Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Why Nvidia Is My “Slam Dunk” Stock Investment for the Decade - 16th Jan 21
Three Financial Markets Price Drivers in a Globalized World - 16th Jan 21
Sheffield Turns Coronavirus Tide, Covid-19 Infections Half Rest of England, implies Fast Pandemic Recovery - 16th Jan 21
Covid and Democrat Blue Wave Beats Gold - 15th Jan 21
On Regime Change, Reputations, the Markets, and Gold and Silver - 15th Jan 21
US Coronavirus Pandemic Final Catastrophe 2021 - 15th Jan 21
The World’s Next Great Onshore Oil Discovery Could Be Here - 15th Jan 21
UK Coronavirus Final Pandemic Catastrophe 2021 - 14th Jan 21
Here's Why Blind Contrarianism Investing Failed in 2020 - 14th Jan 21
US Yield Curve Relentlessly Steepens, Whilst Gold Price Builds a Handle - 14th Jan 21
NEW UK MOT Extensions or has my Car Plate Been Cloned? - 14th Jan 21
How to Save Money While Decorating Your First House - 14th Jan 21
Car Number Plate Cloned Detective Work - PY16 JXV - 14th Jan 21
Big Oil Missed This, Now It Could Be Worth Billions - 14th Jan 21
Are you a Forex trader who needs a bank account? We have the solution! - 14th Jan 21
Finetero Review – Accurate and Efficient Stock Trading Services? - 14th Jan 21
Gold Price Big Picture Trend Forecast 2021 - 13th Jan 21
Are Covid Lockdowns Bullish or Bearish for Stocks? FTSE 100 in Focus - 13th Jan 21
CONgress "Insurrection" Is Just the Latest False Flag Event from the Globalists - 13th Jan 21
Reflation Trade Heating Up - 13th Jan 21
The Most Important Oil Find Of The Next Decade Could Be Here - 13th Jan 21
Work From Home £10,000 Office Tour – Workspace + Desk Setup 2021 Top Tips - 12th Jan 21
Collect a Bitcoin Dividend Without Owning the King of Cryptos - 12th Jan 21
The BAN Hotlist trade setups show incredible success at the start of 2021, learn how you can too! - 12th Jan 21
Stocks, Bitcoin, Gold – How Much Are They Worth? - 12th Jan 21
SPX Short-term Top Imminent - 12th Jan 21
Is This The Most Exciting Oil Play Of 2021? - 12th Jan 21
Why 2021 Will Be the Year Self-Driving Cars Go Mainstream - 11th Jan 21
Gold Began 2021 With a Bang, Only to Plunge - 11th Jan 21
How to Test Your GPU Temperatures - Running Too Hot - GTX 1650 - Overclockers UK - 11th Jan 21
Life Lesson - The Early Bird Catches the Worm - 11th Jan 21
Precious Metals rally early in 2021 - 11th Jan 21
The Most Exciting Oil Stock For 2021 - 11th Jan 21
Financial Market Forecasts 2021: Navigation in Uncharted Waters - 10th Jan 21
An Urgent Message to All Conservatives, Right-Wingers and Patriots - 10th Jan 21
Despite Signs to the Contrary, Gold Price at or Near Top - 10th Jan 21 -
Ultimate Guide On The 6 Basic Types Of Index Funds - 10th Jan 21
Getting Vaccinated at TESCO - Covid-19 Vaccinations at UK Supermarket Pharmacies and Chemists - 10th Jan 21
Cheers for the 2021 Stock Market and These "Great Expectations" - 9th Jan 21
How to Plan Your Child With Better Education - 9th Jan 21
How To Find The Best Casino - 9th Jan 21
Gold Is Still a Bargain Buy - 8th Jan 20
Gold Price Set to Soar as Hyperinflation Looms - 8th Jan 21
Have Big Dreams? Here's How to Pay for Them - 8th Jan 21
Will the Fed Support Gold Prices in 2021? - 8th Jan 21
Stocks trading strategies for beginners - 8th Jan 21
Who is Buying and Selling Stocks in 2021 - 8th Jan 21
Clap for NHS Heroes 2021 as Incompetent Government Loses Control of Virus Again! - 8th Jan 21
Ultimate Gaming and Home Working PC System Build 2021 - 5950X, RTX 3080, Asus MB - Scan Computers UK - 7th Jan 21
Inflation the bug-bear looking forward through 2021 - 7th Jan 21
ESG ETF Investing Flows Drive Clean Energy to Fresh Highs - 7th Jan 21
5 Financial Market Surprises in 2021 - 7th Jan 21
Time to ‘Reset’ Your Investment Portfolio in 2021? - 7th Jan 21
Bitcoin Price Collapses almost 20% at the start 2021 - 7th Jan 21
Fed Taper Nervous Breakdown - 6th Jan 21
What Will the U.S. Dollar Ring in for 2021? - 6th Jan 21
Stock market frenzy- Ride the bandwagon but be sure to take along some gold coins - 6th Jan 21
Overclockers UK Custom Build Gaming System Review Heat Test and Final Conclusion - 6th Jan 21
Precious Metals Resuming Bull Market, Gold, Silver, GDX Trend Forecasts 2021 - 5th Jan 21
Trump’s Iran-COVID-Gate Anniversary  - 5th Jan 21
2021 May Be A Good Year For The Cannabis / Marijuana Sector - 5th Jan 21
Stock Market Approaching an Important Target - 5th Jan 21
Consumer Prices Are Not Reflecting Higher Inflation; Neither Is The CRB - 5th Jan 21
NEW UK Coronavirus PANIC FULL Lockdown Imminent, All Schools to Close! GCSE Exams Cancelled! - 4th Jan 21
The Year the World Fell Down the Rabbit Hole - 4th Jan 21
A Year Like No Other for Precious Metals… and Everything Else - 4th Jan 21
The Stocks Bull Market is Only Half Completed - 4th Jan 21
An In- Depth Look At Gold Price Trend - 4th Jan 21
Building America Back After a Dark Covid Winter - 4th Jan 21
America's Dark Covid Winter Ahead - 4th Jan 21
Buy a Landrover Discovery Sport in 2021? 3 Year Driving Review - 3rd Jan 21
Stock Market Major Peak in Early April 2021 - 3rd Jan 21
Travel and Holidays 2021 - Flight Knight Cabin Bag Review - 3rd Jan 21
�� Happy New Year 2021 Fireworks and Drone Light Show from London and Sheffied - BBC�� - 2nd Jan 2
The Next IMMINENT Global Catastrophe After Coronavirus - 1st Jan 21

