The Wall Street Journal had a fairly extensive article in today’s paper on the extension of the ban of wheat exports by Russia from December of this year until after next year’s crop.  However, as most traders and farmers know, you will believe what Russia says at your own risk.  What we do know from the article is as follows:

• Wheat stockpiles are still much higher than in 2008, however, the original news of the Russia ban led to a 5% rally in food prices last month.  Wheat rallied substantially, along with corn and sugar.
• Russia last year accounted for 14% of all wheat exports and if the ban continues to next year’s crop, then this will drop to zero.  The Ukraine and Kazakhstan will also have sharply reduced exports this year.  During the the current 2009-2010 crop year, Russia exported about 650 million bushels up from 40 million bushels in 2000-01.
• A possibly bigger concern is that the winter wheat crop will not get planted if the drought continues.  Normally, 44 million acres get planted to winter wheat and Russia right now assumes the worst case scenario for this year is closer to 2/3 of that number and that may be too high.  If that is the case, even if the drought is lifted for next spring’s crop, spring wheat normally produces less than winter wheat.
• Also, drought is hitting Argentina and Australia, and Germany had a wet season and the quality of their crop is way down.  They have had to import wheat from the US which rarely happens.
• Egypt, which historically has not bought much wheat from the US, just struck deals to import about 8 million bushels at prices 5% higher than last month.

This is the second day in a row that the Wall Street Journal had an article on wheat exports  and I think we will see several more over the next few months.

Kansas State University provides a very good map of basis for most of the major crops over most of a five state region comprising all of Kansas, Nebraska, Oklahoma and parts of Texas and Colorado.  These maps on a weekly basis show what the current basis is and how it compares to the three year average.

During 2010, the basis maps for Soybeans show that the average basis has both increased in some areas and decreased in others, but overall  has not moved to much.

The basis maps for corn show that the basis is narrowing in some areas.  At the first part of the year, in some areas the local cash price was 40 cents higher than futures.  That has decreased to about 27 cents while the lowest basis areas remains steady at 84 cents cash price under futures.

Now, wheat basis has shown a dramatic change since the first of the year.  On January 6, cash prices ranged from 29 cents under futures all the way up to $1.14 under futures.  As of August 25, this spread has widened to 35 cents under futures to almost $1.65 under futures.  This represents a 44% increase in basis for the worst areas of these states.

So even though futures may be rallying, this does not always mean the local farmer is getting the benefit of these prices.

Many more farmers are using futures contracts to hedge their crops these days than 20 or 30 years ago.  Hedging income and losses are treated as ordinary income or loss as part of the farming operation.  What many farmers do not know is that if they are using futures to speculate in other commodities or crops that these transactions are considered speculation and the income tax treatment is very different.  If a farmer is speculating, then these losses are treated as capital gains and losses.

I will give you an example from when I was in college.  I had a very good friend that was speculating in the commodity market.  During year #1, he enjoyed a very profitable year and lets assume he made $300,000.  All of these gains were short-term and at that time, the top rate was 50%.  Therefore, his tax bill from his speculation that year was $150,000.  During year 2, he lost the $300,000 he made in year 1 and then lost another $300,000.  When he filed his tax return for year 2, he deduction, the net loss of $600,000 on the return, but the capital loss rules limit you to only claiming a net capital loss each year of $3,000.  Therefore, he got a credit of $1,500 for year 2.  Adding the two amounts together resulted in net tax due of $148,500.

If he had all of the transactions in one year, he would have gotten a net refund of $1,500.  As you can see, if your capital gain income occurs earlier than your losses, the tax laws provide a large penalty to taking advantage of any future capital losses.  You can use $3,000 each year or use your capital losses to offset other capital gains.

In your farm operation, make sure to note what is actually hedging and what might be speculation and subject to the rules above.

