Articles

    Is that a bot with my soup?

    It’s been a long week. You’re tired, but you need groceries. Not to worry. No need to leave your abode. Order what you need online, click on delivery and the next thing you know, a bot is at your door with your weekly groceries.

    The bot is not in the picture yet, but Rob Dongoski, Chicago Farmers’ May 14 speaker, said that the bot in this application is not an impossibility. He noted that the United States spends $5 billion a year on ag tech, and the use of robotics in all phases of food production and delivery is not relegated to daydreamers. He said there is a lot of conversation about the use of drones, robots and wearable sensors. Goggles that can produce fields in virtual reality are among ag tech’s newest developments. “I think you will see some application of these goggles in the next four or five years,” said Dongoski.

    Dongoski, Partner and Global Agribusiness Leader at Ernst & Young LLP, said that by 2015, agriculture will have to feed 40% more people, and different kinds of food will be in demand as people in developing countries acquire more money.

    Global markets are alive and well, said Dongoski, and EY is looking at megatrends. He said there are a number of mergers that are quite large, such as the Dow/DuPont $130 billion merger in 2015. “Three of the five largest acquisitions from 2011 to 2015 dealt with food and beverage companies,” Dongoski shared.

    Regarding the future of agriculture, Dongoski said EY is seeing investments shift to the biotech side. Technology is seen as the way to produce more and healthier food in a more efficient manner. This technology also will help agriculture become more productive in areas of the world that do not have a robust agricultural economy. Dongoski noted that by 2100, 7 of the 10 largest cities in the world are projected to be in Africa.

    While more farms are needed, Dongoski related that urbanization is leaving a void on farms. He commented, “Children are not staying on the farms; they don’t want to be in a rural environment.” He noted that because it is difficult to realize profits with small farms, the farms now are getting bigger due to consolidation. He is seeing more farm operations that range from 10,000 to 20,000 acres. Will anyone own 20,000 to 30,000 acre farms? “People who are serious about farming and see it as a profitable business will act to own these large operations,” said Dongoski. He also noted that with the move to larger acreage, the future is moving quickly to autonomous equipment.

    A rapid change also is coming regarding the farmer’s source for advice. “Advice about agronomy is shifting from the local guy to data science,” said Dongoski. “The potential coming down the road is making retailers nervous.”

    An audience member voiced concern about the accuracy of the data that would be available to farmers. Dongoski said there is not a mechanism currently in place that can guarantee the accuracy. “There is a lot of work to do regarding this issue,” he said. “We have to know who owns the data, what is it worth and who wants to consume the data. Security and fraud protection have to be in place.”

    Ray Brownfield shares his views on Illinois land values

    More than 70 people attended The Chicago Farmers’ April 9th meeting to hear Ray Brownfield discuss 2017 land values in Illinois. Brownfield, a 40-year member of TCF, is the managing broker/owner of Land Pro, a company composed of professional land real estate specialists that is based in Oswego, Illinois. An accredited land consultant and accredited farm manager, Brownfield recently received the Realtors Land Institute APEX 2017 Top Twenty Producer award. He noted that he and Jason Lestina, also a member of TCF and an Illinois real estate broker and an accredited farm manager with Land Pro, sold $27 million worth of real estate in 2017.

    Thanks to the melting of glaciers during the Ice Age, portions of Illinois boast some very fertile soil. As the glaciers receded, they left behind silt and minerals that give the state its Class A soil. “The area that I refer to as the Golden Triangle, in the center of the state, has the largest concentration of Class A soil,” said Brownfield. “This soil, of course, commands the best prices.”

    Brownfield noted that buyers usually refer to a farm’s productivity index (PI) to determine the price they are willing to pay for parcels. All farms have a PI, he noted. The PIs are used to quantify yield potential of Illinois soils. The highest PIs are located in east-central, west-central, and northern Illinois. The counties with the lowest PIs are found in the southern part of the state.

    “The prices for excellent soil are down about two percent, but there are still some pockets of strength” said Brownfield. “B quality soil prices are down about one percent, while C quality soil prices are down about five percent, which is due to drainage issues and less productivity.”

    Brownfield said that the regions of the state that have excellent quality soil are experiencing median prices per acre that range from $9,755 to $10,800. Regarding B quality soil, Brownfield said it is a buyers’ market; people are looking for the best possible soil at a discounted rate. “If buyers can purchase land with lesser quality soil at a discounted price, they are willing to invest another $200 to $300 in improvements, such as drainage tiles,” said Brownfield.

    He went on to say that farms with C soils and lower PIs are difficult to sell because they have high clay content, do not drain well and usually are irregular in shape; however, some farmers will purchase these farms if they believe they will fit their needs. Brownfield said that the average quality of soil diminishes as you travel farther south in Illinois.

    Regarding properties with less productive soil, Brownfield said that the demand for recreational land has decreased. The larger the parcel of recreational land on the market, the less attractive it is for buyers because they cannot produce enough income from it and still cover costs.

    How does farmland rate as an investment? Brownfield noted that the annual growth rate in farmland investments from 2001 to 2017 ranged from 6.19 percent to 10.3 percent, depending on the region. The farms have to be held for at least 10 years to experience these rates, he said.

    Regarding 2018, falling commodity prices will affect land prices, said Brownfield. He said that real estate professionals and appraisers don’t expect to see much increase. A December 2017 survey of the group shows that 54 percent believe there could be a one to four percent decrease in land values.

    “A lot has happened since December, too,” said Brownfield. “Tariffs, decreasing commodity prices, increases in interest rates, and the possible elimination of the Renewable Fuel Standard are among the factors leading to price declines. On the other hand, higher yields and good economic growth in the United States will lead to price increases.”

    Your fields can tell you a lot if you know where to look

    Climate Corporation, an ag-tech company that develops resources to support farmers in making data driven decisions, was the host for the Chicago Farmers’ March 12 meeting. Located at 1330 W. Fulton Market Street, in the West Loop area, Climate Corporation is a neighbor to Google and McDonald’s corporate offices. It is a Platinum Level sponsor of TCF.

    Climate Corporation’s Craig Rupp, senior director of engineering, and Patrick Dumstorff, market developer lead, gave TCF an overview of the company’s workings as we dined on a buffet luncheon in Climate Corporation’s dining room.

    Climate Corporation began life as 640 Labs in October 2012. It derived its name from the number of acres in a square mile, according to Rupp. Its accomplishment became attractive enough to gain the attention of Monsanto and was acquired by that company in December 2014. It moved into its current headquarters this past October. A subsidiary of Monsanto, Climate Corporation operates as an independent company. Any data it collects is not shared with Monsanto.

    “We are doing things with technology that have been in use for a while, but are new to agriculture,” related Dumstorff as he displayed the drive to the company’s Climate FieldView Plus, which has the ability through the drive to acquire machine data, such as RPM, speed and temperature, and agronomic data that include seeds/acre, gallons/acre, and bushels/acre. The Climate FieldView Plus is in place on farms throughout the United States, Canada, Brazil, and Europe, according to Rupp.

    The drive, which is a black metal apparatus that is about three inches in diameter, connects to the “nervous system” of the farm machinery’s internet, said Dumstorff, and it grabs data from the implement to which it has been affixed. The field data it acquires can be streamed directly from the equipment, manually uploaded to a thumb drive or iPad or transferred to another system such as the Cloud. In addition to the data that the program gathers, it will soon have the ability to produce image based yield maps that would inform farmers how many pounds of a crop are coming off a field, for example.