Market Oracle FREE Newsletter

FIRST ACCESS to Nadeem Walayat’s Analysis and Trend Forecasts

Corn Price Gets Creamed

Commodities / Agricultural Commodities Jul 04, 2011 - 12:03 PM GMT

By: Douglas_French

Commodities

Best Financial Markets Analysis ArticleCorn prices took a two-day shellacking last week, settling under $6 a bushel for the first time since last December. Traders were caught wrong-footed, expecting wet weather to have slowed corn planting.

Weather didn't get in the way of economics. The US Department of Agriculture said last week that surveys conducted during the first two weeks of last month found farmers had planted 92.3 million acres of corn, the second most since World War II after 93.5 million acres in 2007.


The news sent corn futures down nearly 10 percent on Thursday and another 3.8 percent on Friday, after prices had reached close to $8 just weeks ago.

Some economists think the USDA not only can't count but didn't take into account the acreage that's flooded in corn country. But for now the government reports "threw a wrench into everything we were thinking," said Curt Hudson, whose family farm has 2,500 acres devoted to corn growing.

Hudson not only grows but speculates on the commodity. He had purchased options on corn futures recently, expecting a bullish USDA report, while also holding on to some of last year's crop expecting to take advantage of higher prices.

In 2005, corn fetched less than $2 a bushel, and farmers are like anyone: chase a buck and a bubble. Bill Bonner wrote a couple years ago,

Judged as a businessman, the typical farmer would make a good veterinarian. Over and over, he walks into the same trap. When prices go up, he borrows in order to expand his holdings. He buys more equipment. He leases more land. And he plants more crops to take advantage of the high prices.

Although Mr. Hudson had forward-contracted to sell 40 percent to 50 percent of this year's crop at the elevated prices, the report is "frustrating and stressful," he told the Wall Street Journal.

This isn't the first time grain prices have boomed. Crop prices surged in the 1970s as grain demand from the Soviet Union swelled. Farmland prices shot up 30 percent a year in the mid-1970s, peaking in 1979 with prices in Iowa averaging $1,958 an acre (that would be just short of $6,000 if adjusted for inflation). The net cash yield on land was 4.55 percent in 1979.

But the trend did not last, and prices fell. When rising interest rates at the time began to hit troubling levels, the two developments together jolted the Farm Belt, driving down land values nearly 30 percent in the 1980s, with net yields reaching 10 percent.

Of course, today's Big Ag boom is sponsored by ethanol subsidies from the state. Just as when the federal government told farmers during WWI to grow wheat to win the war, Congress voted to double production of corn-based ethanol "to win Al Gore's war" — and so a third of the US corn crop could be dedicated to making fuel, up from 7 percent in 2001.

