Farm Profits Capitalized Into Land, Equipment, Despite the Slow Moving Train Wreck

Train WreckI had snow blowing across my combine today.  I am in the last few days of corn harvest.  The weather has turned very cold, as you would expect as we move into late November.  In southwestern Ontario we can push harvest almost later than any other part of Canada.  I just hope that the snow stays away.  There is still quite a bit of crop to get out of the fields in this part of the province.

The crop in the field is quite a bit better than I expected.  If you remember, back in the spring I had a very difficult time getting crop in the ground.  My soybeans were planted very quickly in June, but when you plant that late you usually don’t expect a good yield.  So I was quite pleased this past week when I figured out yield and had the second-highest soybean yield ever.  My 55 bushels per acre over approximately 500 acres of soybeans is testament to good rains in August and September.  In football terms, it was like a Hail Mary pass thrown in June and for whatever reason I caught it in October.  It would only get our agricultural commodity markets to catch the same Hail Mary pass.

I say that because the longest running train wreck in world history continues.  When you think of train wrecks, it usually means some type that catastrophe that happens very quickly in about the worst way you can expect.  For instance, how do you put a train back on the tracks after it flies off?  That’s exactly how the European monetary situation is being described these days.  Wake up any morning and you will hear about a new European country that is having problems, as noncommercial speculative money is moving around in the grain market like Ping-Pong balls in a lottery draw.

I, as of yet do not have a good handle on my corn yields.  I had expected a 30-bushel per acre drop in yield from average.  I don’t think it is as drastic as that but today I came across huge holes in the field caused by flooding right after planting.  It was a reminder of how tough this past spring was and how lucky we are to come out the other side.  It’s not that way for everybody in Ontario, as many people in central Ontario suffered drought at the very worst time.  Despite that, the Ontario provincial yield for corn will move upward from 140 bushels per acre.  Dynamic basis movement in the Southeast United States is pulling corn into there.  This is backing up into Ontario, which after the harvest pressure is over should see sustained basis strength into the spring.

So where is all the farm money going to be spent this coming winter.  It is no secret that despite the lower prices we have seen since August 29 taking a bit of the cream off the top, profitable prices have been there for the taking.  I have got thinking about this lately mainly because of a continuing education course I teach called “Agriculture for Realtors.”  I was asked to develop this course about 3 years ago in response to the high demand for farm real estate.

In one section of the course I do a commodity analysis.  It is great stuff for me because I do that all a time.  However, I quickly learned when speaking to realtors, their eyes would glaze over when I talked about the price of corn wheat and soybeans.  So I made up one slide talking about rules of thumb with regard to commodity prices and land prices.  I said any corn price over $4 was positive for real estate values and any soybean price over $10 was the same.  Needless to say, over the last 2 or 3 years prices have been above that and a tremendous amount of this revenue has been capitalized into the price of land.  In southern Ontario it is not uncommon to see farmland sell for $10,000/acre.  Farmers are not always the buyers but in some locales they are.

I know that this is not the same for many of you who are reading this.  Land prices are determined by many factors and what is true in southern Ontario is not necessarily true in northwestern Alberta.  However, farmers still have money jingling in their pocket this fall and if it is not capitalized into land it will surely be capitalized into equipment to make ourselves that much more efficient.  I’m sure also there will be lots of debt repayment.

Meanwhile our interest rates stay super low encouraging all types of investment in the above.  At the same time that slow moving train wreck in Europe continues to inch along on a daily basis, causing all kinds of fractures in our macro economic picture. It is such a dichotomy and something tells me those differences cannot be sustained.  In other words the strong fundamentals of agricultural demand are getting leapfrogged from poor microeconomics out of Europe.  At least for now, that’s the way it seems to be.  Stopping this slow moving train wreck is becoming much harder than I ever imagined it to be.