Cooling New Crop Grain Prices Will Surely Cool Land Values

Farm Land 510     I got a note in my email the other day asking me to comment on 498 acres for sale in SW Ontario for $19 million.  I didn’t really bat an eye at the comment, as I’m a bit blind to it after speaking about farmland values all winter.  However, when I put the value up on Twitter, there was a firestorm of conversation.

Of course the comments you get is how crazy is that?  Needless to say, there has been much comment on farmland prices both in these pages and even the mainstream media over the last few months.  However, among farmers the over riding reality is our new crop fundamentals showing lower prices, making some of these land prices unsustainable over time.  Yes, corn futures at $4 and soybean futures sub $10 have a dampening effect on the perceived “wild west” of land prices we’ve seen over the last year across the US and Canadian grain belt.

It’s interesting, because nobody really feels like going there.  I remember last year at this time, our grain prognosticators were all saying the same thing as now.  Prices will be going south.  That was our new crop reality.  Of course, nuclear heat and dry hell descended across the American Midwest and the rest was history.  As my standing orders for selling corn off the combine kept getting ticked off, $6, $7, $7.50, I couldn’t believe my good fortune.  For a guy who has sold sub $3 corn many times, it was like Independence Day.

That of course is not the end of the story.  Soybeans topped out in early September, corn in August.  Corn demand has been destroyed to the tune of approximately 1.3 billion bushels, while at the same time corn and other feed grains suppliers are coming out of the woodwork.  Traditional buyers of US corn have gone elsewhere, not necessarily because of price, but more because of the lack of supply.  Simply put, the rest of the world geared up to grow corn, and that toothpaste is out of the tube.  The world’s production capacity to produced corn and feed grains has increased and will only be reduced through much lower prices.

It means Brazil is replacing the US as the world’s biggest corn exporter in 2012.  Sure, that will be temporary, as our American friends will surely regain the title.  However, even Mexico, a large producer and importer of US corn sourced some corn from South Africa this past winter.  So the dye has been set, all these markets need to be re-captured and the only way that can be done is through cheaper corn.  The road head is going there.

The problem is as farmers we like “round numbers”.  Back in the day (only 6 or 7 years ago), $4 corn represented everybody’s price to sell in Ontario.  In fact, I used to have a rule, when corn was $4 I sold.  Then came ethanol, the noncommercial spec demand and so on and so on.  As those round numbers got to $5, $6, $7 and even $8 our pricing psychology got all mixed up.  Pricing preferences changed and so did our whole supply and demand fundamental world.  So if and I say if, or maybe I say maybe, when corn prices go back down, that psychology will need to recoil.  Agricultural commodity prices need to go down to a point where demand picks up again.  It all makes sense to me.

And the Toronto Maple Leafs are going win the Stanley Cup!  Yes, I’m hoping, and I’m also hoping just like any other farmer out there that prices stay high.  I often say I’m always long the grain market because I’m a farmer, that’s what we do.  Needless to say, despite my manifestations on what should happen in our grain market with normal weather, it might not.  The road ahead is littered with people who thought they knew what the grain market would do.  Nobody knows I’ve been down that trail too many times.

What we do know is the default choice for both Ontario and US farmers to plant is corn.  Corn genetics offer superior productivity compared to their soybean cousins.  That will mean big acres come spring in both the US and Ontario.  I expect 98 million acres of corn in the United States and 2.2 million acres in Ontario.  By July 4th, we should have a pretty good idea where that market will be going.  Rain in August will tell for our soybeans.

So as we move ahead, the whole world seems bearish new crop grains.  Nobody knows if that will happen, but if it does, there surely will be a cooling of the Ontario farmland market.  Simply put, like almost everything in agriculture, its cyclical and it cannot remain white hot forever.  Ditto for grains, ditto for all things related to agriculture.  If anybody gets it right someday, I hope they tell me.  The only thing we know for sure, is that we can’t be sure of anything at all.