Living among the farms of east-central Indiana, Charlie Rentschler, ag machinery analyst for Wall Street Access, brings a unique perspective to his trade as an industry pundit. In his March 10 report to investors ("Oink, Moo, Cluck, Baa — Or What We're Hearing on the Farm"), Rentschler reports, "While we regard U.S. agriculture's outlook as very bright long term, we can envision some real turbulence in the next year or so — which may create investment opportunities."
Rentschler says he's never seen "such optimism among our farm neighbors." Despite the cost of everything sky-rocketing, "like the prices of their crops, they report their absolute margins are better — or they feel they're better — and they're spending money on equipment."
Corn Ethanol Producing Mixed Results. Rentschler, who has let it be known far and wide that he's no fan of using corn for ethanol, says he sees this as the major underlying cause for the worldwide boom in agriculture, but also the major factor in some very erratic swings in demand and prices, not just for maize, but other crops as well.
"As this hair-brained, government-sponsored industry abruptly gets built out and starts to contract, these turbulent times could create opportunities for investors.
"However, we remain very bullish long-term for world-wide farming as the industry transitions from a supply-driven to a demand-driven model, courtesy of the new meat diets of several hundred million emerging middle-class Asians, as well as the cheap U.S. dollar which helps lower their cost," he says.
Through-the-Roof Expenses. The farm analyst says that he's been checking various local sources and to a person they are telling him about dramatic cost increases.
For example, one near-by farm is renting for $250/acre vs. $150/acre last year. A local fertilizer co-op reported the retail price of anhydrous ammonia (nitrogen) is $740/ton, compared with $560/ton last year, while 0-0-60 fertilizer (potash) has climbed to $500/ton vs. $260/ton last winter.
But, while costs have rapidly escalated, so, too, have prices farmers get, with corn trading for over $5/bushel, soybeans, $15, and wheat $11, 2-4 times as much as a couple of years ago.
Equipment Deliveries. The local Deere and Case-New Holland dealers are sold out of large tractors and combines — delivery of new machines is sometime in 2009. "Best Equipment, a used machinery dealer in nearby Greensburg Ind., told us that they can sell a 5-year old row-crop tractor or combine harvester for "significantly more" than a year ago.
The local Hemisphere GPS "Outback" representative explained, "sales of automatic-steering units have exploded." The reason, he said, was "farmers have more money."
Rentschler says that there's no doubt that area farmers are "growing wealthier. Plus, they need to renew equipment that wasn't replaced in the long recession that lasted from 1999 to 2006," have put them in the mood to spend.
Fly in the Ointment. The way Rentschler sees it, the fly in the ointment is corn ethanol. "An unnatural phenomenon, it is based on governmental subsidy — principally, a $0.51/gallon credit to the blender that mixes the stuff with gasoline to get, say E10, or 10% "white-lightning" — but has grown to be such a monster customer for the American farmer that it will consume some 30% of this year's corn crop. This is approximately 4 billion bushels of the expected 13 billion raised. Sharply higher prices for corn, as is well understood, have caused farmers to shift out of other crops — primarily, wheat and soybeans — collaterally raising their prices by significant amounts, too."
The problem now is that soybeans have become so attractive relative to corn (exceeding the long-held rule-of-thumb of 2.5:1) that there is likely to be a switch this spring back to beans. We expect land planted to corn this season to slip to 84-85 million acres from last year's 92 million. A cold, wet spring that many meteorologists are predicting (hello La Nina) could drive corn planting below 84-85 million acres. As a result, some economists are guessing, corn could go to $10 this summer.
While significantly hurting the livestock industry (already sows are being slaughtered at near-record numbers) as well as exports, these never-seen-before prices for corn will devastate the ethanol refiners, certainly the marginal ones which are under- hedged and over-leveraged and located on short-line railroads. As the consolidation of the corn-ethanol producers plays out (and we see this as an enduring, yet significantly consolidated industry), farm-ground planted to corn in the spring of 2009, accordingly, could exceed 93 million acres, forecasted an economist that spoke to a local audience of 150 or so farmers packed into a make-shift auditorium at a nearby grain elevator the other night. We were seated on bales of straw.
He advised this spring doubling up on purchases of Monsanto triple-stack corn at $120 per bag to avoid paying possibly twice this amount in 2009. Clearly, vendors of nitrogen fertilizer (e.g., Terra Industries and CF Industries Holdings) would be big beneficiaries a year from now if this scenario played out. Ditto, for the machinery makers, especially Deere and CNH Global.
America, the Beautiful. We are optimistic about the future of American agriculture because of the emergence of an enormous middle-class in China and India, too, as well as the other Asian nations. With some 1.4 billion citizens, China is transitioning from a country subsisting on starch (rice and wheat, e.g.) to a nation eating protein (chicken, pork and beef), which requires corn. It is noteworthy that China not only has stopped building ethanol plants (did you hear that Washington?) but also appears to have halted exports of corn.
The Communist chieftains would be well advised to focus on raising soybeans, whose demand is insatiable, rather than corn, which is amenable neither to their soil nor to their weather.
When we spent 2 weeks in China last October, it was obvious that to us that these folks are as brain-dead about covering up prime farmland for industrial developments as we are. We visited a 10 x 30 mile industrial park that had gobbled up prime alluvial ground next to the Yangtze River!
To us, it's just a matter of time when China starts to import corn from the U.S., which, after all, is the world's corn granary.
It's called "comparative advantage" (per Paul Samuelson, Economic 101, years back). And, when this happens, it is likely to snowball, especially if the dollar remains low vis-à-vis the Yuan. There is no richer farmland in the world than lies in our Corn Belt, and we need to respect and nurture this ground as a hallowed, national asset!