Thursday, June 20, 2013

"INSIGHT-Big U.S. harvest may hit grain prices, test high farmland values"

Corn $5.6625, wheat $7.1025.
From Reuters:

With the U.S. grain harvest set to bounce back and pressure crop prices after last year's drought, some economists have cautioned that sky-high U.S. farmland prices may be a bubble about to burst.

Kansas City Fed President Esther George has warned of rising farmland values. Capital Economics economist Paul Ashworth said in a recent research note to clients "there does appear to be a localized bubble in Corn Belt farmland values" and the biggest factor has been a surge in grain prices.

But most farm bankers and industry analysts don't see a bubble in record crop land prices set in the last year from Nebraska to Indiana. This year, farmland has still been selling for $10,000 an acre or more in top growing areas of the Midwest and Great Plains, though prices are rising more slowly than last year's dizzying pace of more than 20 percent.

Global food and fuel demand for corn, the bellwether Midwest crop, justifies high land prices, farm economists say. Low U.S. interest rates have also encouraged buying.
But even if grain prices decline and U.S. interest rates edge higher, analysts say demand for crop land from cash-rich big farmers should stay strong.

"Farmers are still buying," Jim Farrell, chief executive of Farmers National Company in Omaha, Nebraska, the country's largest farm manager, said in an interview. "Many in the industry think if we take corn prices down to the mid $4 bushel range and they stabilize, that is going to slow down the increase in land values or stabilize the market."...MORE
See also May's " Corn: Deutsche sees potential for price below $4".
Right now it's a guessing game. Planting intentions are at record levels and the drought area is slowly receeding. On the other hand it is so cool in parts of the northern corn belt that things are off to a slow start.
Everything is guesswork right now but sub-$4.00 is a really low number.
Corn $6.5750, wheat $6.9625...
And even as far back asDecember 2011, coming into the 2012 marketing year:
What Would Sub-$4.00 Corn Do to the Price of Farmland?
My back-of-the-envelope calculation says that every arms-length purchase since 2008 would be underwater.
Farmland is worth it's discounted cashflow. Period.
It may sell for more but at some point it returns to trend. It can correct either in price or in time.

Corn is trading at $5.94, down considerably from it's $7.99 record high earlier this year....