    In response to an audience member’s question, Rupp said that the cost of the Climate FieldView Plus program is $1,000 per year and the cost of the drive is $250.

    Rupp explained that he monitors advanced technologies and keeps aware of the development of autonomous robots. “I look to see where the industry is going,” said Rupp as he showed a brief video of recently developed autonomous robots at work. There were instances of robots planting seeds, thinning a lettuce crop (by oversaturating the plant with fertilizer), and cultivating soil.

    “This is what is coming and Climate will be involved,” said Rupp. “Think of Climate as the Amazon of agriculture. We’re the data storage warehouse coupled with data analytics. Our vision is to couple our platform with agriculture robotics. The agronomic insights would come from us.”

    In response to a question about the possibility of cyber security threats to the platform, Rupp said that Monsanto is extremely sensitive to privacy and has a firewall to protect data. Additionally, standards are being developed that would ensure even greater security.

    It was noted that with the increasing use of technology in agriculture, the farmer has to be a scientist as well as an agriculturist. However, that does not alter the farmer’s connection to his work.

    Rupp said, “I grew up on a farm. Climate is a fascinating company to work for. I spend every working moment ultimately focused on the same problems my father worked on. I always tell people that we have the best customers. Farmers are salt-of-the-earth people - genuine, honest, and really nice.”

    Will we soon be eating meat that is not animal-based?

    There could come a day when one might find an aisle in the meat section of the grocery store devoted to alternative meat. Not veggie burgers, but a product that is considered meat and is not from an animal.

    Known as alternative meat, it is one of the three key trends that should be watched over the next 5 to 10 years because of its possible impact on the food chain, according to Lucas Frye, the speaker at The Chicago Farmers January 8, 2018, meeting. Frye, a 2015 University of Illinois graduate, is founder of Amber Agriculture, an agtech startup that automates farmers' grain management.

    Joining alternative meat as a key trend are gene editing and vertical farming, said Frye. He noted that the companies that are involved in these areas are focusing on themes that include the stories they have to tell, greater nutritional value and convenience. “These are themes that will be prevalent for the next five to 10 years among these trends,” said Frye. “The trends are not set in stone. They could slowly increase their impact on the food chain or they could fall flat, but these trends will dictate the conversation in food and agriculture.”

    Regarding alternative meat, Frye noted such companies as Impossible Burger and Beyond Meat, both produce alternative meat that is plant-based. “These companies create meat from scratch and want it labeled and sold as meat,” said Frye. “But words will escalate and impact the conversation. There will be battles about definitions. How will cattlemen respond to the words alternative meat? But these are companies that are exploring what happens if they design a new food system.

    He went on to say that the environment is an important element with these companies and they share the belief that animal agriculture is an evil. In addition to plant-based meat is lab-based meat. One company starts with a chicken feather and a petri dish to create meat. The lab-based meat is not scalable yet and costs $1,300 per pound. “These producers are centered on the story that they can share with the consumer,” said Frey. “They are not worried about the livestock producer; they are more worried about scalability and making the economics work.”

    Frye said the group is confident that it can create food, find the ingredients and not go through the cereal crop to do it. These groups are building software, databases and an ecosystem. “They have a story, they are focused on nutrition and will get the food to market in a convenient manner,” he related.

    Gene editing is the next trend to watch. It focuses on nutrition and its conversation is similar to the one involving GMOs. Companies like Calyxt are involved in gene editing, said Frye. Calyxt is focusing on building in the next three years new varieties of crops such as high fiber wheat and higher oil content soybean. These new varieties could help farmers command higher prices for their grain from buyers seeking higher composition values. It has partnered with the Farmers Business Network for distribution.

    The final trend Frye focused on was vertical farming. He pointed to Plenty Agriculture, which is a main player in this area. It uses efficient LED lighting that is strung vertically in warehouses and is able to grow fruit and vegetables. Its developers have indicated they can better control the nutrition of the crops and the cost, once the endeavor has become more scalable. “Plenty Agriculture claims it can build a factory and grow its crops in 30 days. Plenty can produce 16 crops in one year and can produce what regular production grows in a soccer field with only the space of the soccer net,” related Frye.

    “In all of these instances, the goal is to control the entire story, produce foods that have more nutrients and provide convenience to the consumer,” said Frye. “They are striving to prove their products taste better and the production process is transparent. If all of these ideas fail, they will resurface in the next 10 years or so. People will just keep trying new variations on these same ideas.”

    Frye explained that his company, Amber Agriculture, is leveraging the latest in sensing an analytic technology to help farmers capture high market prices. Currently the company is in test trials in Illinois and Canada and hopes to have the product on the market this fall.

    U of I celebrates its sesquicentennial and looks forward to the next 150 years

    “You cannot go a day without being impacted by some innovation from the University of Illinois,” related Dr. Robert J. Jones, chancellor at the University of Illinois Urbana-Champaign, during remarks made at The Chicago Farmers’ December 11th holiday meeting at the Union League Club of Chicago. The university has a history of excellence and innovation, but it will not rest on its laurels, he noted.

    “The university is very good across a wide spectrum and is excellent at a massive scale,” he said. “I am surrounded by excellence at the University of Illinois in every field of study. Most universities would die for what we have.” He noted he was proud to be in the midst of the university’s 150th anniversary, which will extend through graduation 2018, but it is necessary to ensure that it will be a strong and sustainable University of Illinois for the next 150 years.

    “To reach our goal, we must include a strong and sustainable agriculture foundation. Everything I have done has been shaped by my experiences as an agriculturist and provided me with an understanding of the mission of land grant colleges,” said Dr. Jones.

    He related that he was the son of Georgia sharecroppers who made it clear to the landowner that their children would not lose a day of school to work on the farm. Dr. Jones said he was grateful for his parents’ view. Interested in science since an early age, Dr. Jones worked with his high school vocational ag instructor and saw how science and agriculture are related. He was a member of 4H and was impacted by his association with the Future Farmers of America, he said.

    After earning undergraduate and graduate degrees, Dr. Jones embarked on a 34-year tenure at the University of Minnesota. Later, he served as president of the University at Albany, State University of New York, from 2013 to 2016 when he was named chancellor at the University of Illinois. He isan experienced and accomplished scientist and research university leader.

    Noting that the University of Illinois Urbana-Champaign was ranked14th overall in the country this year by U.S. News and World Report, he said that 22 of the university’s programs rank in the top five in the country and 75 of its programs rank among the top 25 in the country.

    He said that there were 39,000 freshmen applicants last year for 7,500 slots. The university welcomed 7,581 freshmen who had a strong profile with an average ACT score of 28.5. It also is a diverse class, 22 percent of whom are first generation college students. “The class demonstrates that the university can be an elite academic institution, but not an elitist university,” said Dr. Jones. “Also, 5,500 of the students are Illinois residents. We educate a large number of students from the state and will continue to do this. This is what the land grant mission is all about.”

    Dr. Jones also expressed pride in the core academic faculty, which includes 1,190 tenured and 1,000 specialized faculty members. The faculty generated more than $600 million in research and development expenditures. “For the sixth consecutive year, we are the top university in receipt of National Science Foundation awards. Our students and our faculty are our assets,” he said.

