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.

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.

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.

I got into the Kansas City airport yesterday about an hour late due to mechanical issues.  My partner in the farm picked me up and we then traveled about 350 miles to Sioux Falls and met up with the Pro Farmer Crop Tour participants.  There were about 30 people at the meeting and we had about an hour and half meeting to discuss how to do the counts, who were were traveling with, etc.

We left Sioux Falls this morning with about 8 different groups traveling southeastern South Dakota and Center Nebraska.  We headed west on I-90 to about 10 miles west of Mitchell and then turned south toward Nebraska.  Our first two corn fields that we checked turned out to be the worst ones we say all day with yields much less than 100 bushels per acre.  We sampled about 7 or 8 fields in South Dakota and crossed the Missouri River into Nebraska at Fort Randall Dam. 

We made a couple of quick stops right after crossing the river and we did not see another corn or bean field for at least 35 or 40 miles traveling through most of Holt County.  Almost all of the fields in South Dakota were dry-land, whereas, almost all of the fields in Nebraska were irrigated ground.  We saw a couple of fields that should yield more than 200 bushels but all in all, I would say most were in the 120 to 175 range.  We made a total of about 18 corn stops and 17 bean stops.

Talking with a farmer from Illinois that was in the car with us, he thought the yields we saw today were slightly lower than last year.

I am on the way to meet up with all of the groups to see how they saw things and will write another post tonight after that meeting.

According to the USDA (using 2007 information) farmers who grow and raise more than $1 million in annual farm sales account for 47% of total farm production.  The survey done by the USDA compared 2007 to 1991 and there are several interesting facts in the survey:

• Very small farms have increased by over 315,000 during the  period and large farms over $250,000 increased over 50,000 while the small commercial farms between $10,000 and $250,000 decreased by about 275,000 (all of the revenue numbers have been adjusted to reflect 2007 values).
• In 1991, farms with less than $250,000 in sales represented 42% of the total farm sales.  In 2007, this had dropped to 23%.
• Farms over $1 million in sales increased from 28% of the total to about 47%. 
• Farms between $250,000 and $1 million held steady at about 30% of the total, while farms between $100 thousand and $250 thousand decrease from 23% to only 14%.
• Operating margins were the highest in the over $1 million farmers with at least 60% of the farms showing an operating margin of 20% or more.
• In all categories of farms, the farmer aged 65 or greater grew from 1991 to 2007.  For example, in those farms between $100 thousand to $500 thousand, the percentage of farms over age 65 grew from about 10% to about 20%.  Even the large farms say a small increase in these age groups.
• Farms under $250,000 continue to be a large factor in the growing of hay, tobacco and small grains with their production ranging from 24% to 30% of these commodities

I think the trend of larger farms will continue especially as the older farmers pass on their land to children that are not in farming.

In the recent Holdner Tax Court case, the IRS was able to make an argument that the farming operations carried on by father and son were in fact a partnership and not two separate farming operations that should be reported on their respective schedule F.

In the case, the father and son had operated the farm business together since 1977.  However, during these years, the father and son each reported one half of the income on their schedule F.  However, the father arbitrarily reported most of the farm expenses on his return.  Upon audit, the IRS took the position that the farm operation was in fact a partnership and allocated one-half of the income to each and disallowed all of the farm expenses to both.  In addition, the IRS assessed the 20% accuracy penalty against the dad.

The Tax Court reviewed the case and agreed that the farm operation was in fact a partnership, however, they did allow the deductions to be split 50/50.  The Court did uphold the extra 20% penalty assessed against the dad.

I know that many farmers who farm either with their children or siblings do so in an informal farm partnership and usually report their income and deductions on schedule F.  If this allocation is based upon a formal accounting process, then the IRS is not going to have an issue with the reporting.  However, if the income or deductions are allocated based upon the whim of the individuals involved, then the IRS may come in and both disallow the allocation and assess an extra 20% penalty of the tax owed.

If this applies to your farm operation, make sure you review with your tax advisor that you are handling your allocations correctly.

I was skimming through the Reuters.com website the other day and came across an article on how US Farm Managers are enjoying the benefits of the Baby Boom Generation of farm land transfer and the continued high farm land prices.

Most of these larger national farm managers went through crisis in the early to mid 1980′s as they struggled with many foreclosed farms.  However, since the late 1990′s they are enjoying a fairly successful business climate.  According to the article, about 80% of the farmland in the US is owned by people age 65 and over and this property will be transferred to the Baby Boom Generation, of which almost all of them are not farmers.  This requires the use of a competent farm manager to manage the whole farm process in many cases. 

The largest US farm manager is Farmers National out of Omaha.  It was founded in 1929 right at the time of the stock market crash and like many others struggled with the 1980′s farm crisis and was sold to MetLife.  In 2000, MetLife sold the company back to the employees and it now employs over 200 employee/owners and sell well in excess of 25 million bushels of corn, 5 million bushels of beans and over 1 million bushels of wheat.  They actively manage 1.5 million acres of crop land in 23 states.

I believe that most newer farmers should view this as an opportunity to get to know these farm managers well and show that you can be a profitable farmer for them.  This trend will continue and it provides a great opportunity to acquire more acreage to farm.

The Rural Mainstreet Index maintained by Creighton University dipped below growth neutral in the latest July posting.  This marks the first time since April that the index dipped below the neutral 50 level by sinking to 49.3 from 52.6 in June and 54.3 in May.

Like other economic indicators, this index appears to be signalling that there is slowing in the national economy including rural areas, however, the farmland-price index continues to move above growth neutral for the sixth consecutive month to close at 52.5 down slightly from June’s 54.7.  One banker noted that “The farm economy has clearly improved from last year and we are seeing that reflected in farmland prices.”  Also, with the recent dramatic rise in wheat prices, I would expect this trend to continue or even accelerate.

The farm equipment-sales index slipped from 53.1 in June to 51.8 in July.

Bankers on an overall basis do not believe that the financial reform bill passed by Congress will help their borrowers.  About 29 percent view it as positive while 66 percent anticipate a negative effect on the economy.

Retail sales for the rural area took a nosedive in July with a reading of 41.7 down from 52.6.  This represents an almost 21% drop in the index.

A lot of analysts are talking about a double dip recession and these readings may reflect those opinions.  We will have to wait and see how the next few months turn out.