I was reading this article on Reuters.com about a “Superfoods Company” Genesis Today revealing a new advertising campaign for their line of “super juices”.  These juices are comprised of fruits that tend to have a perceived health benefit such as anti-oxidants, etc.  Fruits involved are cranberry, pomegranate, acai and most berries.

Their campaign will strive to make their juices sound much more appealing to the general public than the traditional orange or apple juice.  They are touting the health effects of the juices along with the extra vitamins and natural sugars that the juices have.

I am starting to get the feeling that these companies have become more of a marketing company than a “real” food company.  Based on these trends, I think most farmers should try to start marketing their products as “Super Corn”, “Super Soy” to compete. 

I have sampled some of these juices and hope they have very good health benefits since some of them do not taste very good to me.  It will be interesting to see if in ten years these are still “Super Juices” or if orange and apple have made a comeback.

We shall see.

As cold weather threatens the crop in China, cotton has reached a new 15 year high in prices.  At the beginning of 2009, cotton prices were approximately 50 cents a pound.  As of today, the price is well over 95 cents a pound and if the adverse weather in China continues, the price may go even higher. 

Global inventories fell to 45.4 million bales in the 12 months ended July 31, 2010, the lowest levels in 14 years.  A bale weighs 480 pounds.  O.A. Cleveland, a professor emeritus in agricultural economics at Mississippi State University indicates that prices may rise to $1.25 per pound by January as supplies dwindle.

Brazil, the world’s fifth largest exporter, cut the tariff on imports of the fiber to zero from 10% from October to May as domestic supplies fell well short of demand.

India, the world’s second largest exporter, plans to delay registration of export contracts by two weeks until October 1.  The nation, estimated by the USDA to account for 18% of global cotton exports in 2009, is limiting overseas sales to 5.5 million bales in the year starting October 1 and impose “prohibitive” duties on an shipments over that amount.

As the world adds more and more people and we lose arable land, I believe these types of pricing structures will become more the norm than the exception.

I came across an article put out by the Center on Budget and Policy Priorities from Washington DC.  The gist of the article was that having an unlimed estate tax exemption for farm estates is unnecessary and likely harmful.  The focus of the article is that this policy would create 3 harmful situations:

1. First, according to the article, there is overwhelming evidence that the estate tax does not pose a significant problem for farmers.  The Urban Institute-Brookings Institution Tax Policy Center estimated there would be fewer than 110 small farm estates for 2011 if we used the 2009 estate tax exemption of $3.5 million (their definition of small farm estate is less than $5 million in assets or less than 1,000 acres of good Iowa farmland).
2. Second, an unlimited exemption for farmland would promote tax sheltering by giving wealthy individuals whose primary occupation is not farming a strong incentive to sell financial assets and purchase large tracts of farm land to avoid paying the tax.
3. Third, an unlimited farmland exemption could hurt ordinary farmers by driving up the price of farmland as wealthy individuals buy farmland for use as an estate tax shelter.  This would make it harder for young aspiring farmers to enter the farming industry and for families to hold onto true family farms.

Remember that these are their conclusions, not necessarily mine.

My comments are as follows:

• They stated that estate tax opponents have not been able to come up with one case where the estate tax forced a family farm to be sold.  I would be curious to hear from my readers if they have any experience of a family farm being sold because of the estate tax.
• Their definition of a small farm being less than $5 million in today’s environment very likely understates what I would consider to be a family farm anymore.  Many typical family farms these days have at least 1,500 to 2,000 acres of owned land plus equipment and other non-farm assets.  This could very easily result in a taxable estate of $10 – $15 million or more.  Under this scenario, the estate tax using 2009 rates could be in excess of $5 million.
• There are several estate tax provisions to reduce or defer the amount of tax that a farm family would owe, but these items have not been indexed with inflation and the value has decreased dramatically with the rise in farmland prices.
• The one conclusion that I probably agree with the most is that it would promote a desire by wealthy families to invest substantially in farmland to escape estate taxes.  This would drive up the value of farmland leading to much higher cash rents, etc.  I would not be in favor of exempting only farmland for that reason.  If all small businesses were exempted, then the effect would be much more minor.

My personal opinion is that I would like to see an estate tax exemption in the $3.5 to $5 million range for each spouse and allow this exemption to be combined in any manner that the family chooses.  We will most likely see a new estate law sometime in the next year or so, but who really knows what it will look like.