    Dr. Jones went on to say that to keep the university strong and deliver on its land grant obligations, it must have a presence and deep engagement where most of the state’s citizens live, which is Chicago. “We won’t diminish anything we do at Urbana-Champaign, but we have to be more strategic about our connection with Chicago,” he said. “To that end, the university wants to work with The Chicago Farmers because it has a critical and long historical presence in the city.”

    Dr. Jones said the university was charged with enormous potential and he shared with Chicago Farmers the university’s vision for the future. “We have to activate that potential for impact and change,” he said.

    He shared that the university has faced challenges: budget stalemates, changes in leadership and a climate of social and political unrest on the campus.

    “If you look closely, you will see what we have done to prepare us for the worst of times,” said Dr. Jones. “We can’t be held hostage by a budget crisis, and we can’t sustain excellence without proper funding. Our 2018 appropriation was our 2015 base, minus 12 percent. We are working diligently through this budget impasse. We continue to work on reforming the budget model, but it is a challenge. Despite implementation of a $67 million permanent reduction to the budget, we are increasing our financial aid to $92 million for the next year. We have to be financially prudent and resilient to meet the challenges of the next 150 Years.”

    Dr. Jones briefly reviewed the framework of the measure of success in the strategic process for “The Next 150 Years” and a glimpse of things to come:

    • The University of Illinois will be ahead of the game, be innovative, and lead to discovery.
    • The creation of the Carle Illinois College of Medicine, the first engineering-based medical college; students will be immersed in clinical experiences from the first day of school.
    • Improve food production to feed the world. “The work we are doing now is Nobel-like research focused on feeding the world,” said Dr. Jones.
    • As a foremost leader in science and data analytics, the university has been sought out by the Mayo Clinic to create a partnership to advance the notion of individualized medicine for Mayo’s 100,000 patients annually.
    • Efforts are focusing on creating new ways to engage with the population of the state outside of Urbana-Champaign, while maintaining the anchor campus. The building of Discovery Partners Institute will create a presence in Chicago on a 62 acre parcel at Roosevelt Road along the Chicago River. Through the institute, college partnerships with Northwestern, the University of Chicago and the Fermilab will be created. Some 1,800 students will attend classes there with 90 faculty members. The students will graduate from the Urbana-Champaign campus, but they will have the opportunity to have internships in Chicago to encourage them to return to Chicago-based companies for work after graduation.
    • The 53rd Street Project, initiated in conjunction with the University of Chicago, which will offer public engagement activities and research on advance materials and advance analytics.
    • A campaign to raise $2.25 billion in the next five years for the Urbana-Champaign campus. Dr. Jones said, “It is an ambitious goal, but a critical one to meet to carry out the University of Illinois’ mission.”

    Grain merchandising and uncertain markets

     

    When dealing in the commodity markets, volatility is your friend. This observation was among the nuggets that Jeffrey Hainline, chairman of Advanced Trading Inc., and Jeremy Strubhar, Ag Risk advisor at Advanced Trading Inc., shared during their presentations at the November 13 Chicago Farmers’ meeting.

    Advanced Trading (ATI), based in Bloomington, Illinois, is a commodity trading company. It offers consulting services to people in agriculture on how to manage their enterprises, related Jeff. Additionally, ATI provides assistance for logistics, strategic planning, marketing, and research. Proprietary software and solutions to help manage commodity risks also are available through ATI. It has national and international clients.

    Some things to know in managing your commodities:

    • Jeff noted that in 2017 there have been very narrow price ranges in corn and soybeans with little movement. “Without much movement, grain companies suffer. Lack of  movement means lack of opportunity,” said Jeff.
    • He said that 2017 has the second highest corn stocks/use ratio since 2000. Jeff went on to say that 87 percent of corn is used domestically and the use is growing slowly by about two percent a year. Feed and industrial uses of corn respond to the size of the crop.
    • Jeff related that ethanol use is growing and ramping up. As a result, there will be a need for more corn. Currently, China only uses a two percent ethanol blend with gasoline. If they expand their ethanol use, there would be a dramatic increase in fuel and ethanol demand. The same situation exists in India. Brazil is a major ethanol producer, but its ethanol is made from sugar. The United States exports corn in the form of ethanol to Brazil. He said that the United States has lost the China market because it has a stockpile of corn. However, we have picked up Mexico and Turkey.
    • Ethanol companies continue to be profitable.
    • Logistics is an important consideration with stockpiles of corn. Last year’s record corn crop forced many ground piles. When there is a significant amount of corn that needs to be stored and there is no place to put it, the price goes down.
    • The forecast for this year is that there will be deficit space by 250 million bushels.
    • At one point, the United States had 74 percent of the corn market; however, exports stayed stagnant and now the United States has 34 percent of the market.
    • Regarding soybeans, it is estimated that China will import 97 million tons of beans this year. This is due to the increase in feed needed for animals because Chinese are eating more meat. South Africa, Asia, and the Middle East bean markets also are growing because they are buying more meat.
    • There is a meteoric growth in the demand for soybeans because it has become food for animals.
    • There is an incentive for farmers to plant more beans and sell them; not so for corn.
    • There is a record short position for managed money in corn.


    Jeremy discussed what the farmer can do to better manage the grain market. He noted that 2.4 billion bushels of corn were carried over from 2016-2017 and” the farmers owned it,” which resulted in a lot of storage costs.

    “You want to be hedgers,” said Jeremy. “Lock in prices. Be aware of what will hurt your operation, such as lower prices. Things outside of our control can lead to lower prices, such as political unrest and natural disasters.”

    Jeremy observed that the American farmer has become an expert in managing risks in growing the crop, much of which has improved due to technology. However, managing price risk still suffers.

    The tools that help manage prices are:

    • Put options, which give the farmer the right to sell unsold bushels; puts gain in value as the price drops.
    • Call options, which give the farmer the right to buy. It is used to replace ownership after selling bushels; calls gain in value as the market goes higher.
    • “A put is used to protect yourself against lower prices,” said Jeremy. “With a call, if prices go higher, you benefit. A call option is a way to replace grain once you sell it. It is often cheaper to own grain in a call option than to store the grain in a commercial grain elevator.”
    • He pointed out that options work best when there is volatility.
    • Puts:
      • Lock in a floor and give you a minimum price
      • Extend cash pricing window
      • Allow you to partake in higher cash prices, or increase floor
      • Make the risk know
      • Insulate you from a price drop, protect your financial balance sheet
    • Calls:
      • Gain if futures prices rally
      • Risk is known
      • Remove fear of selling too early and too low
      • Make cash sales with confidence
      • May be cheaper than paying for commercial storage


    In response to a question, Jeremy said that 5,000 bushels is the minimum amount of bushels for option strategies.

    Jeremy said, “My recommendation is to have a basic risk management plan based on protecting prices, not speculation.”

    FSA fosters successful farmers and quality environment

    Rick Graden is an enthusiastic spokesman for the Farm Service Agency (FSA) and he helped attendees at Chicago Farmers’ October 16 meeting understand why the FSA is beneficial and benefits farmland owners during his presentation.

    Stabilizing farm income, helping farmers conserve land and water resources, providing credit to new or disadvantaged farmers and ranchers, and helping farm operations recover from the effects of disaster are the missions of the U.S. Department of Agriculture’s Farm Service Agency (FSA), explained Rick, who is the acting state executive director of the agency. He noted that FSA has been a part of the U.S. Department of Agriculture since the 1930s when it became an initiative through the Agricultural Adjustment Act. While its name changed over the years, FSA has maintained its focus on ensuring that the country has safe and reliable food sources and on keeping farmers on the farm.