I have read several articles recently regarding the trend in yields for corn and beans over the last 20-30 years.  During the 1980′s and early 1990′s, the average increase in corn yields was about 1.5%.  During the last 15 years or so, the yield increase has been closer to 2%.  How will corn yields look over the next 50 years assuming that they increase by either 1.5% or 2%.  This table recaps those potential yields based upon using the 2009 average yield of 162.9:

                                     1.5%                           2.0%

• Year 10                 189                             199
• Year 20                 219                             242
• Year 30                 255                             295
• Year 40                 296                             360
• Year 50                 343                             438

Just a .5% difference in yield results in overall yield in year 50 being 438 bushels per acre instead of 343 or a difference of about 28%.  These numbers do look very high, but think back 20 or 30 years.  At that time, did you think that corn yields would go from less than 100 bushels per acre on average to an estimated 165 bushels for this year.  I know that several of the seed companies are discussing 300 bushel corn as not being too far off for the average farmer in the corn belt.

For beans, the average increase has been lower on average per year at about 1.3%.  Plugging these numbers into the same table basing it on the 43.3 2009 bean average results as follows:

                                    1.3%                          

• Year 10                 49                   
• Year 20                 56                            
• Year 30                 64                            
• Year 40                 73                            
• Year 50                 83

These increases in yields probably account for some of the increase in land prices over the last 10 or more years.  With yields going up by around 1.3% to 2% per year, the return per acre is going up by this amount (assuming prices stay steady).  This would result in prices going up by at least this same amount to reflect the extra income.

Moe Russell, of Russell Consulting Group wrote a very good article in the Corn and Soybeans Digest clear back in 2007 on the fact that you do not need to own land to be a farmer.  I personally think in today’s environment, most farmers who already own a bunch of land with no debt are most likely not maximizing their return as a farmer.  They are probably doing a good job of maximizing the return to them as land owners since they are farming it themselves. 

However, as both a landlord and a farmer, you need to review each year what your return has been as both.  Make sure in your management reports that you have allocated cash rent to yourself as landlord that is reflective of what cash rents are bringing in your area.  Make sure that you do not use the highest or lowest, but somewhere in a median range.  Once you allocate this cash rent to your farming operation, how profitable was your farm for the year and what is the trend.  I believe, in many cases, the farmer will find out that it is earning a good cash rent return, but as a farmer, it is generating a loss or very little profit.

If this situation continues for too long, the farmer has two good options:

• Stop farming and either sell the land or cash rent (this would probably be the most difficult for most farmers), or
• Increase the profitability of the farming operation to take advantage of the land that the farmer owns.  This may require renting more acres, sharing equipment with other farmers, etc.

Have you taken the time to do this analysis on your farm.  If not, I think the results may surprise you.

After at least two years of massive losses, hog farmers are now starting to enjoy much higher prices for their products.  Most of the studies I have reviewed indicated that most farmers that raised hogs probably lost anywhere from $20 to $60 per hog produced in 2008 and 2009.  Based on the higher current prices, I would estimate that they are making at least this much per hog raised right now.

During 2008, the hog farmer had a double whammy of low price for their product and much higher feed costs.  Right now, they have a high price for selling the hogs and feed prices have not rallied too much (as compared to 2008).

Prices for pork bellies which makes up our bacon have risen about 72% in the past year to around $1.43 per poundaccording to an article I read in this Kokomo, Indiana newspaper.  Bacon prices have averaged more than $4 per pound which is the highest price since at least 1980 (although on an inflation adjusted basis, it is still much lower than 1980).

This is a good article to give you perspective on where the pork industry is at right now.

It appears as usual that there is a buying frenzy in the wheat futures market that has not totally transferred over to the cash market.  Since early June, the Wheat Futures market has gone up by about 80% whereas the cash market has gone up by much less leading to a large widening in the basis.

For example, the wheat futures on Thursday locked limit up at a 60 cents gain while the CIF bids for August fell 10 cents per bushel and September bids fell 30 cents per bushel.

Unlike 2008, there is ample wheat stocks in the US (at a 23 year peak) and there are supply disruptions from the Russia and Ukraine regions, however, we will see a drop in wheat futures prices if cash prices do not rise.

Most of this rise is wheat futures is attributed to the massive fund buying.  Just on Thursday alone, the funds purchased a net 20,000 contracts which is equal to 100 million bushels.  This led to the increase in wheat prices on Thursday, but this price will drop once the funds sell these contracts.

