Category Archives: investment

New Barclays Report Somewhat Bearish on Agriculture Commodities

This month’s Barclays commodity report contained the following interesting graph. It shows how the sectors of energy, agriculture, livestock, industrial and precious metals in exchange-traded products funds have changed since the first of this year.

The title of the report was also interesting: The Commodity Refiner. From an age of shortage to an era of enough?

The paper’s forward starts out like this, and you just might find the whole report worth a read…

Spring is in the air and, right on schedule, the familiar swoon in commodities has arrived. But although the price action may be familiar, the causes are less so. For the past few years sovereign debt concerns and financial market jitters have been dominant price drivers, bulldozing their way indiscriminately through markets as diverse as gold, copper and oil with little care for the subtleties of supply or the nuances of demand trends. In contrast, the factors at work recently are much more commodity-specific: investors turning bearish on gold as the prospect of an easing in Fed liquidity injections beckons; disappointing Chinese growth bringing in to question the health of base metals demand; concerns that an unusually high level of refinery maintenance is resulting in a large surplus of crude oil. And the price response, with gold leading the fall, some base metals following but others less affected and energy markets dipping relatively modestly, was suitably differentiated.

Certainly, as the above commentary indicates, outside of cyclical patterns, investment in commodities has not only been driven by supply issue perceptions, but by global banking practices. Note that this viewpoint of “enough”, while some broken records like Jim Rogers may disagree, is congruent with the ongoing overall relaxed outlook about global agricultural commodities over the past several years here at Big Picture Agriculture. This stems from increased production in the BRIC nations, increased industrial production efficiency methods, and increasing mechanization of agriculture. In addition, were it not for sudden recent demand created by biofuels policies, we’d have severe price problems, or at least far less production incentive than we find ourselves with today.

As the following graph demonstrates, agricultural investments are volatile, even “with a rising global population” and more “meat eaters”.

Of concern, is always the energy sector, however. All other commodities in the top graph are impacted by energy costs. The Barclays forward has this important commentary and I always like to compare the dynamics of energy supply to similar dynamics going on in the Ags; think trucks lined up in Brazil to export corn and soy recently or the southeastern U.S. importing corn from Argentina for feed use instead of purchasing it from the U.S. cornbelt this year. The quote is not very reassuring.

Spare capacity and inventory buffers are still relatively low in many markets and this at a time when geopolitical risks are a becoming an ever more clear and present danger, especially to energy supplies from the Middle East. The most obvious friction point at present lies in the severe infrastructure deficits that are creating choke points and preventing the smooth flow of many commodities around the globe. A lack of pipelines, storage facilities and ports of the scale required to get new supplies to where they are most needed is at the heart of the huge increase in regional oil and gas price differentials and soaring physical premiums in base metals. Distribution is becoming the new battleground for commodities and is likely to remain one for some time to come. (emphasis mine)

The report makes this next analysis concerning energy/agriculture.

Meanwhile, perceived ethical issues, and the changing regulatory environment have affected investors’ attitudes towards agricultural-linked notes negatively, which have been extremely quiet since mid-2012 and have received merely $6mn so far this year. For energy-linked investments, 2012 saw a healthy performance, attracting $1,457mn (up 30.6% y/y), thanks to the upside risk for Brent crude oil. However, as market volatility decreases while the general outlook in early 2013 remains bearish, we expect fewer energy issuances in the coming months.

As for weather, the big wild-card, I see increased resilience as seeds advance and as production continues to increase in more regions of the world, the downside being increased extreme weather events associated with climate change. Also, today’s biofuels mandates could be eliminated if weather caused steep supply shortages translating to high food prices, so they potentially provide an added layer of resilience to the Ag commodity and food price system — assuming the political will exists to respond to shortage situations.

REFERENCE: http://www.stockmarketnews.biz/wp-content/uploads/2013/04/Commodities-Research9.pdf

Agriculture is Not a Guaranteed Investment Sector. Plus, More Agriculture News This Week.


Winter field. Larimer County Colorado. Yesterday.

Below, is a selection of recent agriculture-related news.

There has been such a frenzy of investors seeking to invest in all things farming-related in the past decade, some of them simply puppy-dog followers of Jim Rogers. I think that anyone who has operated a farm or knows the business has questioned and even resented this movement and one of the idiocies has been using “we will have to feed nine billion people by the 2050″ as the sure-thing logic. I’ve written plenty on how farmland values and returns are related to policy (including Bernanke-policy), not just population numbers; what we have had going on in agriculture for decades is overproduction and not an inability to provide enough food for people; and that farming involves multiple risks similar to gambling in Vegas. So, I try not to be too repetitive on this site, and have not spoken of these things much recently, but this article from Financial Times (“Investors Wary of Going Back to the Land”) is a good one looking back a few years on some of the lessons learned about investing in agriculture.