    Rick noted that FSA is the only U.S. government agency that works with elected county committees that are composed of farmers’ peers. “Because there is local representation, these committees make determinations based on local affairs, and agricultural conditions,” said Rick.

    FSA provides numerous programs that benefit farmers, but due to time constraints at the meeting, Rick focused on the Conservation Reserve Program (CRP). Implemented in 1985, CRP protects the environment, controls erosion and benefits wildlife, said Rick. CRP acreage is capped at 24 million acres under the current farm bill. “FSA would like to see a cap of 35 million acres,” said Rick.

    Currently, FSA is processing CRP applications that were submitted from May to September of this year. Rick urged people to be patient. He said that FSA is always adding more acreage to the CRP pot as CRPs are terminated when farms are passed on through inheritance or when people opt out of the program. Farmers can re-enroll in the CRP program, but owners might have to enhance their CRP practices to remain eligible to re-enroll. However, FSA will cost share in many instances for the enhancements.

    Rick noted that FSA has approximately 42 different CRP practices, not all practices are available in Illinois. Among them is the pollinator habitat that was implemented in 2012. A maximum of 100 acres per farm can be set aside as a pollinator habitat.

    “Seed for these habitats is expensive, but FSA will cost share with farmers for these plantings and specialists will assist in planting the areas,” said Rick. “A pollinator habitat on your property results in higher CRP cash rental rates.”

    Rick noted that FSA monitors practices and spot checks CRPs and pollinator habitats. At times, it might recommend spraying for weeds. There are 106,615 acres of pollinator habitats in Illinois and applications are no longer being taken. Rick said FSA will probably return to the pollinator habitats program because the planting of milkweed, goldenrod and blackeyed Susans are so beneficial for Monarch butterflies and honeybees. He noted that FSA hopes that pollinators could be planted along the interstates and Illinois is considering undertaking this. Iowa already is doing this.

    “CRP is the best program FSA has ever had,” Rick said. “Its provisions result in so many benefits for the environment. In my opinion, it is here to stay.”

    Longtime TCF Speaker Returns to Share His Expertise

    Dr. Gary Schnitkey, professor of Agricultural and Consumer Economics at the University of Illinois Urbana-Champaign, discussed crop farm income, cash rents and farmland prices during his presentation at the Chicago Farmers September 11, 2017 meeting. Dr. Schnitkey has been keeping TCF members well informed through his presentations since 1998. “He is a wealth of information,” said TCF President Barbara Clark.

    Dr. Schnitkey related that 2015 was a low income year, but income bounced back in 2016 with an average income of $90,000 per farm. This was due to good yields in Illinois. However, he suggested that incomes in 2017 could be less, averaging around $60,000.

    “Of course, much depends on where crop prices go as we move forward,” said Dr. Schnitkey. “Income is down because prices have not changed a lot and the yields this year are projected to be down.”

    Dr. Schnitkey said that soybean and corn yields have been above the trend in recent years, but he said that projections are down for soybeans in Illinois. He noted that 50 percent of this country’s soybeans are exported, with the vast majority going to China, which also imports soybeans from Brazil. “The hope from farmers’ perspective is that this export situation to China continues to grow so that soybeans remain in a positive situation,” said Dr. Schnitkey.

    Other information shared by Dr. Schnitkey:

    • Static prices for corn and soybeans: 2017 price per bushel for corn - $3.30, soybean - $9.50; 2018 projection: corn - $3.80, soybean - $9.50

    • ARC payments are expected to decrease and will vary by county; however, recipients should expect one-half or less of what they received last year

    • Costs are expected to be less in 2018 than they were in 2017; fertilizer costs have come down as well as fuel costs

    • Seed costs have not come down

    • For Central Illinois, soybeans are more profitable than corn; corn costs and seed costs increased more than costs for soybeans

    • Corn demand is static in comparison to soybean demand

    • There will be downward pressure on cash rents

    • Farmers and landowners should consider moving into variable cash rents

    • Little movement in farmland prices; prices have come down 10-15 percent off their peak; prices could come down another one to two percent

    • Anything that causes trade to slow in regard to NAFTA would be a negative; grain farmers want free trade

    • Regarding real estate taxes, use-valuation should be coming down

    • Projections indicate that the federal government will not do anything with ethanol; Brazil is raising a lot of corn that can be used for ethanol; the overall use of corn in ethanol is static

    • The United States could possibly begin exporting more corn, primarily to China, which now uses soybeans to feed animals

    • It doesn’t appear that water constraints will cause land to go out of production; Dr. Schnitkey thinks we will see more land coming into production due to Asian countries beginning to eat more meat: “As long as growing increases, land will be brought into production.”

    How to plan for smooth succession planning

    The hardest part about owning a farm is how to keep the land in the family, said Paul Morf during a presentation at The Chicago Farmers’ May 8, 2017, meeting. Morf, chair of the estate planning group for Simmons Perrine Moyer Bergman, a law firm principally located in Cedar Rapids, Iowa, allowed that “taxes are hard, too.”

    Morf related that setting up an LLC is the most efficient structure for succession planning. The LLC provides:

    • Centralized management.
    • Privacy regarding the ownership of real estate.
    • Separation of ownership from control through recapitalizing the LLC into voting and non-voting ownership interests.
    • Facilitates estate planning transfers of real estate to descendants and trusts for descendants.
    • Treatment like a partnership for income tax purposes so that all income and deduction items of the LLC flow through directly to the members.
    • Distribution of funds from the LLC to the members without taxation.
    • Liability protection for all owners.
    • Restrictions on transfers and insulation of LLC assets from creditors of owners.
    • Facilitating availability of significant valuation discounts for transfer tax purposes.
    • Avoidance of partition.
    • Avoidance of ancillary probate and possibly state death taxes in Iowa or Illinois for a non-resident landowner from Florida, Texas, Arizona or other state without a death tax.
    • Smooth business succession planning.

    Morf noted there is an emotional and economic attachment to a farm and there are times when fair is not always equal. He said this situation generally occurs when a child returns to the farm to work on it and maintain it, while other siblings have chosen other paths. Decisions have to be made:

    • Should there be identical treatment for siblings?
    • Give farming son the right/option to purchase farms from the estate or other siblings?
    • Should the land be held in trust, require rental to son at fair market retail rates and distribute rent equally to siblings?
    • Sell farms to the son (or grantor trust for sons) on an installment contract during life?

    In families where the business owners or famers have few assets outside of the business/farm and there are one or more children involved, other decisions have to be made when creating estate plans:

    • Treat children equally or fair but not equal?
    • Will the equipment pass predominately to the on farm heirs? What about the land?
    • Should children be put in business together or is each given a different parcel?
    • If you give children different assets, do you equalize with life insurance or liquid assets? He noted that life insurance is subject to the death tax.
    • Should children involved in the business be given purchase options?
    • Are those children not involved in the business given put options?
    • How do you value farmland or business assets for purposes of division?
    • Are buy-outs among family members for cash, or on an installment basis:

    Morf pointed out that there are a lot of tools for shared inheritances. He encouraged people to talk with their advisers and family during these considerations. Morf suggested that premarital agreements be in place for second marriages to protect the children. He added that placing an inheritance for children in a trust is a protection against a divorce.

