Ag Equipment Intelligence  

Why Ag is Among the Brightest Investment Opportunities

 With the new profit opportunities Wall Street investment fund managers are seeing in both farmland prices and economic returns from agricultural companies, they’re showing more interest in food and fiber production than has been the case for many years.

On March 9, Ag Equipment Intelligence, along with the financial investment firm of Boenning & Scattergood of Conshohocken, Pa., co-sponsored an “Ag Day in New York City.” Now in its fourth year, the event is designed to give investment fund managers and financial analysts a first-hand look at the latest trends in both farm technology and the farm equipment business. This year’s event drew nearly 50 managers and financial analysts from numerous investment funds. The program featured growers from Indiana and Pennsylvania along with executives from the farm equipment and grain industries. Here are a few of the key takeaways from the conference.

$15,000 Land Values?  
With more investment funds looking at the possibilities of investing in agriculture, soaring farmland prices were a hot topic. With numerous farmland sales over $10,000 per acre in parts of the Midwest, Tom Dorr reported there have been land sales as high as $13,000 per acre in parts of Iowa.

“With $6 per bushel corn, you can make a case that farmland is not overpriced at $15,000 per acre,” says the president of the U.S. Grains Council in Washington, D.C., and a farmer in northwest Iowa. “While my farmer friends don’t like to hear me say this, it’s true.”

He maintains that dramatic increases over the past 6 months in corn prices are not due to the growing demand for fueling ethanol plants. Instead, he cites several reasons for the increase.

“In 1989, we saw the fall of the Iron Curtain in Eastern Europe,” he says. “This placed about 3 million new people into the global market for the first time.”

“Over the past 30 years, there’s been a 528% economic growth rate in developing countries vs. only 36% in already developed countries.

“The economic growth around the world is the reason behind the increased value of corn. The number of middle-income urban consumers will double by 2020, leading to a growing demand for meat and crop production.

“It’s not due to the demand for corn with ethanol.”

From the 1930s to the present, Dorr says there have been four instances where the price of corn doubled over a 20-year time span. Corn that was selling for 50 cents per bushel in the 1930s now brings over $6.

But we definitely need more corn. Dorr says USDA economists are predicting that when the 2011 corn harvest gets underway this fall, there will only be a 7-day carryover supply of corn, says Dorr.

300-Bushel Corn?  
Tom Evans of Great Plains Manufacturing outlined how producers may reach the 300-bushel level with corn by 2030. He outlined a half dozen ways growers can boost yields that can add up to an 89-bushel-per-acre increase.

These included more efficient usage and placement of fertilizer, reduced planting speed, making effective use of planter accessories, selecting proper hybrids, using new techniques, such as vertical tillage, to control residue and adopting twin rows to push up yields. More efficient use of light utilization with new hybrids, narrower row widths and increased emphasis on root growth will also boost yields.

Yet, Evans maintains the biggest increases will come from newer hybrids that will allow growers to push plant populations to 55,000 plants per acre. He credits these developments with offering a possible 105-bushel-per acre increase by 2030.

“By going from 35,000 to 55,000 corn plants per acre, a grower can get a 7-bushel boost for every
1,000 additional ears,” he says. “For a Midwestern grower who’s harvesting 200-bushel yields, these yield boosts of 89 and 105 bushels could get him to a yield of 394 bushels.”

Evans says the key to 300-bushel yields is not allowing the corn plants to have even one bad growing day during the growing season. He also predicts the end of fall fertilization may be coming due to nutrient losses exceeding 20% over the winter months.

Steady Farming Gains
Ken Rulon noted how agriculture has averaged an 8% return on investment over the past 100 years. The Attica, Ind., grower, who farms 7,400 acres with his brother and cousin, says half of this return came from increased land values and half from new developments in crop production.

He’s convinced that yields have very little to do with farm profits.

Instead, it’s the selling price of the crops that really counts. Rulon says the key to success today is effectively managing all of the risks in farming. As a result, he sees many natural hedges and opportunities today in agriculture:
•  Bad weather equals higher prices. “We get normal weather only 20% of the time,” says Rulon.
•  Higher energy prices lead to higher grain prices.
•  A weaker dollar represents increasing land values.
•  Higher interest rates mean it’s time to consolidate farming operations.
•  A farm depression represents an opportunity for innovative and efficient growers to expand.

“But the risks in farming are also growing,” says Rulon. “Banks are now requiring farms to cash flow even on land purchases, and payments are due every year. Farming has never had to do this in the past.”

Rulon says tiling is one of the keys to earlier planting. Yet only 4-7% of U.S. acres are adequately tiled. Tiling costs $1,200 to $1,500 per acre.

— Ag Equipment Intelligence, March 2011