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News from Global AgInvesting 2011: Why Is This Plateau Different? (5.16.2011)
by Marcia Zarley Taylor - DTN The Progressive Farmer

Speakers at a recent farmland investment conference in New York City were so bullish on agriculture in early May that skeptics like South Dakota corn and soybean farmer Bob Metz felt compelled to remind them that only a year ago, he was selling 2010 corn for $3 cash, not the $6 bushels that holdouts enjoyed this spring. 

It’s hard to argue that 100 years of price deflation in commodities has come to an end, and farmers can't be blamed for being skeptical. Wasn’t there a chance that this rally was just another temporary price blip, not a “Super Cycle” set to usher in a decade of prosperity to agriculture, the former American Soybean Association president asked?

“Since the mid-1970s, we’ve been a year or two away from not feeding the world multiple times—in the early 1970s, in the early 1980s and then again in the mid-1990s,” Metz said. In all cases, the  world quickly rebounded with food surpluses. High prices cured high prices. “What’s different now?”

Plenty, the experts responded.  Conference sponsor HighQuest Partners estimates that the world will need to produce almost 25% more tonnage of 10 major crops to meet food demand over the next decade. In their view, GM-traits, technology and fertilizer applications aren’t growing fast enough to boost global yields to that level on their own. The gap between crop productivity and food demand over the next decade will require the world to add an extra 160 to 210 million acres of farmland, HighQuest’s Managing Director Hunt Stookey said.  

Africa's ability to expand is limited; the former Soviet Union could bring idled farmland back into production but it will be subject to drought and lacks reliable labor, working capital and port facilties. In remote areas like the Brazilian frontier which show more promise, “growers need prices and exchange rates at this [high] level to make conversions work,” Stookey said. Bill Wilson, a professor of agribusiness and applied economics at North Dakota State University, pointed to structural differences that are underpinning commodity markets and will likely elevate farm earnings for the next eight to 10 years, in his view:

 --Adding energy to food demand. Biofuels account for 35% of U.S. corn use now. That’s a sizable new market that didn’t exist a decade ago, he added, and it’s made feed prices sensitive to fluctuations in energy not just livestock or export demand. “Ag is inextricably tied to oil prices,” he said. What's more it puts a floor on corn prices: If corn gets too cheap, the ethanol industry just makes more fuel while the margins are good, so stocks never fully recover to comfortable levels.

--The end of cheap oil. A decade ago, crude was $30, not $120/barrel. To get agriculture back to substandard prices that characterized the 1980s and 1990s again, “you’d have to believe oil will fall nearly that far,” he said. “I don’t buy it.”

--Just-in-time stock levels. Chinese grain stocks are a national secret, but a decade ago, USDA and others believed that the country held a year’s consumption in all major commodities to fend off a bad harvest. Today China purchases half of all US soybean exports and is “exhausting” most world soybean production, Wilson argued. The same phenomenon could hit corn in the near future: China could import 25 mmt of corn by 2015, a Rabobank report estimated last December, reversing a long history of China as a net corn exporter and grain competitor. That will be a sea-change in feedgrain markets, considering world corn trade is about 93 mmt now. “The problem is the world doesn’t have it,” Wilson says, so he expects more price shocks ahead.

All this makes Wilson bullish on U.S. agriculture, and even more bullish on US farmland outside the core Corn Belt, since it hasn’t fully factored in higher incomes from technology shifts yet. Shifting the U.S. Corn Belt north and west to the Dakotas the last 20 years “has probably been a bigger deal than Brazil,” Wilson says Given the U.S.’s affinity for seed technology, our proximity to markets and transportation arteries and a friendly business climate, US crop producers and farmland stand to benefit from a long term runup in prices. "Demand is growing faster than supply and we will be in this state of affairs 8-10 years," says Wilson.

Join DTN editors in a free, 90-minute webinar discussion May 18 on “Agriculture: Cornerstone Investment or Bubble?”  To register for the live event or rebroadcast, go to http://www.dtnprogressivefarmer.com/go/ag/

Follow me on Twitter at MarciaZTaylor

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