    Morf reviewed revocable trusts and related that the trustor, who is the initial trustee and initial beneficiary, can amend or revoke the trust at any time. The trust is not a separate taxpayer and gifts to the trust have no tax implication. Additionally:

    • With the death of the trustor, the trust continues with new beneficiaries, according to the terms of the trust, which at that point becomes a will substitute.
    • It is important that every revocable trust be backed up with a valid will. A “pour over will” provides that any property owned by the trustor (and not by the trustor’s revocable trust) at death pours into the revocable trust.

    Investing in farmland

    There are good reasons to invest in farmland and Douglas Hodge, District III vice president of the American Society of Farm Managers and Rural Appraisers, outlined farmland’s many investment enticements from an institutional perspective during The Chicago Farmers’ April 10 meeting. Hodge also is part of Nuveen’s APPR Services/Risk Management group.

    “Historically, from an institutional perspective, farmland is a solid investment,” said Hodge. “It provides steady income, serves as a hedge against inflation, and reacts differently than equities to outside stimuli. It is a risk alternative to other investments. Plus, they are not making more farmland in the United States.”

    Hodge did note that unlike the United States, acreage in Brazil is increasing, but at the expense of the rain forest and many green spaces in that country.

    With the acreage of farmland not increasing in the United States, how can farmland be used most effectively? Hodge said that world demands have to be considered. Agriculture has been a key to energy through ethanol. Additionally, as third world countries improve, their populations are moving away from a grain-based diet to a meat-based diet. Technology has allowed increased production to begin meeting the growing world demand for food, Hodge added.

    As an aside, Hodge related that recently he met with a delegation from China and he learned that the typical farm in China is seven to 10 acres. The Chinese want the technology and equipment that the United States has so they can grow the food they need. “China is our greatest export market, so this Chinese goal could be bad news for the United States,” Hodge remarked.

    Among other reasons to invest in farmland is the preservation of capital, said Hodge. He noted that he personally recommends investing in farmland, which can be used to feed people. Former dairy farmers, Hodge and his wife are beginning to invest in farmland.

    He noted that farmers’ financial statements are stronger now than they were in the 1980s so he does not foresee the problems that plagued that period.

    “You have to keep in mind that you have to be in a farmland investment long-term,” said Hodge. “The next closest hedge against inflation is gold or silver.”

    The growth in bio-fuel presents more opportunities for agriculture, according to Hodge. Noting that 25 percent of corn is used for fuel, Hodge said other opportunities besides corn will present themselves. He noted that sugar cane is used for bio-fuel production in Brazil.

    While returns have declined on farmland, it is not a reason to panic, said Hodge. “Remember, it is a long-term investment. The average return on farmland has been 12.5 percent over the last 20 years.”

    Nearly one-half of all farmland will transfer ownership in the next 20 years, said Hodge, so it is important to take a careful look at estate planning.

    “The average age of the American farmer is over 50,” said Hodge. “As we age, who will buy our land? It is possible that the older famer can own the land and cash rent to younger farmers.”

    He added that less than one percent of farmland in the United States is owned by institutions. It is mainly owned by farmers.

    Hodge said that Nuveen is buying farmland in the Midwest and the Pacific Northwest. He said there also are investment interests in Brazil, the eastern and western parts of Australia, Eastern and Central Europe, and Africa. Nuveen buys Class 1 farmland, he said. “More and more money is chasing this category of land.”

    Hodge shared that the Creighton Farmland Index is a good tool to use to see how values are tracking.

    What are the cons of farmland investment?

    • The risk of inflation and deflation
    • Volatility of commodity prices
    • Lack of liquidity
    • Possibility of high transaction costs
    • Geo-political risk

    Hodge pointed out that top quality land will not decline in value as less desirable land will. He noted that fundamentally, farmland is real estate and the adage, “location, location, location,” also applies to it.

    The current market indicates that farmland owners are facing lower values; however, commodity prices are stabilizing, said Hodge. On the negative side, there is a potential for higher interest rates and that has to be closely watched.

    He went on to say that cash rents are likely to decrease; there is a correlation between land values and cash rents. Hodge said there will be some harder negotiations between the farmer and the owner.

    Hodge added that investors have to be aware of what is happening in Washington regarding trade issues because it will have an impact on commodity prices.

    Good soil management promotes the quality of water

    The weather forecast of several inches of snow falling on the Chicago area did not discourage a number of Chicago Farmers’ members from attending the March 13 meeting, which dealt with the relationship between agriculture and water quality. Unfortunately, travel conditions did hamper our speakers’ ability to get to Chicago. But Chicago Farmers’ member Jeff O’Connor, who had come to the meeting to provide support for the scheduled speakers, volunteered to take on the topic of “Cover Crops and Nutrient Reduction” and serve as the day’s presenter.

    O’Connor, a graduate of the University of Illinois, is a sixth generation farmer who raises soybeans, corn and wheat on 1,000 acres in Kankakee County. He also is chairman of the Kankakee County Soil & Water Conservation District and a member of the Kankakee County Farm Bureau.   In both roles he works to promote the use of cover crops and better nutrient management.

    In addressing the connection between agriculture and water quality, O’Connor explained that the two become linked through the gulf hypoxia zones. Hypoxia, or low oxygen, is an environmental phenomenon where the concentration of dissolved oxygen in the water column decreases to a level that can no longer support living aquatic organisms.

    The largest hypoxic zone currently affecting the United States, and the second largest hypoxic zone worldwide, is the northern Gulf of Mexico adjacent to the Mississippi River. O’Connor noted that there have been sedimentation studies in the gulf to determine how long the flushing of nutrients down the Mississippi has been occurring. Studies were possible through the study of two types of algae that thrive in a hypoxic zone and whose remains can be measured in the sediment on the Gulf floor.   He said that researchers have routinely been able to measure higher concentrations of these single cell organisms in the gulf area sediment dating back to the 1950s. These higher concentrations roughly coincide with the advent of modern agriculture and the introduction of commercial fertilizers.

    To control the flow of nutrients into the Mississippi River Watershed, the USEPA (United States Environmental Protection Agency) in 2011 urged states to develop strategies to reduce the outflow.  Illinois stakeholders met from August 2013 to May 2014 to develop a strategy and gave input that resulted in the release of a 10 year plan in July 2015.  Guidelines were developed and in July 2015 the official Nutrient Loss Reduction Strategy (NLRS) plan was adopted.  Several points that O’Connor made from that plan include:

    • Science assessment-the University of Illinois along with IEPA conducted research that addressed what practices could be used to control loss and at what cost.
    • Rivers that are considered impaired receive priority but non-impaired watersheds also are to be supported in the maintenance of the quality of their water. Interestingly, O’Connor noted that the Kankakee River is probably the cleanest river in the state due to the act that its primary source of water comes from Indiana through limestone and bedrock.
    • By 2025, there should be a 15 percent reduction of nitrates and a 25 percent reduction of phosphorous being flushed from fields into the Mississippi with an ultimate goal of 45 percent reduction for both. O’Connor added that studies have gone so far as to test the water run-off of golf courses and homeowners’ properties and found that they were contributing little to the problem. Agricultural lands are the main source within Illinois.

    O’Connor said that a priority of the Illinois Farm Bureau (IFB) is the education, research, implementation, and accumulation of evidence of ability to protect the quality of water. The Illinois Farm Bureau has allocated $100,000 for the Nutrient Stewardship Grant program that is funding 15 projects in 32 counties. O’Connor pointed out that it also is important to have boots in the field demonstrating what needs to be done. IFB also is offering free, confidential water testing in select counties to test for levels of nitrates in tile drained farm fields.

