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Will the farm boom last?
USDA’s chief economist and an official of the Federal Reserve Bank of Kansas City shared a crystal ball for crop farmers Monday that’s still pretty rosy, at least in the short term—but don’t count on land prices staying high.
Chief Economist Joe Glauber shared insight into USDA’s recent plantings and supply demand reports.
Glauber told members of North American Agricultural Journalists in Washington to expect some changes in the corn crop due to geographic shifts in acreage as farmers boost corn plantings by 4 million acres this year over 2010.
Because much of the expansion in corn acres has been in Great Plains states, Glauber said that may mean slightly smaller yields coming from that added acreage. Expansion of corn acres in the South may help keep the corn pipeline flowing as we near the end of the 2010-11 marketing year next August. Glauber expects more corn to hit the market from early southern harvest before the marketing year ends.
Along with increased global wheat production expected by the International Grains Council, Glauber said “we’re expecting more wheat to be fed this year.” That, too, would help maintain corn supplies toward the end of the marketing year.
Those are some of the reasons why USDA did not lower ending stocks for corn below 675 million bushels in the most recent supply demand estimate.
Glauber said high prices are being felt in consumer prices for food, with USDA projecting beef prices to be up 17.2% in 2011 over 2010. Pork is expected to be up 15.9%. Overall food inflation isn’t expected to be as high at the 6% increased in 2007-08, but USDA’s Economic Research Service expects food cooked at home to cost 3.5% to 4% more this year over last.
“Until we start seeing stock levels get rebuilt…we’ll continue to see volatility in these markets and high prices,” he said.
High prices mean continued increases in farm income. And that’s driving higher land prices.
When first quarter 2011 land values are released soon, “we’re talking farmland values rising more than 20% in the Corn Belt” over 2010, said Jason Henderson, vice president and branch executive of the Omaha Branch of the Federal Reserve Bank of Kansas City.
Henderson said that one measure of land value returns, the ratio of land values to rent, shows that for every dollar in rent investors have to spend up to $26. That’s even higher than in the early 1980s, he said. The ratio is similar to the stocks to earnings ratio used by investors to evaluate stock market investments.
Henderson said that land values are also measured against the capitalization rate tied to yields on ten-year treasuries. That’s used to show the opportunity cost given up by investing in land.
“If yields on ten-year treasuries rise, people will be less likely to buy land,” he said.
Yields are currently about 4%, well below the historical capitalization rate of 7%.
“Farmland values could have a correction of 33% if things return to historical values,” he said.
That doesn’t mean there would be a return to anything like the credit crisis of the 1980s, however.
“In my opinion, credit is not an issue for the crop sector,” he said. Instead, any correction in land values would reduce landowners’ equity.