As you can probably guess this headline that the answer is – “It Depends”.  Iowa State University economist Mike Duffy ran some numbers comparing the return from owning farmland to owning stocks over certain time frames.

Returns are comprised of two components:

1. Yearly return – Cash dividends on stocks and cash rents (or the equivalent on farmland), and
2. Change in market values

Mr. Duffy assumed that a farmer invested in land on January 1, 1960 paid $1,000 or the equivalent of 3.83 acres.  He also assumed a farmer bought 17.60 shares of the S & P 500.  The farmer then took his net cash return (after 7% for management fees and 6% for taxes and insurance) and reinvested it in more land each year.  At the end of 2009, the farmer would have owned 32.87 acres worth about $143,672.  He would have owned about 75.58 shares of the S & P 500 worth about $83,805.  The land outdid the stocks by about 72%.

However, Mr. Duffy then redid the analysis assuming purchase of farmland on January 1, 1980 (at almost the last farmland value peak).  In the scenario, the farm would have only grown to a total value of $8,314 whereas stocks would have grown to $17,365.  The land would only be worth about 48% of the stocks.

What will the next 20 or 40 years bring.  With the high value base of farmland and the lower base of common stocks, it may be hard for farmland to outdo stocks, but it may be more rewarding to own the land than a piece of paper.

For the article, click here.

Whenever a farmer sells a crop to a purchaser of their product, they always need to be aware of what happens if that purchaser goes bankrupt.  Any payments that the farmer receives within 90 days of bankruptcy can be considered preference payments and the farmer may have to pay some or all of these payments back to the bankruptcy court.

However, there are usually three key defenses that the farmer has:

• A contemporaneous exchange for new value – This is a legal term that means the crop was sold for cash by the farmer and not for a promise of a payment in the future.  Essentially, the payment was directly related to the delivery of the crop, i.e., a cash sale.

• Ordinary course of business – To establish an ordinary course of business defense,  a farmer will have to show that the debt was incurred in the ordinary course of business or financial affairs between the farmer and the buyer.  The bankruptcy court will require documentation showing the transactions that support this contention.  For example, if the farmer was delivering corn on a weekly basis for cash payment and has the invoices to prove it, then they should win on this basis.

• Subsequent new value – Essentially this means that the farmer received a payment from the supplier and then delivered the corn after receiving the payment.

With the announcement that the Verasun bankruptcy trustee is in the process of attempting to get back 80% of these payments made to farmers within 90 days of its bankruptcy, you need to review your records and do something now.  If you think this will go away, you are wrong.  I have been involved in a couple of bankruptcies where the trustee attempted to get preference payments from the company I was involved in and  we probably would have failed all of the three tests shown above.  However, we ended up succeeding since the bankruptcy court had signed off on an agreement between our company and the company involved.

The Center for Agricultural Law and Taxation has a very good article on the Verasun bankruptcyand I have seen several other good articles.  If you sold corn to Verasun and have gotten a notice, take action.  It may save you large amounts of money.

This is not a legal opinion.  You must review this with an attorney and make sure you follow all of the steps.  If you do, then you stand a good chance of not paying back these payments.  If you do not, then this will cost you.

Potash Corp. of Saskatchewan is one of three Canadian potash producers who Canpotex.  Canpotex handles all of their sales outside North America.  Two other similar organizations are Belarusian Potash and International Potash.  These three entities control nearly 70% of the world’s potash production.

By cooperating with each other, they are able to mitigate any decreases in prices and as we saw in 2008, increase pricing far above what most farmers felt it should have been (anybody remember $1,000 ton potash prices).

Even if the bid by BHP fails, Canpotex faces long-term pressure.  Such organizations work best with the following situations:

• There are limited number of producers,
• There are barriers to entries by other competitors, and
• There is homogeneity in the product.

While the barriers to entry in potash are high, they may not be high enough.  BHP is already developing the Canada’s huge Jansen field and big miners live BHP and Vale like to keep production running full steam.  If they can bring on the 13.5 million metric tons of supply that they target over the next few years, then the big three’s combined share of capacity will drop to 55% from 70%.

If BHP is successful in obtaining Potash, then the market would be changed dramatically.  Assuming all proposed new projects materialize, BHP would control 24% of global capacity by the end of this decade versus about 38% for Canpotex and its two sisters.

By running flat out, BHP would cause prices to drop, however, as high cost producers drop out of production, prices may start to increase.

For more information, please see this article by the Wall Street Journal (you may need to be a subscriber to read all of the article).

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.