Farm Futures held its 2009 Management Summit in Indianapolis Jan. 21-22. Here are some highlights from keynote speakers:
1) Land is a great wealth accumulator as long as you have cash flow to go with it. "Land values have spiked up in recent years," notes Virginia Tech Ag Economist David Kohl (left). "If it grows too fast, it's a weed. That applies to business and land values." Any time you have war, land values go up; people want to invest in a hard asset. In 80 of the last 100 years, land values have gone up. Don't get caught in a land 'trap,' where you have invested all your assets in land and don't have cash flow to get through hard times.
<<David Kohl, Virginia Tech ag economist
2) There's an 80% probability of a 10% decrease in land values. Decreases are likely higher in cotton country. "Land values will adjust, but not like the 80s," says Purdue University Ag Economist Mike Boehlje (right). "This will not be like the housing market, where the property goes back to the lender."
3) Corn-based ethanol industry will mature out. Ethanol demand eats up a third of the U.S. corn crop and that's about where it will stay, says Boehlje. Ethanol plants being built now will stay in production, but ownership will change. The bankrupt Vera Sun will sell its assets to buyers cheap enough to put them back into action, but there's little growth for ethanol in future. To increase beyond current demand automakers and blenders would need to boost the blend above today's average of 10%. Distribution systems for fuel would have to change and that will happen only if oil companies are forced under new regulations.
4) There's a 90% correlation between the price of corn and price of oil — but for how long? "When we had $150 oil, we had nearly $8 corn," says Boehlje. "That relationship is increasingly disconnected. Fundamentals are coming back into play." If we get excess supply of ethanol, you'll see more traditional market fundamentals at play.
Mike Boehlje, Purdue University ag economist>>
5) Global demand for animal protein will replace corn ethanol demand. This is a much trickier demand factor, for a host of reasons. Animal protein demand in other countries depends on the vagaries of world and domestic politics and economic growth. China and India grew in 7 to 10% spurts the last several years, compared to 2 to 3% in the developed world. "This is a sustainable, predictable market force as long as people keep earning more income and improve their diets," notes Boehlje. "If a recession in China and India stalls us out and ethanol matures, we could find a gap in global corn demand."
6) Will U.S. farmers participate in animal protein market? The future of U.S. livestock industry is in question.California voters approved measures in November that could destroy that state's livestock industry. The new regulations are driven by emotion, not science. Encouraged by this victory animal rights groups will surely try to pass similar measures in other states. "Your special interest groups, not politicians, are driving this," notes Kohl. The threat is competition from Ukraine, Brazil, Australia and other countries with livestock-friendly laws.
7) Beef industry is disadvantaged. U.S. livestock industry will downsize due to higher feed costs, and the beef industry could be hit hardest. Beef is relatively inefficient in feed conversion, but it's only a problem with expensive feed — which is what we are facing now. Second, beef has a very slow gestation period with single births compared to pork and poultry. "The fundamental biology of beef works against it," says Boehlje.
8) The average U.S. recession lasts 11 months. The average period of good economic times is 56 months, says Kohl, but since WWII, the good times have been longer and the bad times shorter. However, the severity of this recession means it could last as long as 17 months, he adds. How will we know when the economy is healthy again? Watch housing starts. "Right now there are 6 million homes vacant and builders need to learn we want energy efficient, more affordable homes."
9) Infrastructure opportunities. With President Obama focusing on massive building projects, there has never been a better opportunity to fix agriculture's crumbling infrastructure. "Farmers need to get on the phone and talk about locks, dams, roads and rural bridges," says Boehlje. "If we don't solve the lock and dam problem our exports will be severely impacted." Most of the locks and dams on the Mississippi and IllinoisRivers were built over 70 years ago and need to be replaced or expanded. "Our competitive advantage over Brazil used to be technology, but now they have that," adds Boehlje. "The only advantage we have now is infrastructure and that's fading quickly."
10) Watch dollar for clues on corn market. Start watching the value of the dollar. A stronger dollar will damage exports, and exports have been the major driver of farm income over the last 20 years. Other factors include the price of oil and the price of wheat. Why wheat? Because wheat is a feedgrain in the rest of the world. If wheat gets too expensive, people will start switching to alternatives.