out in say, in 2005. But unless you're holding a condo in Manhattan, your retirement nest egg may not be what you had hoped. To be sure, if you have been in your house fro a considerable time, and the especially if the mortgage is paid, you still have a pile of equity - but maybe not the kajillions you hoped. But the truly scary scenario is at the bottom of the home buyer pyramid. Subprime mortgages were another real-estate gimmick that seemed feasible as the tide was coming in. As these loans head south, the defaults have crimped earnings at several financial companies. They will survive, and don't need my tears. But borrowers with less than perfect credit are now out of the market and also - more importantly, I think - out of the home-equity loan market. Notice how those ads are scarcer recently. Home equity loans fueled a significant portion of consumer spending growth, thus driving the economy as businesses held back on capital spending. What do all these developments suggest? First, if Shiller is right, we may not be close to seeing the effect of lower home prices on the economy as a whole. More and more borrowers will be at least frozen in place instead of ratcheting up the equity ladder. You may be stuck with actually paying off your mortgage. Labor will become slightly more fixed in place, as relocation costs for companies skyrocket and workers choose to stick it out in the old job. Retirees will recalculate their last day differently as well. The upper end seems to be bulletproof so far - largely untouched by the loss of equity and shrinking pool of buyers. But interestingly one big loser could be Uncle Sam. But there's a more alarming explanation for the surge in tax revenues. It could be that the orgy of speculation in recent years—in housing, stocks, investment instruments—has generated an unexpected gusher of the types of tax revenues derived from flipping assets and trading securities. And that suggests that with the housing boom over and the stock market moving sideways, tax-revenue growth could be slowing down, and soon. [More] Of course, the current fad in DC is not fiscal restraint, so it may not get much play unless deficits approach the the gold standard of $450B or so. Still, it might become a slightly hotter talking point. But what about farmland? Don't color me worried. And here is why - can you say "mandate"? The measure would establish an overall goal of reducing future gasoline use by as much as 45 percent below what it otherwise is expected to be in 2030. That would happen through a combination of more biofuels, such as ethanol, and production of more gas-electric hybrid vehicles and other fuel-saving measures. Land prices are firmly in the grips the need for carbohydrates to make fuel. This was an auction of 160 acres. The ground was flat, systematically tiled and nearly all tillable. Selling price: an eye-popping $6,731 an acre. A local farm family who were expanding their operation purchased the farm. {more detail from Mike Walsten's new farmland blog - subscription to PF required, but worth it] Now this example is Hoosiers, of course, so we have no idea what real free-spenders might be paying. We won't even miss 1031 buyers, IMHO. In fact, farmers could start our re-ownership of agriculture in this window of opportunity. Saturday, April 28, 2007
Another reason Brazilian title insurance is expensive...
Our formidable competitor to the south struggles to cope with wide income inequality and the all too familiar reaction - land reform. Conflict in the countryside has ebbed but hardly stopped (see chart). For the MST, the demand for land reform is nearly bottomless and the conflict with industrial farming irresolvable. Mr de Oliveira reckons that 5m families—around an eighth of the population—are candidates for land redistribution. “Monocultures” like eucalyptus for paper, sugar cane for ethanol and soya degrade the environment, reduce the food supply in Brazil and drive labourers and small farmers off the land, he claims. [More]Does this suggest a Zimbabwe-like meltdown of a powerful ag production system? Perhaps to be soon echoed by South Africa? In Zimbabwe, forced and often violent takeovers of white farms led to a disastrous collapse of farm production. In South Africa a legal process of takeover under a democracy might lead to less disastrous results, but would still replace high-productivity white farming with the lower productivity of black farming. At best, the Government of South Africa would have a hard struggle to limit the damage done by its own land policy.The analogy may not apply in Brazil. In the first place, Brazil has plenty of land still to deal out. No other country has this luxury, but the government could effectively albeit heavy-handedly create small plots by simply moving bigger landowners with generous grants farther into the frontier. Brazil, and to a lesser extent Argentina, still enjoys tremendous potential toSecond, like all real estate, it appears the issues are focussed on location. Landless peasants usually prefer acres close to population centers and markets, not a farm in the middle of a cerrado hundreds of miles from civilization, like many soya plantations are. There is a similarity to land use arguments here in the US. Much of the dispute is centered on places like Lancaster County or the Eastern Shore. Few care about 15,000 acre farms in NW IA, by contrast. Agrarian farms are a good solution where they are close to the markets they need. But people have not distributed themselves smoothly across any country. Thus efforts like Brazil's likely will never threaten the enormous majority of soya or cane production. It will be interesting to see if small farms contribute seriously to pork production. My hunch is they may be a popular source for domestic supply, while the large and growing Brazilian pork industry focuses on exports. This is one reason some of us pay scant attention to land distribution/use issues, and some of us lay awake at nights. It is also a reason why national rules to decide these matters are unworkable. Land markets - which is how people tell us what they think land should be used for - are truly local. Still, the power of agrarian movements in the response to perceptions of unfair incomes will likely bleed over to other issues, especially in South America, where socialist voices are getting a new hearing. This is the real reason trends toward inequality are problematic - not that they don't make economic sense (all the boats, yadda yadda) but that the inherent human bias toward fairness overrides carefully drawn charts and economic models. Wednesday, April 11, 2007
NH3 effects...
