Ann Duignan, machinery analyst from JP Morgan, reports on her recent trip to Iowa to survey farming conditions in the Midwest and its potential effects and farm equipment sales during the rest of the year. Here's what she has to say.

We attended the annual ProFarmer conference in Iowa this week. This is our eighth year of attending this conference, where 150+ (mostly) crop farmers gather to discuss issues pertinent to their livelihood. On a relative basis, the tone of the meeting was decently upbeat as attendees noted that they have prices locked in for 40-50% of the crop for the 2009/10 marketing year; most farmers in attendance rated their current crop condition as slightly to significantly better than their 5-year average (there were some exceptions). While it is still early in the growing season, the weather has been pretty cooperative thus far, and the biggest weather worries going forward include hail, wind or an early frost (likely worse for soybean yields). Additionally, input costs are down significantly for next year, and a number of farmers noted that they have already locked in some prices. The general tone is reflected in large tractor and combine sales, which have held up pretty well YTD as crop farmers look to minimize reported income.

Some of the key takeaways included:
Downward pressure on crop prices is likely to continue — Overall, ProFarmer expects more downward pressure on crop prices as ending inventories are decent in most crops and global supplies are likely to increase, particularly in soybeans, for which South American production is forecast to be up 5-10% in 2009/10 (Brazil expected to be flat YoY as Brazilian farmers are not making money at current prices). This will likely put downward pressure on exports from the U.S. to China in 2010. Additionally, the livestock sector continues to liquidate herds (especially in the hog sector -- we spoke with one hog farmer who just liquidated his entire herd and recorded a loss of >$500,000) which should put downward pressure on feed consumption. Using ProFarmer's average assumptions suggests that major crop receipts could be $88B in 2010 vs. $96B in 2009, a decline of 8% YoY.

Brazil update — 29% of beans are grown in the Mato Grosso region, and producers in this region are not making money at current prices and exchange rates (-15% variable profit by our calculation). While interest rates have come down from a peak of 20% to a current rate of 9%, farmers are still not in a position to pay off prior-year loans. While expansion is expected over the next several years, it is expected to come at the expense of pasture land, not virgin land in the Mato Grosso region, as environmental concerns are growing. Acreage is expected to be about flat this year vs. last, but yields should improve. Conditions in the rest of South America should improve significantly, too, with the recent elections in Argentina as well as a return to more normal weather. Overall, 17.2-17.3MM Ha of soybeans were planted last season in South America, and this year the region is expected to plant about 18.5-19.0MM Ha.

Land values declining in the Midwest but rental rates still rising — Land values are down 5-15%, with farmers still the major buyers, but they have become more cautious. Recreational ground is not selling. Average rental rates in IA have risen significantly over the past few years (up about 100% over the past decade) and are running at about $186/acre, on average. In a recent survey conducted by LandOwner, 49% of respondents said that they had purchased land in the past three years and 34% said they intended to purchase land in the next three years.

Weather risks depend on El Nino — Overall, farmers in attendance rated their crops as slightly to significantly better than last year (there were some exceptions). The biggest weather risks going forward were cited as 1) hail; 2) wind and 3) an early frost. Biggest influence in the near term is the El Nino condition, which is likely to cause NA to be cooler and wetter, with some risk of an early frost in the Southeast; drought conditions could develop in regions such as Australia, Malaysia, Indonesia and India. South America weather should improve going forward.