What possible connection could land, India, crop prices, and Hershey’s chocolates have to one another? This may take a few minutes…
Three recent articles have driven home to me the reasons that the public is unusually uncertain about what is going on in our economy. First was an article online at cattlenetwork.com. It compared what is happening today with commodity prices and land values with what happened in the mid-nineties. In 1996, new-crop corn on the futures market rose as high as $3.83 per bushel in July, after which the price began a five-year decline—the following year’s pricing never rose above $3.08 for instance. In contrast, today the futures market tells a different story. Even though we are coming off of a record corn harvest, the 2008 new-crop corn is still more than $5.00 per bushel. The difference between today and 1996 is that farmers can sell their 2009 and 2010 crops for just about the same price into the futures market as their 2008 crop.
Take this one step further—according to the article, the implication is that land rents (the rent that one pays to rent someone else’s land in order to farm on it) in Iowa and the rest of the Corn Belt should increase by a factor of about 2.8. Going back to 2005 (prior to the sharp increase in crop prices), the annual land survey by Iowa State University shows the average acre of Iowa farmland valued at $2,914. If one applies the 2.8 factor to the 2005 land value, it suggests that $5.00 corn and $12.00 soybeans could support average land values greater than $8,000 per acre. One other conclusion of the article is that we can all expect to see higher food prices over the next few years as the higher cost of commodities are passed on to consumers. The author concludes by rhetorically asking whether these futures prices can be trusted to predict land values.
The second article appeared yesterday in the Wall Street Journal. It starts out describing how an Iowa farmer intends to demolish a few buildings on his farm in order to expose the rich topsoil beneath so that he can plant a few more acres this year. The article cites soaring demand for grains in China, India, and other emerging markets as one of the culprits for increased commodity prices. It further cites such companies as Kraft Foods, Tyson Foods and Hershey’s, all of which announced an increase in prices this year due to higher costs of production.
The article continues by mentioning a number of risks that farmers face: higher seed and fertilizer prices, “nocturnal thieves… stealing grains from unlocked bins,” potential drought, etc. The author says farmers are left to wonder whether the grain boom could be just another in a string of bubbles such as the dot-com disaster and our current housing slump. She reaches no conclusion as to the answer, so we are left with essentially another rhetorical question, although this article is somewhat more negative than the first.
The third article appeared on January 27, 2008, in the Mason City Globe/Gazette. It is, perhaps, slightly less analytical than either of the first two, but it off
ers a little clearer conclusion. The essence of this article is that land itself may be the hottest commodity on the farm. Buyers abound, sellers are not all that common, and land prices reflect that imbalance. This article offers the opinion that it is primarily farmers who are buying farmland. That may sound obvious, but over the past few years it has been investors who have been heavy participants in farmland purchases. Today, the article points out that higher commodity prices make it possible for gross revenues from 2007 production on land might have actually paid for that land if it had been purchased in 2006; therefore, farmers themselves are more likely to be the buyers of farmland than investors.
What can we conclude from these three articles? The conclusion that I draw is that the “experts” do not know what is going to happen and there are as many opinions out there as there are “experts.” Is it any wonder, then, that the rest of us are a little confused?
I thought about ending this blog with the rhetorical question that ends the previous paragraph, since the articles I am discussing essentially ended rhetorically, but I decided I could not do that to you, my loyal reader. So here is my opinion, based on a little bit of research and fifty-six years of living in this economy: 1) farmland prices will continue to rise, possibly fairly sharply; 2) commodity prices will stabilize or continue to rise; 3) prices in the grocery store will rise. There you have it—those opinions, plus about $4.00, will get you a cup of coffee at Starbucks if you hurry before prices go up.
Ken Tharp
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