Since the low times of mid-2008, agriculture has been on an incredible winning streak. This is as obvious to the casual observer looking at the daily commodity prices to ag equipment manufacturers in the nation’s heartland, who are scrambling to find workers to fill shifts to fill customer orders.
But how much longer can this prosperity bubble last before it once again pops? This was the key question speakers attempted to answer at the 2012 Mid America CropLife Association (MACA) annual meeting, held in early September in Omaha, NE. On the plus side, virtually every speaker remained bullish on agriculture’s outlook for the near and long term. On the downside, they said, there is no downside.
“We are in a golden age of agriculture right now and it isn’t going to end for decades,” said Dr. Jay Lehr, science director for The Heartland Institute. “People sometimes talk about the light at the end of the tunnel, but right now, I don’t see any dark at the end of the tunnel.”
Ed Lopez, director of marketing for the investment firm Van Eck Global, agreed that this is a great time to be involved in American agriculture. “Food, and the means to produce it, is becoming the new oil of the 21st century,” said Lopez. “As a result, agriculture is going to be one of the great new areas of the U.S. economy going forward.”
To understand why this seems to be the case, both speakers pointed to the same general trends driving agriculture’s growth. First is a desire among global consumers to eat more like people do in America. “World food demand is dramatic,” said Heartland’s Lehr. “The rest of the world has survived on a fraction of our diet here in the U.S., and, because of the Internet, they now realize this is the case. Since 1950, the average family has increased its animal protein consumption by 50%.”
In addition, there are more consumers who currently are, or will soon fall into, the middle class classification. By the end of this decade, it is estimated that the middle class in China will contain 234 million consumers and India’s will contain an extra 60 million.
Adding to this mix, Lehr foresees the commodity prices for grain remaining at slightly below their current levels, at worst. “The market may not be able to sustain $8 corn and $17 soybeans, but will we ever see $4 corn again? Hell, no, because then, China would step up and buy absolutely everything we had produced.”
On top of the population increase, the quest for renewable fuel sources is also driving demand for crops such as corn to produce ethanol. Put together, both of these factors are driving commodity prices to record highs, which have kept Wall Street focused on agriculture.
“Increases in global population consumption and biofuels demand is driving commodity prices up — and will continue to do so,” said Van Eck Global’s Lopez. “Most market watchers believe that grain prices will be sustainable at their historic levels, given these current demand profiles.”
In particular, he said, China’s appetite for corn should keep that crop in a strong price position. “China became a net importer of corn for the first time in 2010,” said Lopez. “The country imported 140 million tons of grain that year, and this figure has continued to go up since.”
As a by-product of this growth in agriculture, land values have continued to climb as well. In recent years, buyers have forked over upwards of $20,000 per acre to get in on the agricultural game — and this trend shows no signs of slowing down in the coming years.
“We are in the middle of the largest transfer of wealth in modern history,” said Jim Farrell, president/CEO of Farmers National Co. “For ag land values, these are the best of times, and this has been going on for the past three or four years.”
For long-time market watchers, this should come as no surprise, added Farrell. According to USDA statistics, grower profits have increased approximately 30% since 2007, spurred on by record crop demand from ethanol producers and China.
But that’s not to say that farming is becoming less popular. According to Farrell, more than 75% of the farmland sold by his firm ends up in the hands of other growers who are looking to expand their existing operations. “This isn’t like in the 1980s farmland sales event,” he said. “Back then, more than one million farmers just left the market, selling their land to be developed and taken out of production agriculture. It’s different today. Most of the land is being purchased by other growers at auction, with the newest phenomenon being the 80-plus-year-old cash buyer who is buying the land for his family.”
As for the buyers of the other 25% of current farmland, these are typically what Farrell refers to as new investors. “These buyers are bullish on the prospects for agriculture and they have a set plan for how to make a profit in farming for 10 years or so,” he said.
And the land grab should continue. “We expect a good land market into 2013,” said Farrell. “If commodity prices stay high, interest rates stay low, renewable fuel standards stay intact and China’s growth keeps going, then all is good.”
No Farm Bills In Election Years
If there is one potential dark cloud on agriculture’s horizon in 2012, it could be the prospects for a new Farm Bill. According to Chuck Conner, president/CEO for the National Council of Farmer Cooperatives, everyone in the nation’s capital knows how important Farm Bills are to keeping the country’s agricultural system protected. But in 2012, there is a much bigger issue keeping lawmakers busy — the Presidential Election and, in some cases, their own re-election bids. As a result, the drive to craft a new Farm Bill in 2012 has ranked a very distant second on many Washington politicians radars.
“That’s the one big problem with the 2012 Farm Bill — it’s not a good idea to do one in a Presidential Election Year,” said Conner. “Agriculture would have been better off if it passed a four or six year bill back in 2007 to deliberately avoid the 2012 campaign.”
Of course, that’s not to say that absolutely nothing has been done on the 2012 Farm Bill, he added. In fact, the Senate has actually passed a version of the bill. This includes crop insurance payments, very modest cuts to nutrition spending and a gradual scaling back of conservation acreage. “This last provision could bring five million acres back into agricultural production immediately and ultimately could see 10 to 15 million acres come back,” said Conner.
Unfortunately, the House of Representatives version of the 2012 Farm Bill is much different, which has kept it from even getting to the voting stage. In this version, direct payments are completely eliminated and nutrition spending is cut $16 billion over 10 years.
“The deeper nutrition spending cuts in the House version is the reason why we don’t have a 2012 Farm Bill done,” said Conner.
At the time of his speech, Conner pointed out that there were virtually no days left for Congress to reconcile these two Farm Bills and pass them before the November election. “I’ve made a career on Congress doing nothing,” he said. “And the election will make progress going forward much more difficult.”
However, he added, there are two words that could spur Congress into action during a Presidential Election Year — fiscal cliff. For those unfamiliar, the fiscal cliff refers to several tax hikes and automatic government spending cuts that will kick into place on January 1 unless Congress acts to delay them. Among the potential fallout from the cliff — the nation’s gross domestic product could fall four points during the first quarter of 2013, which Conner said would virtually guarantee another nationwide recession.
“Everyone has warned Congress that to not act on this would mean the economic blood of America would be on their heads,” said Conner. “So assuming they do act, I think you could see the 2012 Farm Bill being part of this package because of how it will play as helping rural America.”