David Peligal at Grant's Interest Rate Observer says that if the ethanol subsidy were removed, the price of corn would collapse. Senator Tom Coburn, a Republican from Oklahoma, has put forth just such a bipartisan proposal to end the 45-cent federal tax credit for every gallon of ethanol-blended gasoline.

Farmland prices doubled nationally in the 2000s, to more than $2,300 per acre, according to the US Department of Agriculture, and prices today in soil-rich areas of Iowa and Illinois are more than three times that level. Values for nonirrigated cropland soared by 10 percent or more in 2010 alone in states across the Midwest, according to the Federal Reserve Bank of Kansas City.

Net cash yields cluster around 3.5 percent for corn land in Iowa and wheat land in Kansas. At the height of the 1970s boom the net cash yield was 4.55 percent.

As corn prices have shot upward, so has Iowa farmland, which is selling for $8,500 to $10,000 an acre.

Recently an 80-acre parcel was auctioned in Mitchell County, Iowa, going for $10,000 an acre, or $800,000. But with only 72.2 acres actually tillable, it works out to $11,080 an acre — a country record.

Grant's Interest Rate Observer provides some color to the auction. It turns out the farmers bidding for the ground dropped out at $9,000 an acre and then two investors took it the rest of the way. A gentlemen who attended the auction said it was the slowest he'd ever seen. The last $1,000 was bid up in $25 increments.

In Kansas, with wheat going for $3.25 a bushel, the land is going for $1,500 an acre, double what it was five years ago.

It's thought that this bull market in ground is firmer than the 1970s version because lots of acreage has been bought for cash, and bankers are limiting purchase loans to 50–55 percent because "cash rents haven't caught up with some of the values of the properties yet."

That happens in all real-estate bubbles. A lender told Grant's, "one of the lessons learned in the 1980s is that rising asset values do not repay loans."

Right, but the underwriting likely assumes these Fed-flattened rates will last forever.

Cotton prices are also on a tear, and the price of land it's grown on reflects the boom. Irrigated cropland in the northern Low Plains region of Texas fetched more than $1,400 an acre in the fourth quarter of last year, and there have been recent sales at $2,000 an acre, which would generate a net cash yield of 3.5 percent (just like wheat land and corn land).

Even farm ground in Arkansas has soared from $2,600 an acre in '07 to $4,000 an acre recently, with out-of-towners jacking up the prices.

Real live farmers don't seem to be selling. After all, what will they do with the money? A 3.5 percent cash yield, assuming current prices, is better than the 1 percent interest banks are paying. More buyers than sellers means prices are rising.

In Indiana, where Mr. Hudson farms and speculates, land that fetched less than a $1,000 an acre in 1987 is going for $4,000 today.

The prevailing cash-rent multiple is over 27 times. Back in 1987, that multiple was less than 13 times. Rent multiples have averaged 20 times since 2001, during which time the price of Indiana farmland has doubled.

Even bank regulators are worried about cropland prices.

The FDIC's Sheila Bair said "the steep rise in farmland prices we have seen in recent years creates the potential" for serious trouble for both bankers and farmers, particularly if the ethanol industry falters just as interest rates are expected to soon rise.

Brian Briggeman, an economist with the Federal Reserve, points out that if rates on real-estate loans rose from around 5 percent today to something closer to the historical average of about 7 percent, farmland values could fall by a third.

Should crop prices fall and interest rates rise, Bair said, local economies that depend heavily on farming could see their fiscal health rocked as they "tend to rise and fall" with the success of agriculture.

Regulators may be concerned, but Gary Taylor, cofounder of Agri Cura LLC, a farm investment-management venture, told Grant's, "This feels different than the 1980s."

He says,

Back then it was a mad land rush and people were leveraging all they had. … You always worry about a bubble. But for an old guy like me, who has been through a couple of these, you say, "Oh well, agriculture will find a way to resolve this and prices will go down." But this doesn't feel like the others felt. It's driven by demand from China, and soon to be India. We liquidated all of our grain and fiber reserves here in the last five or six years, and we don't have a cushion anymore. It's different.

That's for sure. Every new bubble feels different.

Douglas French is president of the Mises Institute and author of Early Speculative Bubbles & Increases in the Money Supply. He received his masters degree in economics from the University of Nevada, Las Vegas, under Murray Rothbard with Professor Hans-Hermann Hoppe serving on his thesis committee. See his tribute to Murray Rothbard. Send him mail. See Doug French's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules