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February 2010 Archive for Farmland Forecast

RSS By: Marc Schober, AgWeb.com

Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.

Major oil company enters ethanol industry

Feb 22, 2010
Royal Dutch Shell plc has plans to strike a deal with Brazil’s Cosan for a $21 billion a year ethanol joint venture. Shell will become the first major oil company to access ethanol on this scale. The deal will be Cosans largest entry into fuel distribution as well. Cosan purchased Exxon Mobil’s Esso chain of service stations for $1 billion in 2008. Shell and Cosan’s 50/50 joint venture features 4,500 filling stations nationwide.
 
The companies plan to more than double ethanol output to up to 5 billion liters a year from about 2 billion now, according to Shell’s downstream director, Mark Williams.
 
“Brazil’s aim is to become an ethanol exporter,” according to Cosan Chairman Rubens Ometto. “Shell has distribution facilities throughout the world that we could use in a much more integrated way.”
 
While sugar is at 29-year highs, and Brazilian ethanol is derived from sugar cane, it may become difficult to keep production economical, although most analysts predict sugar prices to decrease by 2011, according to Reuters.
 
Outlook
 
Shell has taken its position on ethanol becoming the first major oil company to joint venture with an ethanol producer. Other companies have looked into Brazil as well. Bunge Ltd bought sugar and ethanol producer Moema for $452 million in December, according to Reuters.
 
The Shell/Cosan joint venture is a major move connecting the largest sugar cane producer with a company that has great distribution and technology in Shell. The joint venture could promote cellulosic ethanol production down the road that would ease demand for food-based material used in ethanol production, like corn and sugar.
 
Other oil companies may choose to follow suit by gaining exposure in ethanol production, but Shell and Cosan have a strong first step. Grain demands will continue to grow with an increasing global population and changing diets, so further technology on cellulosic ethanol production could solve long-term food supply issues in the future.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.

Crop Insurance Basics

Feb 16, 2010
Anything can be insured today; let it be a cat, car, or crop. Crop insurance has been in existence since the early 1930s. Federal crop insurance was established to combat the effects of the Great Depression and the Dust Bowl. If a farmer were to pick out crop insurance today, they would have many different options to choose from.
 
Crop insurance provides a safety net for farmers by reimbursing them due to revenue or yield diminishing problems for their crops.
 
The two categories of crop insurance are yield-based and revenue. These are a few examples of yield-based insurance policies according to the Risk Management Agency (RMA) of the USDA.
 
Actual Production History
 
This type of policy protects farmers against natural causes for poor crops including drought, moisture, wind, and hail. The farmer will insure the crop for a specific yield and at the end of the year, if the actual yield is below the insured amount, the insurance will compensate the farmer for the difference.



Group Risk Plan
 
In this policy, a county index is used for determining crop loss. When the National Agricultural Statistics Service changes the index, and it falls below a farmer’s insured point, then the farmer will be eligible for payment.
 
Rainfall Index
 
The country is split into six regions based on amounts of rainfall. Farmers can choose to insure water dependent crops based on the Rainfall Index supplied by the National Oceanic and Atmospheric Administration.
 
Revenue insurance policies protect against a crop’s market. These are a few of the revenue policies according to the RMA.
 
Adjusted Gross Revenue
 
Farmers can insure their entire farm revenue by utilizing an adjusted gross revenue policy. The insurance guarantees a percentage of gross revenue from the entire farm based off of the farmer’s Schedule F tax form.
 
Crop Revenue Coverage
 
Farmers will provide price and yield expectations for the policy, and the policy will pay for losses below either the harvest or early-season crop price.
 
Group Risk Income Protection
 
Farmers receive payment when a county’s revenue for an insured crop drops below the point where the farmer chooses coverage.
 
Revenue Assurance
 
A farmer choose a target revenue and the policy would pay a percentage of the expected revenue if actual revenue is less.
 
There are a few specific dates that producers must be aware of throughout the year, according to the RMA:
 
·         Sales closing date - last day to apply for coverage.
·         Final planting date - last day to plant unless insured for late planting.
·         Acreage reporting date - last day to report the acreage planted. If not reported, insurance will not be in effect.
·         Date to file notice of crop damage - after damage; the date the producer decides to discontinue caring for the crop; prior to the beginning of harvest; immediately, if farmer determines that the crop is damaged after harvest begins; or the end of the insurance period, whichever is earlier.
·         End of insurance period - latest date of insurance coverage.
·         Payment due date - last day to pay the premium without being charged interest.
·         Cancellation date - last day to request cancellation of policy for the next year.
·         Production reporting date - last day to report production for Actual Production History (APH).
·         Debt termination date - date insurance company will terminate policy for nonpayment.
 