    To further education in the use of cover crops, O’Connor said demonstrations of new practices are necessary; there has to be a cultural change among farmers; and the appearance of innovators and early adopters of cover crops to lead the way are necessary. He noted that changes should benefit both the environment and the livelihood of agriculture.

    Among the changes that need to take place, for example, is more application of nitrogen to fields of corn in May or June, prior to when the tassels appear. O’Connor said this is the time when the corn is in most need of the nitrogen, rather than in the fall when nitrogen traditionally had been applied. “Putting nitrogen on when the crop needs it and is using it means less opportunity for it to escape in run-off,” he noted.

    Tillage patterns also need to be changed, said O’Connor. “No-till is a better system for soil health,” he said. “The worst thing you can do to discourage soil health is work the soil.”

    Regarding cover crops, O’Connor said that his use of cereal rye as a cover crop has prevented erosion of the soil through wind and water.  Any soil that leaves a field often carries with it phosphorus residue. As a result of the cover crop usage, phosphorous stayed put. The cover crop system also had no increased herbicide costs.

    O’Connor said that he found cereal rye to be a beneficial cover crop because it grows anywhere, handles cold weather well and grows early in the spring. He said his system mixes the cover crop seed with fertilizer in the fall and both are spread on fields that will be rotating to soybeans in the subsequent year.  O’Connor noted that the roots of cereal rye may inhibit the growth of corn, but not soybeans. He related that he raises his own cereal rye seed on areas of his farm where corn won’t grow profitably. O’Connor is able to raise the seed for $7 to $8 per bushel versus the commercial cost of $15 per bushel. He also sells excess seed to neighbors. O’Connor said that many producers use their fields of cover crops for grazing livestock. Winter rapeseed is another good cover crop that he is experimenting with.   Winter rapeseed can overwinter well and adds diversity to the soil fungal activity.

    Regarding cover crops’ effectiveness in removing residual nutrients, O’Connor said that he had two fields of corn in 2015, side by side. In one field, a cover crop was not used; in another, there was a cover crop. The following spring he said there was a 67 percent reduction of nitrates leaving the soil in the cover crop field versus the field with no cover crop.

    Agriculture and technology make good partners

    Does technology have a place in agriculture? The resounding answer is yes. A group of panelists, moderated by Dan Stokes, a director of Chicago Farmers, discussed Agtech at The Chicago Farmers’ February 13, 2017, meeting and offered interesting insights. Panelists included Guy Turner, a partner with Hyde Park Venture Partners; Corbett Kull, senior director engineer and head of the Chicago Office of Climate Corporation; Mark Haraburda, CEO of Barchart; and Matthew Rooda, CEO and president of SwineTech.

    How do the panelists define Agtech? Haraburda, whose Barchart company focuses on commodities and futures data, said that Agtech has made it possible to analyze large amounts of data that are cloud-based, and Rooda, of SwineTech, which creates products that reduce piglet deaths, noted, “Time is our most valuable resource and technology gives time back to people.” Kull, of Climate Corporation, which helps people and businesses adapt to climate change, remarked that the technology has to improve productivity for the farmer and/or landowner. Turner, whose Hyde Park Venture Partners focuses on high-growth technology startups in the Midwest, believes that Agtech involves genomics and chemistry.

    And who are the innovators of Agtech? “Everyone, including growers, who have been tinkering with new solutions for decades,” said Turner.

    In discussing the history of the adoption of technology in agriculture, Kull that it can be traced back 120 years and include mechanization and the use of fertilizers, chemicals and GMOs. “There appears to be a cycle every 20-25 years in agriculture,” he said. “At the front end of innovation, there are a lot of naysayers. There was a time when farmers were suspect of tractors and were reluctant to replace their field horses with these machines. Three or four years ago, I was hearing that farmers don’t use smart phones. That is not the case now.”

    Timing is everything, observed Haraburda, and noted that rooster.com came out in 2000. While it was a great idea to bring a digital marketplace to the farmer, the time was off, said Haraburda. “The platform was not there. Now we have that platform, but it is still tough to sell grain online. It won’t happen overnight, but the behavior is changing.”

    How does that platform happen? “You have to think ahead,” said Rooda. “You have to find cost-effective ways to get an advantage over your competitors.”

    Kull noted that computerization has gotten very cheap. He pointed to the ability to walk up to livestock in the field and check a fit-bit in an animal’s ear and gain a reading with an iPhone. “Affordability and pervasiveness make the technology right for right now.”

    Also noted in the discussion:

    • The consumer drives the investment in the Agtech industry. Look for what the consumer needs.  The consumer has to lead the way. They won’t buy if they don’t need it. (Rooda)
    • The grain market is a huge area of investment opportunity. There are two or three tiers of management structure on a farm, so there is opportunity to create transparency. (Turner)
    • While hog prices are low and there is an oversupply of pork, the rise of the middle class in China and its appetite for American cuts of meat could change that situation in the next few years. (Rooda)
    • Every commodity industry lives on a supply curve. (Turner)
    • A farmer is running a factory and it requires doing a better job of measuring and scaling. (Kull)
    • Immigration and tariff issues could affect Agtech’s future; however, if there is a shortage of labor, some start-up would figure out how to pick the fruits and vegetables. “Regulations present great opportunities for startups.” (Kull)
    • The demand for restaurants to serve locally grown food affects agriculture and technology. There have been advancements in storage and modifications in growing to give longer life spans to fruits and vegetables.
    • Collecting information for the famer is a problem; don’t let information die in the field.
    • Regarding tech investments or involvement in startup companies, panelists recommended gathering as much information as possible and consulting with a good legal team regarding structuring a company.
    • The bar is high for venture capital; a 20 percent return is sought.
    • Expertise in the market, tenacity, and previous experience indicate probability of success for a startup company and make it easier to raise capital.
    • In response to a question about protection of intellectual property in overseas deals, Haraburda said that Barchart has grains.com and sells grain to one or more elevators. A Brazilian grain buyer wanted a similar situation in Brazil. Barchart is licensing the technology to the group.
    • Regarding the future of land grant colleges in research and development of technology, Haraburda said that the University of Illinois tech campus is extensive and it has talent. People are being hired from this pool of talent.
    • Future of Agtech? Kull said that Climate Corporation is making investments in sensors for the field and livestock. Haraburda said he is interested in tools that are simple and affordable.

    Farm managers’ compensation and goals explored at January meeting.

    The Chicago Farmers’ January 9, 2017, meeting featured Kyle Mehmen and Gary McDonald who shared their insights about farm management with an appreciative crowd. The two men were part of a panel that was moderated by TCF Director Dan Stokes.

    Kyle owns MBS Family Farms with his family in Plainfield, Iowa. The group influences over 20,000 acres via farm management, input sales, custom work, and traditional farming. Gary is the owner of Organic Resources in Springfield, Illinois. He became a farm manager in 2010 when he was asked to assist with the management of an organic farm owned by an organic investor. From that point, the need for an organic farm manager was evident because of the consumer shift to organic, which has created a demand several times greater than supply, he said.

