The best second-half for commodities in a generation is pushing U.S. farm incomes and agricultural land prices toward record highs.

While the 17% rise in the Thomson Reuters/Jefferies CRB Index of 19 raw materials since the end of June reflects higher prices for all commodities, agriculture led the biggest rally since 1972. Cotton prices surged 76% to a record, wheat jumped 48% and corn reached a two-year high.

At a time when the U.S. jobless rate is 9.6% and home prices are weakening, this year’s farm income may top the $87.3 billion reached in 2004, while cropland values will rise as much as 10%, said Neil Harl, an agricultural economist at Iowa State University and former adviser to the governments of Ukraine and the Czech Republic. The jump in commodities means more sales of Deere & Co. tractors and Mosaic Co. fertilizer.

“It will be a phenomenal year for farm income,” said Michael Swanson, a Minneapolis-based senior economist at Wells Fargo & Co., the largest U.S. agricultural lender. “We are not going to rebuild inventories in one year. This will take several years. Farmers are already running flat out, and it will take time for supply to catch up with rising demand.”

The CRB index will rise another 30% next year, the most since Richard Nixon was president in 1973, said Michael Pento, the economist at Euro Pacific Capital Inc. who forecast the commodities collapse in 2008 and last year’s rally in gold.

Fighting Deflation

The Federal Reserve’s program to buy $600 billion of Treasuries to fight deflation should bolster prices and stimulate demand, Allison Nathan, Jeffrey Currie and other analysts at Goldman Sachs Group Inc. in London, New York and Hong Kong, said in a report Nov. 9.

Food prices jumped after drought in Russia and parts of Europe, flooding in Canada and cold in China damaged crops. Cotton rose 77% this year, its best performance since 1973, corn gained 32%, wheat 31% and soybeans 21%. The S&P GSCI Agriculture Index added 27%, more than twice the advance in the broader S&P GSCI Index of 24 commodities.

That surge may not last beyond next year because farmers will respond to higher prices by planting more crops, said Daryll Ray, director of the Agricultural Policy Analysis Center at the University of Tennessee in Knoxville. Corn planting will rise to a four-year high in 2011 and farmers will sow more wheat and cotton, Informa Economics Inc., a Memphis, Tennessee-based researcher, said in a report Nov. 11.

U.S. Equities

Investors may not be doing as well as farmers. The S&P GSCI Total Return Index rose 0.7% this year, compared with 11% for the spot index. The S&P 500 Index of U.S. equities returned about 9.4% this year with dividends reinvested, according to data compiled by Bloomberg. Treasuries returned 7.8%, a Bank of America Merrill Lynch index shows.

The jump in agricultural prices probably will force the U.S. Department of Agriculture to increase its farm-income and export forecasts, said Iowa State’s Harl, 77, who owns 1,000 acres of cropland, including some his family has owned since 1863. The USDA is scheduled to release new estimates Nov. 30.

Since August, when the USDA forecast a 24% jump in this year’s farm income to $77.09 billion, corn prices paid to farmers rose 37% on average and soybeans gained 24%, government data show.

The U.S., the largest grain exporter, may exceed the 2008 record of $115.3 billion in shipments next year, Joe Glauber, the USDA’s chief economist, said last month.

Rural Economy

“The rural economy is going to lead the way,” Jason Henderson, an economist at the Federal Reserve Bank in Kansas City, Missouri, said in an interview last month. “Those high crop prices will last until the next crop. Export demand will continue to expand.”

Agriculture accounts for 1% of the $14.3 trillion U.S. economy and its impact may be 10 times greater when including related businesses such as farm supplies, grain handling and food making, Henderson estimates.

Deere, the world’s largest farm-equipment maker, forecast in August a gain of as much as 10% in full-year U.S. sales. The company is based in Moline, Illinois. Mosaic, based in Plymouth, Minnesota, is seeing “strong demand” for fertilizers, Chief Executive Officer James T. Prokopanko said in an interview Oct. 4.

Farmland prices are gaining as the return from each acre increases, a trend that’s also attracting investors.

Reserve Bank

The Kansas City Federal Reserve Bank on Nov. 12 said cropland values in the seven-state region it monitors jumped as much as 12% in the third quarter, the biggest such gain since crop prices touched records in 2008. In Iowa, the largest corn- and soybean-growing state, farmland prices rose 5.7% during the six-month period ended Sept. 1, according to a survey by the Chicago-based REALTORS Land Institute.

“In 34 years, I’ve never had so much available capital and so little property,” said Murray Wise, who owns a real-estate brokerage and land-auction company in Champaign, Illinois.

As of Jan. 1, average U.S. values were up 1.4% to $2,140 an acre from a year earlier, USDA data show. The 8% to 10% gain forecast by Iowa State’s Harl for this year would leave prices as high as $2,354, topping the record of $2,170 on Jan. 1, 2008.

Higher commodity costs also are being passed on to manufacturers and retailers.

Unilever NV, the world’s second-biggest consumer products maker, is raising prices for tea, Jean-Marc Huet, the chief financial officer of the Rotterdam-based company, said in a conference call Nov. 4. Tea averaged $2.50 a kilogram (2.2 pounds) this year at auctions in Mombasa, Kenya, the second- highest level since at least 1997, according to data compiled by the United Nations’ Food and Agriculture Organization.

Coffee Shops

Starbucks Corp., the world’s largest coffee-shop operator, will probably have to lock-in a greater-than-expected costs after speculators drove up prices, Troy Alstead, the Seattle- based company’s chief financial officer, said during a Nov. 4 conference call. Arabica coffee traded on ICE Futures U.S. in New York rose 50% this year.

While some of this year’s jump in agriculture was caused by extreme weather, futures markets are pricing in no relief any time soon.

On the Chicago Board of Trade, wheat for delivery in July 2013, the contract with the latest expiry, is trading at $7.5875 a bushel, 13% more than the December 2010 contract. Soybeans for delivery in November 2013 are at $10.935 a bushel, 17% more than the five-year average.

The CRB index has jumped 42% since the Fed started buying Treasuries in March 2009.

“The actions currently being used to stimulate the economy, including the most recent round of quantitative easing, have the possibility of creating an inflationary scenario,” said Christopher Burton, who helps manage the $4 billion Credit Suisse Commodity Return Strategy Fund in New York. “Commodities do particularly well in that environment.”

To contact the reporters on this story: Jeff Wilson in Chicago at; Alan Bjerga in Washington at; Yi Tian in New York at