A lot of the policy decisions are made based on insurance assessments. Assessors determine if an insurance claim is necessary and often what percentage is paid out.
 
Since the past two harvests have been considerably wet across the Midwest, crop insurance companies have been busy. A winter with a lot of snow, like this current winter, can lead to a wet spring with late plantings. Crop insurance will be in the news if farmers are unable to meet certain insurance deadlines in spring. Crop insurance is a complex aspect of farming, but without it, many farmers would not be able to survive.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.

What to Expect in 2010

Feb 11, 2010
2010 should be another exciting year for agriculture and farmland. The economy is expected to continue to stabilize in 2010, but headwinds from high unemployment and rising deficits in Europe will make it a bumpy ride. Farmers are happy that input costs have came down, but the large amount of crops in the ground due to the difficult harvest of 2009 will make spring planting difficult.
Below is a list of things we are keeping an eye on in 2010:
Land Prices – We should see a large amount of land sales in early 2010, as the late harvest delayed the traditional buying season this fall. We expect farmland values to perform well in 2010 as the economy continues to stabilize, grain prices recover, and banks become more willing to lend.
Recent reports from the University of Minnesota and Iowa State have shown strength in farmland prices as values have increased slightly recently.
Grain Prices –We were surprised by the increased production estimates from the USDA in January, but we expect the re-survey in the spring to show a significant decline in production, which should support grain prices. The USDA also needs to factor in the lower test weights of corn, which could drive a premium for higher quality corn. Meteorologists are expecting a wet spring in 2010, which could limit the amount of acres planted for 2010.
We expect corn to outperform in 2010 due to a rebound in feed demand, better ethanol economics, and farmers may transition to soybeans from corn due to the shorter growing season and higher prices.
Interest Rates – The big question for 2010 is when is the Fed going to raise interest rates. Futures markets expect that the earliest chance of an increase in the Fed’s target rate to 0.50% is next September and many analysts expect the Fed to hold steady until 2011.
Mortgage rates will be tested in March as the Fed begins to remove its temporary liquidity programs.
Ethanol – We expect the EPA this summer to increase the amount of ethanol in gasoline to 12% to 13% from 10%. The Obama administration’s proposal for Renewable Fuel Standards 2 should be a strong boost for agriculture as it will accelerate the demand for biofuels.
Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland during the busy 2010.

Corn Suitability Ratings

Feb 08, 2010

When a land buyer is shopping for a piece of farmland, they must compare many different aspects of the land. A land buyer should do plenty of research prior to making a purchase including studying farmer demands, rent prices, comparable land sales, yields, wetness and many other factors. Often the easiest comparison to draw between parcels will be a soil rating. In the state of Iowa, they use a Corn Suitability Rating (CSR). A parcel’s CSR acts as a standard for comparing different pieces of land. CSR assesses only the inherent productivity. Factors such as buildings, location, water supplies, crop and noncrop acreages, and other management features must be subsequently evaluated, according to Iowa State University.

 

CSR is an index procedure developed in Iowa to rate each different kind of soil for its potential row-crop productivity, according to Iowa State University. CSR is based on a 100.0 scale.

 

Other states have soil rating systems, but Iowa’s CSR has proven to be very easy to understand, and effective.



A field’s average CSR is the number that is used for comparisons. If field A has a CSR of 82.5, and field B has a CSR of 85.0, field A should carry a lower price tag per acre. There are many other factors that could easily justify a higher price from a farm with a lower CSR, but typically CSRs can be a great standard for comparing parcels. It measures the pure productivity of the soil.

 
After comparing CSRs, a buyer should get an appraisal done so a professional can give their opinion of a market value. An appraiser will use the CSR, but also many other factors to conclude a market price.
 
Investment land
 
When purchasing land as an investment, soil ratings should be a large factor in determining the quality of investment. A farm with a CSR that is high will retain its value better than a farm with a lower CSR during times when farmland values are decreasing; which has only occurred three times in the past century.
 
Higher quality farms are less volatile to outside factors. For example, high quality land will absorb nutrients very efficiently, keeping fertilizer costs stable. A poor quality piece of farmland might absorb nutrients at a less efficient level and fertilizer costs will affect the profit margin of the farmer that is farming that piece.
 
There will always be farmland buyers that are looking to purchase the best land that they can find at that specific time. High quality land should remain a strong investment for years to come.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.
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