    In discussing compensation for farm managers, Kyle noted that his family owns a small farm management agency and the managers usually are paid a percentage of the gross revenue from the farm that ranges from five to 10 percent, depending on the services provided. He said they are moving away from this model because it may not always encourage the best behavior for the land. Kyle related that they are moving to compensation based on the asset value of the land, but this presents challenges. On the other hand, some of the clients pay on a per acre basis. This can be done on an hourly basis and ranges from $300 to $500 per hour or $5 to $7 an acre, dependent upon the task.

    Gary, who assists existing organic farmers and transitional farmers with a variety of tasks, said that compensation for conventional farm managers on a conventional farm would be two to 10 percent of the gross and $100 per hour when help with leasing is provided.

    “When I am working with an organic farmer, I am handling many things,” said Gary. “I charge 10 percent of the gross or an hourly rate of $200 plus expenses because many times I am required to travel a fair distance. Management of organic operations entails a number of added responsibilities, such as teaching and guiding.”

    Regarding other metrics for determining compensation, including the possibility of being compensated on a percentage of profits, Kyle responded, “We started down that path, but we still have many clients that we manage on a gross basis. It is difficult trying to decide what the mathematical equation should be.”

    Gary suggested that the appreciation of the assets also be considered, but that has to be quantified.

    Kyle remarked that determining the value in appreciation is difficult. “We have a baseline, we use metrics and we look at improvements and ROI, but we are far from perfecting a math equation that can be plugged in. There has to be significant trust between the manager and the client.”

    He went on to say there are variables in determining compensation. For example, a $10,000 an acre farm could have fragile soil, low fertility and an aging draining system. As Kyle’s group addresses these problems and adds their work into the equation, it has to be determined what the new value looks like after the improvements and the receipt of enhanced revenue.

    An essential aspect in managing farmland investments is working with, or being, the people doing the actual work on the farm to produce a crop and care for the soil. Consolidation and automation have not yet eliminated the role of the farmer. Dan pointed out that some farm managers and landowners have in fact expressed concern about the number of qualified farmers retiring and the need for more farm operators who are skilled working with technology and data collection and analysis. Gary noted, “The number one natural resource we are squandering is the American farmer. There is a scarcity.”

    A discussion about managing soil fertility ensued, and Dan raised the question about using soil tests as a tool for measuring progress. Basic soil tests can be misleading not only because they can vary greatly by year and location, but also because they say very little about longer-term soil health soil conservation, which is important for optimizing the value of the land asset over time. The soil horizon test and the Cornell soil health test, for example, are more advanced tests that do a better job of tracking durable fertility. Dan noted, though, that use of these tests, and ultimately how everyone manages fertility, will depend on everyone’s time horizon.

    Gary observed that true farmers work with the soil to make it “reproductive,” not just “productive.” He noted, “An operator, who can raise 200 bushels of corn organically using rotations, cover crops and livestock with very little fertility inputs, if any, has successfully worked with the creative processes of the soil.”

    “There is an art to soil testing,” said Kyle. “You have to establish a benchmark. There is a lot that goes into the process.”

    Dan observed that in the past, relatively few outside of organic farming put much stock in the idea of building soil microbes as a way to build soil fertility, opting instead for applied chemical fertilizer. Now that larger companies are researching and promoting microbes more, interest has broadened.  A lot of wisdom from organic farming is being commercialized and applied to conventional farming.”

    Regarding benchmarks, Kyle said he looked at them on an individual basis. “I am trying to add value to farms,” he said. “Sometimes, fragile areas have to be taken out of production. How do we monetize and reward management in this situation?”

    Gary pointed out that well drained soil is very important. He said he prefers Class B soil with a lower PI because often times it is lower priced lighter soil and sometimes rolling and dries out more quickly so the farmer can more easily get back into the field to perform mechanical weed control. Dan related that the USDA’s Web Soil Survey website provides satellite maps and is a “very useful resource” for discovering the various soil types and drainage issues on a property.

    Next, the conversation went to a discussion about cover crops, and Dan noted that many farmers become frustrated using cover crops because cover crops are legitimately difficult to get right. He asked Gary and Kyle how they approach farmers regarding cover crops.

    “You have to talk with the farmers,” said Gary. “They are very used to thinking about what they can get out of the soil rather than what they can put back. I work to get the biology and earthworms thriving in the soil, that’s the true wealth generating engine. We need to get the biology back to work.”

    Kyle added, “I am trying to learn all the time about cover crops. It is an art to manage cover crops, I have to continue to work at it. I would caution mandating cover crops, they might not be the best solution. But, educating yourself is the right answer. I know what does not work and, at times, that is more valuable than knowing what works.”

    Gary said, “It is a matter of faith with organics. You need more than one year to transition a conventional farm to an organic farm and produce a successful crop. It is three years before the organic crops are produced. To build the soil, one has to be willing to invest in the soil, there is no magic bullet.”

    “We share information,” said Kyle. “I manage for landowners where I farm. We have a full-time farm manager and I rent three parcels that are under the manager. I tell the tenants what we are doing and demand that they do the same on the land.”

    Regarding collection of financial data, Gary said that he is more operational and turns to experts for the numbers side of the farm.

    Kyle related that his group hired a CFO five years ago. “It is the best investment we made,” he said. “It is hard to quantify how it makes me money, but the position has been a good thing for my operations. We also use AgManager software, Quick Books, and Conservis (an analyzing tool).”

    Gary said that he finds his own markets and related, “I grow what the buyer and processors want. I intend to find the best and highest priced markets, and my goal is that the increase in revenue is more than enough to pay my fee.”

    Some thoughts that emerged during the question and answer segment:

    • Gary and Kyle said that investors and individuals comprise their client base.
    • Regarding organic farming, Gary said that he tries to mimic nature. He said he is against burning because it destroys microbes and causes the loss of too much carbon and energy, which is needed in the soil.
    • Organic does not necessarily increase the selling price of a farm, according to Gary. “When I have transitioned a farm to a certified organic farm, the much higher crop prices increases the value of the farm based on ROI; however, without a skilled operator, that is a moot point. The price of anything is based on how the buyer perceives the value,” he said.
    • Care must be taken with equipment that is used in organic farming so that there is no contamination from a conventional farm, Gary said.  It is required that all equipment be properly cleaned before being used in organic production and logs must be kept. Operators who farm both organically and conventionally sometimes will have separate equipment designated just for organics.

    Farming in uncertain times


    Kennedy Weighs impact of new administration on ag.

    The political uncertainty at the national level may result in significant changes to the role of government for many people.

    “For large family farmers, the reduction in inheritance tax may preserve and help protect intergenerational transfer of not just family farmers, but a way of life, as well,” said Christopher Kennedy, chairman of Joseph P. Kennedy Enterprises Inc.

    “On the other hand, a pullback in crop insurance by the federal government may leave all farmers more exposed to the volatility of nature,” Kennedy said during a presentation at the Chicago Farmers meeting.

    To read the full article by Martha Blum with AgriNews, click here

    Updating the farmland market


    Dr. Bruce J. Sherrick gave a highly informative presentation during Chicago Farmers’ November meeting regarding the headwinds, tailwinds and implications affecting the future of agriculture. He noted that his take on a variety of factors that affect farmland value is based strictly on his opinion. Dr. Sherrick added that he gleans valuable resource material in his role as a member of the Board of the Federal Agricultural Mortgage Association and as director of the TIAA Center for Farmland Research at the University of Illinois Urbana-Champaign campus. He is the Marjorie and Jerry Fruin Professor of Land Economics at the university.