Applying anhydrous ammonia is a job few farmers relish, and most would gladly drop like hot rock if an alternative were available. The reasons are simple: it's dangerous, hard to handle, requires special equipment, and involves constant timing with your supplier to be efficient. Unfortunately, NH3 is a superior source of nitrogen - the stuff of life (or at least, yields) for corn. But there is a subtler side to NH3, I think. Because it is such a pain for humans to handle, we often drift into thinking it must be equally hard on the soil. This correlation is exploited by organic or other detractors via anthropomorphizing the soil. It is a common and seemingly natural tendency for humans to perceive inanimate objects as having human characteristics, although few believe this to be of significance. Common examples of this tendency include naming cars or begging machines to work. In 1953, the U.S. government began assigning hurricanes names; initially the names were feminine, and shortly thereafter masculine names were introduced. The fact that that dirt contains living organisms is not news, of course. Extending this liveliness to the particles of soil is easily done in our minds. The result is when ammonia stings our noses, we sympathize with the field we are fertilizing. After all, there is no worse label than a "harsh chemical". Not much objective evidence to support this lovely picture, however. Indeed after using NH3 and other fertilizers for decades, yields are trending up, not down. Due to the chemistry of anhydrous ammonia, the injection band initially is toxic to plant growth because of high pH. In a relatively short period of time after injection into the soil the ammonia is converted to nitrate and the pH of the injection band decreases. Nitrate is the primary form of nitrogen used by corn from the soil. At this point the corn plant can use the fertilizer and provide higher yields. [More]Much of the allure of agrarian agriculture is the elevation of clay particles to some kind of life-form. Because life (plants) spring from it, it is an easy step to take. In the process, however, we attach limitations and rules that may or may not apply. The soil is "exhausted", we say, as if dirt feels weariness. We talk of soil "health". Qualities we find pleasing, like sponginess or rich odors are designated as signs of soil "health". Moreover, as we develop more and more abstruse technologies, the idea of soil as simple and uncomplicated is a relief. But I'm convinced we are fooling ourselves. I don't think we have any idea what the "carrying capacity" for good farmland is, for example. All we know is how much yield we have been able to achieve to date. I think we will look back on 200-bushel corn with the amusement we now use for pre-hybrid corn yields. And people then will mutter about exhausting the soil, I expect. But soil is not human, and not even alive. And the effort to make this fantasy true is our generation's form of idol-worship, maybe. Labels: farm program, farmland, technology
It's not just 1031 money any more...
Farmland prices are receiving non-farmer interest strictly as an investment play. Even if ethanol demand subsides, or an alternative source for the renewable fuel, such as woody biomass or cellulose waste, replaces corn, farmland price appreciation could endure. As the nation's population increases (the U.S. Census Bureau has said it could hit 400 million or more by 2040), so will demand for food, energy, and space.When articles like this show up in popular business information sources alongside bonds and hedge funds, it means something. And it's not just here in the US. Supply and demand are the drivers in the rush to buy broad acres; the basic facts are that during 2006 the average price of arable farm land in Scotland increased by no less than 30.7 per cent. Even fairly moderate acres halfway up the hill have risen in value by 16.3 per cent. What happens next remains open to question, but Dudgeon reckons the omens are on the positive side of neutral.It appears to unlike the inflation-fired Seventies, rapid and massive investment in land could prove to be the key to having a working farm twenty years from now. It will require immense risk and premier management, but my feeling is we are creating the few thousand farms of the next generation today by forcing larger investments in land than most farmers will pay. Labels: farmland Wednesday, March 07, 2007
A time to re-invest?...