US Wheat stocks are at about 30 million tons which is more than twice the amount of production loss from Russia.

The bottom line is that wheat prices are up, but I would not expect a repeat of 2008.

For more information, please see this article posted at Reuters.com.

Please note I originally wrote this on August 6, 2010, but it did not get posted until now by mistake.

Reuters is reporting that Potash Corp. has formally put pressure on BHP to raise the price for its takeover of Potash Corp. or have the company get sold to some other company.  BHP originally bid $130 per share for the company or $39 billion in total.  The price has already jumped to over $150 per share and there are rumors that if BHP raises their bid to $162, the company would be theirs.  However, BHP may not want to go that high.

It is interesting that the CEO of the company, Bill Doyle will earn over $500 million if the deal goes through.  One party that may come to the rescue of Potash is the Chinese company Sinochem, China’s top fertilizer firm and No. 4 oil company.  Sinochem’s Chinese connection is significant due to an expected surge in fertilizer usage by China, India and other emerging economies.  China has bought resource companies located in Canada before (Potash headquarters is in Saskatoon).

Another bidder may be the Brazil mining company Vale, however, it appears they have backed out of the process.

Another option is to break up the company or sell out to a consortium of companies that would jointly bid for the company and then divide it.

Based on where the market price is and the ability of BHP to make the deal, I have a feeling that this will happen and soon.

Here are my comments regarding the crop tour:

• The corn crop looked good, however, most of Iowa had issues with tip-back where the water on the ground deprived the ear of the nutrients to get the last full inch of the ear filled.  This is the main reason why the Iowa crop looks like it will be lower than last year.  We also saw a lot of nitrogen loss again due to the standing water, etc.
• The soybean crop looked excellent.  On our tests, we actually had two plants with over 200 pods with the highest at about 240.
• South Dakota corn and bean crop looked good, however, there are a lot of fields with 10% or more of the field under water so the actual yield with be difficult to calculate.
• Northern Nebraska is going to help keep the Nebraska yield overall even with last year since the southeastern part of the state does not look as good as last year.  Our night in Grand Island was nice, however, the next morning we woke up to rain all day, so that part was not great for counting crops.
• Iowa is down due to the reasons above, however, for us, southwestern and northwestern Iowa looked pretty good.
• Minnesota was not quite as good as we thought it would be for corn, but still pretty good overall.

From Sunday afternoon after landing in Kansas City to Friday afternoon getting on the plane in Kansas City to fly home, I put on over 2,000 miles on the auto driving the tour.  On the western leg, there were about 40 participants with about the same on the eastern leg.  Participants included farmers, the Pro-Farmer staff, media, agronomists, crop insurance agents, seed consultants, etc.

The meetings each night had at least 150 participants with the local farmers turning out to see how the corp looked, etc.  I enjoyed these meetings immensely since it allowed me to see how the local farmer thought there crops were doing and it allowed me to ask questions regarding their farming practices, etc.

Again, I had a great time and highly suggest you consider attending the tour at some time.

Today, we have a very long drive ahead of us as we traveled from Spenser, Iowa, headed north into Minnesota.  We then headed west almost to the South Dakota border.  We then turned north and started to do our counts in those four counties along the border.  At Canby, we then turned south and east and worked our way back to Interstate 90.  All in all, we put on about 350 miles today.

Corn yields were all over the map and we saw a lot of lodging that will show up at harvest.  That will not be fun to combine this year.

We got into Austin, Minnesota tonight and had our final meeting with the local farmers and met up with the eastern crop tour participants.  The estimated yields were given at the meeting and the early call on Minnesota was a .08% increase in yield.  The big surprise was an estimated 6% plus drop in Iowa corn yields.  There are a lot of soybeans out there, however, the crop is much further along this year than last and so many of the pods last year were still blooming and not counted.

This was my first crop tour and I really enjoyed it.  It is hard work driving that much and making that many stops, but very rewarding.  I would higher encourage any of my readers to do it at least once.  You meet a lot of interesting people, not just farmers, but traders, USDA personnel and many others involved in ag.

I look forward to doing it again and we will see what the final numbers look like tomorrow.

Remember to check out the progress at www.agweb.com.