    Among the points that Dr. Sherrick made during his presentation:

    • Farmland remains a good investment.
    • There is $3 trillion in the ag sector and 80 percent of that is in farmland; there is little debt.
    • Private equities have agrowing interest in the agriculture sector.
    • Dr. Sherrick noted that two farmland REITs that sell stock are Farmland Partners (FPI) and Gladstone Land Corp. (LAND). A Wall Street Journal article published November 24, 2015, related, “The National Council of Real Estate Investment Fiduciaries’ (NCREIF) Farmland Index had an average annual return of 12% over 20 years. That beat the NCREIF’s Commercial Property Index and the S&P 500’s return of about 9%. It also topped investment-grade corporate bonds, which had returns in the 7% range.”
    • From 1970 to 2015, farmland is the only investment that averaged a double digit rate of return. “Very few assets have that track record,” he observed.
    • 24% of the land is controlled by four percent of the farms in the United States.
    • While farmland owners are aging, this does not directly portend sales; there are multi-generational operators on many farms.
    • Farms become an asset to sell when families decide to turn the land into money to leave to heirs; however, anecdotal data tell us that the sale does not always happen because the owners can’t think of a better place to invest their money than in the land.
    • Farm sales often are triggered by the fact that generations become too far removed from the farm to have experienced time there or to have clear memories of being a part of the farm.
    • The website AcreValue.com provides free information regarding comps and appraisals, soil productivity ratings, crop mix, and parcel ownership information. “It is astounding what is available for free on line. This ability revolutionizes the cost of acquiring information,” said Dr. Sherrick. 

    Global trends and industry consolidation

    Global affairs and consolidations are some of the factors that affect stocks. In particular, what impact do these elements have on chemical stocks that are related to agriculture? Steve Byrne, an equity analyst for Bank of America Merrill Lynch, brought his insight on this topic to The Chicago Farmers’ October meeting.

    Steve who is BofAML’s director of US Chemicals-Equity Research/Global Research, previously dealt with agricultural chemicals. Currently, he focuses on picking winners and losers in chemical stocks. “I try to answer who is going to post a better or weaker earnings outlook than the market thinks,” related Steve.

    To get an edge in the chemical field, Steve said it is necessary to have a view of growth prospects or demand better than the market has. “This is a hard edge to get,” he remarked. Steve said he spends a lot of time talking to retail channels and getting into the Corn Belt to talk with farmers. A recent survey BofAML jointly conducted with Purdue University helped him acquire a lot of data that otherwise might not have come his way. Additionally, he has myriad sources as part of the Merrill organization. “I have colleagues all over the world who are able to keep me up to date on the agrichemical industry in China, Russia or South America. For example, if a Brazilian crop looks bad, I could change my outlook on that information,” said Steve.

    Steve covers Dow Chemical, DuPont, Monsanto, and FMC. He said there is quite a bit of consolidation activity regarding chemical companies due to the challenging state of agricultural economics. “If a company is a crop or seed producer, the situation is likely to be challenging and remain so for the near future,” Steve said. Currently, Dow and DuPont are moving toward a merger. “If this merger happens, there will be several others,” Steve observed. “This merger will work out only if it has global approval.”

    Further affecting consolidation is the fact that a number of patents are expiring and this will move to more use of generics. He also noted that he was bearish on innovation. “The introduction of new active ingredients peaked 30 years ago,” Steve shared.

    Regarding the Dow/DuPont consolidation, he noted the two companies have different strengths. The consolidation of the two companies combines their skill sets and will offer strong competition for Monsanto down the road, according to Steve.

    Regarding fertilizers, Steve noted that due to the decrease in corn prices, he expects growers to move back to soybeans, and this affects fertilizers and crop seed sales. He said he sees pricing decreasing for potash and nitrogen. He related there was a lot of new capacity coming on in nitrogen in the Corn Belt and there is a new potash mine coming on stream in Saskatchewan. “This could signal a contraction in potash demand. Potash’s pricing this year is down by 50 percent,” he said.

    Steve pointed out that potash inventory levels are high in China, but the potash producers in Canada think that 2017 will be a record year. “They are delusional,” related Steve.

    He went on to say that China is a key player in the nitrogen market. Forty percent of nitrogen produced comes from China, and it is mostly unprofitable. Steve said that China is losing money on every ton that it makes on a cash basis;however, the Chinese government subsidizes the industry so it is able to stay in business. “If China shudders, we could see a $50 per ton increase in urea,” said Steve.

    Other points made by Steve:

    • A powerful trend is to farm according to the heterogeneity of your land. It speaks volumes in yield improvement.
    • The demand for corn in ethanol has played out; genetics is the growth driver for crops.
    • Weather was on the side of the farmer this year and farmers cut back on prophylactic use. If they don’t get burned, the farmers will do this again next year.
    • In the last 10 years, seed prices have doubled; crop prices have not.
    • Gene editing, which came out of Pharma, is being applied to agriculture. The early developers are small start-up companies. Steve expressed surprise that Monsanto did not embrace this technology, although it is licensing Dow’s technology in this area. Gene editing has support because it does not involve GMOs and does not require USDA approval.

    What’s ahead for grain prices, leases for 2017?

    Dr. Gary Schnitkey, professor of Agricultural and Consumer Economics at the University of Illinois Champaign-Urbana, looked into his crystal ball and projected what 2017 might have in store for farmers regarding grain sales and cash rent leases at Chicago Farmers’ September 12, 2016, meeting. Nearly 100 people were in attendance for the informative afternoon.

    It is a good news-bad news story. The last several years have produced good yielding crops. There has not been a shortage of crops since 2013, said Dr. Schnitkey. There have been good supplies. As a result, the $4.70 average price of corn per bushel that was driven by ethanol and hit a plateau in 2006, has fallen and continues to be below the $4.30 mark since 2013.

    Dr. Schnitkey noted that when the December contract futures of $4.30 were set in June, the weather was hot and dry. However, July and August were perfect in Illinois and Iowa for corn and soybean production. Now corn is in the $3.40 - $3.50 range and soybeans are at $9.10 per bushel, down from the high of $10. There have been record productions of corn and soybeans in the United States, said Dr. Schnitkey. “This will push down prices for 2017 and affect revenue.”

    He noted that since 2014, soybeans have been more profitable than corn because corn seed costs have increased. Also affecting revenue is the Agricultural Risk Coverage (ARC) and Price Loss Coverage. The payments in 2016 were lower than those in 2015 and it is anticipated the coverage will be lower still in 2017.  On the plus side, said Dr. Schnitkey, fertilizer costs are decreasing and this could continue into 2017. He went on to say that the average cash rents have been coming down since 2014.

    How long will prices stay low? Until a short crop occurs in the world and until then, prices will hover around $4 per bushel for corn. In planning budgets, Dr. Schnitkey suggested that farmers plug in $4.30 per bushel for corn and $10.30 per bushel for soybeans. He said if these prices do not work, it may be time to initiate variable cash rents.

    Dr. Schnitkey noted there are continued low incomes for 2016; there is potential for low returns in 2017; and to mitigate the losses, non-land costs and cash rents must continue to decline.

    “The outlook will turn around,” said Dr. Schnitkey. “You are still in a fundamentally good business.”

    To help ensure a more positive situation, Dr. Schnitkey suggested:

    • Consider planting more soybeans.
    • Lower all costs.
    • Lower cash rents and negotiate new leases in the fall; don’t negotiate during a price spike.