The indications from the housing sector are not encouraging. Some even compare the problems to the technology bubble bursting in 2000 (mere days after I invested in a tech fund): I do not dismiss lightly the pain being felt in the home-building sector, but there may be an opportunity for farmers hidden here as well. As development slows to work through a large inventory of unsold new homes and the sub-prime lending problem, 1031 money slows as well. It may take some time for it to restart as well. That sources of funds for land ownership competition may be diminishing therefore, just when farmers will be enjoying significantly higher returns. I still think land prices will jump this year and especially in 2008, but producers may have a window of lessened competition. Not everyone agrees, of course, with my devotion to owning (nearby) ground. Maximizing returns could point to another asset or investment choice. While this is valid, no other asset will protect your career, which I feel is more fragile than ever. We don't need many farmers, and the line to join up is very long. Land ownership brings the absolute power to decide who farms those acres - a right of great value. I'll be writing about this in Top Producer later this year, but of all the threats facing grain producers, a sharply lower need for people is Number One in my book. Labels: farmland, production Wednesday, February 14, 2007
A study in land ownership...
Global corn supply may be about to lose a contributor. As South Africa starts to seize and redistribute farms from whites to blacks (their terminology - not mine) it would be reasonable to anticipate a steep decline in SA output.
Currently (as of July 2006), Zimbabwe suffers from widespread food shortages, the world's highest inflation rate at over 1,100% (Year on Year Figures for June according to the CSO) and a bitter political struggle often turns violent between the ruling ZANU-PF party and the opposition Movement for Democratic Change which has faced imprisonment and torture. Domestic and international critics lay much of the blame for the current chaos at the feet of the land reform program. Many Zimbabwean refugees have fled to South Africa or Mozambique. [More]I also wonder where these suddenly-cashed-out Afrikaners will choose to invest. They are great farmers, and should they wind up in Hungary or Poland or Nebraska, they will be formidable competitors. [Note: One great source for background on South Africa is reading "The Covenant" by John Mitchner. It's readable prose, but mostly it downloads an immense amount of concentrated history, geography, etc. to the reader in a palatable form.] If you think about other countries where redistribution might occur, it is hard not to speculate on the leftward tilt of much of South America, and ponder the future of farms in Brazil. Labels: farmland, globalization, politics Thursday, February 01, 2007
And the answer is...
I appreciate the thoughtful and civil comments regarding the "1031 recommendation" in the Bush farm bill proposals. I thought, "What would Milton Friedman do?" and came to these suggestions.
Labels: farm program, farmland, taxes Wednesday, January 31, 2007
I'll bet Realtors love this idea...
Buried in the farm bill proposals from the administration is an interesting wrinkle on 1031 farmland exchanges: Recommendation In Brief [My emphasis] I'm going to ponder this in my heart of hearts and spout off later. Feel free to jump in first. Labels: farm program, farmland Wednesday, January 24, 2007
Full speed ahead...
President Bush seemingly set in stone America's commitment to immense amounts of ethanol and hence immense amounts of corn. This is good news for farmers, but really good news for ethanol investors.
If we in agriculture think this whopping injection of income will not attract competitors and predators we are fooling ourselves. In fact, there may be efforts to capture the income stream at the farm level. In other words, massive (on our scale, not theirs) investments in farms may be one obvious way to see a return on money. And farm suppliers are cashing in as well. Shares of seed producers like DuPont and Monsanto and fertilizer makers like Potash and Terra Industries are soaring. The gains have further to run, even though the stock prices exceed their five-year averages relative to earnings, said Frank Husic, chief investment officer at Husic Capital Management in San Francisco. [More]I have opined before that while investing in ethanol may still be a reasonable venture, land could be the next rush. Owners can capture significant profits with custom farming leasing or getting into the business themselves. Besides it is not rocket finance to see what doubling gross profits (and that is what it looks like to my computer) could mean to asset values. The interesting thing will be to track trends like farm size, farmer numbers, off-farm income, young farmer cohort numbers, etc. to see if higher prices are indeed the answers to these "problems". My bet is these trends will accelerate, not decline with increased revenue. And the ERS will give us the answers just a few years after the fact. US Farm Report host John Phipps surfs the Web so you don't have to...
About Me
Jan and I farm 1700 acres near Chrisman, IL. I have also written humor and commentary for Farm Journal and Top Producer for 13 years. Please visit my website (www.johnwphipps.com) to learn about my speaking services for your group's next meeting. ARCHIVES
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