Two economist highlights from ASFMRA

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INDIANAPOLIS, Ind.—The 83rd Annual Meeting of the American Society of Farm Managers and Rural Appraisers (ASFMRA), which also included the Agronomics—Vision 2013, more than anything else included a program of economists providing differing views and various outlooks for land values, U.S. grain marketing and world economies.

The kickoff came from Steve Elmore, agricultural global economics lead for DuPont Pioneer. He said ag production and food consumption per capita are on the increase, and this consumption is increasing in meat with beef being the least rapidly increasing. China’s impact and situation was a main example of these world economies outside of the most developed nations.

Low ending stocks for corn, wheat and rice are a concern, Elmore said. It is an accounting situation related to when South America harvests that shows soybean stocks going up when in reality they haven’t, he said. It is Elmore’s contention that wheat will pull acres out of corn and soybeans in 2013 planting.

For the near term, the lowest feed to animal supply is a concern, but it will adjust with livestock producers decreasing inventory. “We are at the lowest we’ve been in corn per animal unit, including DDGs in the calculations, even back to 1988,” Elmore said. “What it shows us is that we probably need more contraction in the livestock industry that we have not seen yet, because animal numbers aren’t sustainable.”   

“In 1992, the U.S. produced 51 percent of the soybeans in the world. Now we produce 29 percent of the soybeans. Back in 1992, South America produced 30 percent of the soybeans in the world, and they now produce 55 percent,” Elmore explained.

The increased yields of crops worldwide has been mainly based on increased seeding rates with better planting technology and seed matched to soils to allow higher population planting.

Export of soybeans to China is a number yet to be locked at any level; there is just a lot of optimism in the soy industry. “U.S. exports have gone down. In 2007, while everybody blamed ethanol, it was still a record high year for exports of corn,” Elmore said. The U.S. share of world corn exports was 63 percent and that has dropped to 35 percent in 2012. Big competitors to the U.S. are South America and the Black Sea countries.  

Elmore said in regard to grain use for biofuel. The Department of Energy came up with the 15 billion gallons of biofuels based on the projection of total fuel use of 150 billion gallons. The 10 percent number was based on the use of E10 ethanol in each gallon of gasoline sold. The projections of total gasoline that will be used is lower than original projections by 13 billion gallons. E15 and E20 gasoline are issues to consider. “How this plays out is a big factor in the forecast for agriculture in the U.S.,” Elmore said.

As for the drought, he noted, “You don’t get out of a drought in one year.” He then pointed out there was negative impact for three years in droughts of 1934-36, 1954-56 and 1987-89. Although there are different above average rainfalls suggested as necessary to pull the Midwest and Plaines regions out of drought, Elmore said the average would be about 12 inches above average to exit the drought in 2013.

As for the farm bill and politics, he described forecasting based around the farm bill as the same as driving with your lights on in a heavy fog and still not being able to see much of anything.

Michael Swanson with Wells Fargo

“Everything is connected; we just can’t see how,” said Michael Swanson, ag economist and consultant for Wells Fargo, noted in opening his presentation.

He said, “We have an incredibly low alternative financing environment. Earlier this year, we had tender treasury stuck at 1.4 percent; that meant the market, in its infinite wisdom, perfect market, was willing to give the U.S. government money for 10 years at a miserable 1.4 percent return.”

In looking at farmland values, he said predictability is not fully flushed out but sees ultralow financing to be unsustainable. “Farm income has been a big driver in the increase in the value of farm and ranch assets. But a bigger piece, twice as much of the valuation in the current model is coming from the ultralow financing situation we find ourselves in,” Swanson said.

Swanson questions what will happen when the price of financing goes up dramatically in the next three to six years. “What is that going to do to the net present value of farm and ranch income valuations? It is going to have a negative impact. We know that.” he said.

“I keep telling people it is so much more important to have discipline than intelligence when it comes to investing,” Swanson said. “So many of us know these things are wrong, but can we bring ourselves not to operate on these things.”

“If you don’t even entertain a different price set for corn, you are never going to get enough doubt in your mind to really do a good analysis." He does not dispute that population and income are primary drivers of demand for agriculture.

But Swanson disputes the projected populations of some of the countries of the world as calculated by the United Nations Food and Agriculture Organization. He thinks they are fundamentally flawed. The example he used was Nigeria. “They have Nigeria, of all countries, going from 150 million people to 1 billion people in their long-term forecast. Nigeria, Africa, is going to have a billion people in 2100. That is a long way out, but if Nigeria were to ever hit that number that is forecasted, they would have 8 ½ times the population density of China. Now, you tell me that number is really going to happen,” he said.

Jumping to the ethanol situation. Swanson said ethanol plants already built are a consideration for the future, whether they continue grain ethanol or are converted to various feedstock. They will be in play until they wear out. In the near term, cheaper corn will increase ethanol production. There has been a decline in demand for gasoline, as Elmore explained—five years of sustained decreased demand from year to year from 2007 to today.

Grain production and demand were a big part of Swanson’s presentation. He noted that corn at $2.25 per acre provided little incentive for farmers to try and increase production with any added inputs. Today, he is terming the U.S. as the “Saudi Arabia of corn.”

He said, “We have the greatest amount of production just behind China, and we have a huge per capita production, which means we have a lot of exportable grain, or we can slip it into fuel use if we want. This makes us the key driver around the world, but we are not alone.”

Production in the U.S. has gone up fast in the U.S. compared to almost every country, but Brazil has had a substantially larger growth rate than the U.S. He noted that the U.S. thinks of itself as the big gorilla because of our production. “We take it for granted that we are going to set the price in so many markets, but as others grow their supply in a per capita basis, they either exclude imports or they grow their ability to export. Cumulative change has a big impact.

“Eighty-five percent of the grain grown in this world is grown outside the U.S, but typically at half the yield of what we do in the U.S.,” Swanson said. He contends it is because they have not had the price or opportunity. They have to have a “price signal” for production to improve.

As for the U.S., production improvement is the way to become more profitable in farming than buying more land in a lot of cases, from Swanson’s point of view. “Land prices have responded, correctly so, to higher crop prices and lower interest rates.

“It would be foolish and unreasonable to not think land prices would not run up because of higher crop prices and low interest rates, but at the same time, land improvements have not seen the same distorting factor. If you go back and look at the cost to tile, level, irrigate or soil enhance an acre today versus 2005 or 2006, the actual cost per acre is not substantially different than what it was back in that period.”

There is competitiveness for the services and inputs that have kept prices down, and making improvements will return more than farmers realize, Swanson said. He contends too many farmers are taking the easy way in increasing production. Too many farmers are taking the “easy deal of buying land” instead of investing in technology and management.


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