Jerald Schnoor, an Iowa engineering professor is worried that the increased use of water for making ethanol is threatening Iowa’s aquifers. He is calling for an end to biofuels to preserve our aquifers. “One corn ethanol processing facility in Iowa uses 200 million gallons of water per year in this state where about 75 percent of the corn grown goes towards making ethanol.” On a related note, National Geographic published an article about water use in energy, and one of the biggest reasons it is projected to double in 25 years is because of water required for biofuels production.

This Arizona article discusses the state’s water use in farming and how climate change might affect growing crops there.

Meet the new normal in U.S. corn and soybean farming. Farmers will use the John Deere 600-horsepower tractor which costs $500,000; and the Claas 465-horsepower combine which costs $560,000.

Biofuels policies are about economics, don’t let any of the other lobbyist’s lines fool you. This quote by Iowa’s Governor Terry Branstad says it all:

“Having been Governor during the farm crisis of the 80′s, I know the difference between a strong, renewable fuels industry, and when we didn’t have it. We don’t want to go back to those bad old days.”

The ever elusive product, cellulosic ethanol, looks to be defined today as using the rest of the corn plant, or so it seems, from observing the newest projects on the books. We could see this coming and it’s not surprising for a number of reasons, like easy access to the feedstock.

EIA: Use of E15 was extremely small during 2012; only eight fueling stations in Kansas, Nebraska, and Iowa were selling it by the end of the year. (The industry is pinning its hopes upon increased use of E15 in the future.)

The latest on a proposed nitrogen fertilizer plant here in the U.S. has taken an unusual twist and turn:

Indiana officials are withholding state backing for a Posey County fertilizer plant over concerns about whether its Pakistan-based owners are doing enough at its overseas operations to keep the potentially explosive material from being used against U.S. troops. The Indiana Finance Authority issued $1.3 billion in bonds in December for a nitrogen fertilizer plant that Midwest Fertilizer Corp. wants to build at the Port of Mount Vernon, in the southwest of the state. Midwest Fertilizer is owned by the Fatima Group, a company based in Lahore, Pakistan, that already manufactures fertilizer in the south Asian country.

The WSJ tells us that avocado growers in the San Diego area of California are replacing trees with vineyards and other water saving crops. The cost of the water to grow the avocados was just too expensive, and consequently, avocado acreage has fallen rapidly over a decade.

Hay supplies are at their lowest since 1957.

UK sheep farmers are losing money because of rock bottom prices and many are near to fold, although the price of lamb at the supermarket remains priced very high. What gives?

A few days ago, I covered the rising input costs for U.S. Midwestern farmers, and this article describes the more dire situation for UK farmers. Here’s a great quote:

The National Farmers Union described the Defra data as a “wake-up call for us all”, saying that they “shatter the myth that high commodity prices would mean high profits.”

In Germany, ethanol production increased by 7.4 percent in 2012, mostly by increased production from sugar beets, up 54 percent.

The U.S. textile industry has been looking brighter and has turned around in the past four years.

Iraq, a good wheat producer, is facing multiple challenges in motivating farmers these days and the area being farmed is shrinking.

The WSJ interviewed Monsanto’s CEO, Hugh Grant, on the safety of GMO’s, Prop 37, and weed resistance.

A Pennsylvania organic farmer paints a dismal picture of his fiscal situation.

Golden rice which has been genetically engineered to prevent blindness in children (because it contains vitamin A) is soon to be used in the Phillipines, and other nations. This has been a long hurdle.

Ohio engineers are working on a refrigerator for small farmers in India to help reduce their food waste. They’ve come up with a solar powered unit which uses a compressor like that used in vending machines. Now, if they can just get the cost down to something affordable.

I recommend watching this 13-minute ABC news video which shows how much damage recent fires did to the farming sector in Tasmania and includes interviews of some of the farmers who were affected.

The number of organic farms in Hong Kong is growing because of a consumer desire to trust the food source. (includes a 3-minute video worth watching)

The Perennial Plate team is in India and this is a great 5-minute video of the food scene there.

Last, but not least, see the 2-minute “God Made a farmer” commercial that was such a hit during the superbowl. It subtly advertised the Dodge Ram Pickup, was narrated by someone who’s dead, and used previously seen photographic images of desolate and lonely farmscapes.

BONUS: This piece is about urban planning and the hope of ending city love affairs with cars in this century. “Why do architects hate people so much?” … learn what went wrong and create a “new paradigm for the 21st century.” … Shifting gears may actually mean a return to the old ways.

Written and compiled by K. McDonald.

Comprehensive Update on Farmland/Cropland Cash Rent Rates for the Midwest

With farmland prices escalating rapidly in recent years, rental rates have also been rising, and since half of Iowa and other Midwestern area farmlands are rented, a common and difficult question to answer is how much to charge for cropland rent. Of late, we have seen a rapid rise in the price of farmland, input costs, and farm commodity prices. Both risk and reward are increasing, creating volatility and difficulty when it comes to rental rate decision making time.

Cropland rental rate increases in 2011 ranged widely from 5-30% across the upper Midwest. In this posting is the latest available cropland survey rental data (that I was able to find) for Nebraska, Iowa, Indiana, Illinois, North and South Dakota, Kansas, and Minnesota, based on state-wide surveys provided by their respective universities and the USDA.

According to Economist Ernie Goss, 39% of Midwestern regional bankers reported that cash rent prices for agricultural land rose more than 10% in March 2012 year-over-year. He reports that there has been a substantial increase in rents this year, with an overall average of 7.8%.

For the past four decades, farmland values continue to rise faster than rental rates. In the year 2007, it would take 33 years to pay for farmland through cash rents. Back in 1951 it would have taken only 14 years.

In 2011 the average farmland price reached $6,708 per acre in Iowa, up 32.5% from 2010. Rents rose more than 11% in 2011. Because farmland prices advanced significantly, the return on the farmland dropped from 3.8% to 3.4% in 2011, in Iowa.

Rental agreements vary by type, but are most commonly cash lease, crop share lease, or flexible cash rent agreements. As an example, currently in Illinois, traditional fixed cash-rent leases make up 32% of farming agreements and 68% of agreements include sharing in crop production and price risk.

To follow, are the farmland rental rate averages from the individual states.

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NEBRASKA CROPLAND RENTAL RATE AVERAGES 2005-2011

To view the entire Nebraska report: http://agecon.unl.edu/c/document_library/get_file?uuid=3740277f-4fee-45aa-af27-1428d261d462&groupId=2369805&.pdf

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IOWA’S AVERAGE CASH RENTS FOR CORN AND SOYBEAN ACRES 2007-2011

To view the entire Iowa report: http://www.extension.iastate.edu/agdm/wholefarm/html/c2-10.html

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SOUTH DAKOTA AVERAGE FARMLAND RENTAL RATES FOR 2011

To view the entire South Dakota report: http://pubstorage.sdstate.edu/AgBio_Publications/articles/C278.pdf

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INDIANA AVERAGE FARM RENTS FOR 2011

To view the entire Purdue (Indiana) report: http://www.agecon.purdue.edu/extension/pubs/paer/pdf/PAER8_2011.pdf

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KANSAS CASH RENTS FOR FARMLAND 2002-2011

To view the entire Kansas report: http://www.nass.usda.gov/Statistics_by_State/Kansas/Publications/Economics_and_Misc/Landval/landvlcashrnt11.pdf

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FARMLAND AVERAGE CASH RENT BY ILLINOIS COUNTY IN 2011 AND EXPECTED 2012 RENTS

To view the entire Illinois report: http://web.extension.illinois.edu/jsw/downloads/40766.pdf

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MINNESOTA AVERAGE FARMLAND RENTAL RATE INCREASES FROM 2006-2010

To view the entire Minnesota report: http://www.cffm.umn.edu/Publications/pubs/FarmMgtTopics/RentalRates.pdf

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NORTH DAKOTA

In North Dakota, farmland rents are up 5-10% over a year ago where farmers will plant a record 3.4 million acres of corn this year, up from 2.2 million acres last year. Richland County had the state’s highest rental rate for nonirrigated this year at $175 per acre. Rental rates in south-central North Dakota increased an average of 12%. Nonirrigated farmland in Emmons County was up 15% from $48.10 per acre last year to $55.40 per acre this year. Nonirrigated farmland in North Dakota’s southwestern region of Bowman County saw rental rates up 4.7% from $31.80 per acre last year to $33.30 this year.

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RENT TO VALUE RATIOS ARE IN DECLINE, ACCORDING TO USDA SURVEY DATA

There has been a 45 year trend in decreasing rent-to-value ratios of U.S. farmland. Survey data collected by USDA’s National Agricultural Statistics Service shows that since 1999, almost every USDA region has seen a decrease in RTV ratios. The Lake States and Southern Plains experienced the largest relative decrease in RTV ratios, a decline of 48.3% and 51.2%, respectively. The Delta and Mountain regions had the lowest relative (percentage) decrease in RTV ratios between 1999 and 2008, 4.2% and 8.8%, respectively. Some experience larger levels of volatility in the RTV ratios, especially in the Delta, Mountain and Pacific regions (more farmers in these three regions use irrigation, and some of the volatility could be due to our averaging of irrigated and non-irrigated rents and land values). The areas with the highest RTV ratios are the Northern Plains, Delta, Mountain and Pacific regions. The Corn Belt and Lake States are closer to the national average. The Southeast, the Southern Plains, Appalachia and the Northeast all have lower RTV ratios.

For more information from the USDA on declining rent to value ratios of U.S. farmland: http://www.ers.usda.gov/Publications/EIB92/EIB92.pdf

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Timing and Longer Time Frame are Key to Investing in Farming

Using Morgan Stanley’s failed venture into farm investing in the Ukraine and selling its distressed investment at the wrong time, Bloomberg’s Alan Katz has a good video here with some good farming scenes in the Ukraine. (This region is improving farming infrastructure and buying equipment rapidly, but it takes time and does not happen overnight.)

Haven’t those with dirt under their fingernails laughed as white shirt collars “invest” in this industry? Somethings been wrong with this picture all along . . . ——K.M.