For those people living in rural areas, the smells associated with hogs, cows, etc. can be a nuisance.  Usually most people grin and bear it, however, there are many times when they try to do something about it.

The High Plains Midwest Ag Journal recently reported on a civil trial filed in Kansas City regarding the hog odors from a large commercial hog operation about 80 miles north of Kansas City.  This operation usually contains about 80,000 head of hogs and encompasses over 2,000 acres.  Fourteen rural neighbors had already received $100,000 apiece from a 1999 lawsuit, however, they have taken Premium Standard Farms back to court arguing that these payments are not enough to compensate them for the continuing odors.

The company argues that they are not suffering “substantial impairment” from the odors.  They agree that hogs stink, but it does not meet the qualifications of a nuisance under the law.

Kansas City attorney Charlie Speer has won over $10 million from Premium Standard and its affiliates since 1999 on these types of cases.  In 2009, he indicated a lawsuit that was settled for $1.2 million will “set the bar” for future cases.

PSF attorneys contend these lawsuits are driven only by money and are causing damage to the local ag economy.

I believe that both sides have some merit to their cases.  These smells can be overpowering when you have that many animals in a small area, however, most people living in farm country usually know this when they move there.  I think, however, that these large operators sometimes believe it is cheaper to just settle the lawsuits than to try to fix the problem which can cost substantially more.

Marcia Taylor with DTN/The Progressive Farmer had a great post recently on the elimination of crop insurance under the Group Risk Income Protection (GRIP) and Group Risk Program (GRP) in over 1,000 counties across the US.  The primary reason for eliminating these counties were due to not reporting at least 30 yield reports or 25% of the acres for the county.  The USDA requires at least this amount of data in order to provide the insurance coverage.

Also, of the 1,062 counties that lost these insurance programs, only 310 counties were actually buying these types of insurance policies.  It appears that most of the counties affected were located in the South, Great Plains and Eastern part of the US.  Most the Mid West corn belt was not affected.  The decision eliminates this coverage for corn, soybean, grain sorghum, cotton and peanut producers.

Farmers in Lawrence County, Alabama say their maximum insurance yield reduced from 135 bushels per acre to only 60.  This insurance can be expensive.  GRIP with a harvest-price option cost $90 per acre as mentioned in the article, however, the return has been as high as $415 in 2007 and $222 in 2008 per acre for this particular county.  Payouts were as high as $614 per acre in Baca County, Colorado in 2008 largely due to the steep decline in corn prices.

However, these farmers need to realize they need to report their yields and if they do a good job of this, then the coverage will be available again.  The trends over time have shown that this coverage returns about $1.78 for every $1.00 of premium. 

GRIP has offered some of these growers superior coverage levels.  This coverage is no longer available and it may cost the farmers substantial losses to their bottom line.

Sort of like the photo of my motorcycle at the left, broadband Internet services are much faster than dial up (or in my case a Harley).  Historically, the utilization of broadband Internet services in the rural sector has been much lower than urban areas.

In an article in the September, 2009 Amber Waves , several observations about these issues were made.  By 2007, about 82% of the homes that had Internet service were using a broadband connection.  However, only 70% of rural areas had broadband which is about 15% behind urban utilization.  Clusters of very low service are located in the Dakotas, eastern Montana and Oregon and northern Minnesota.

An interesting conclusion was that rural counties that had broadband service on a quicker basis than other rural counties ended up with better job and economic growth than those without starting in  2000.  This difference in growth rates ranged up to 2% more in 2005 and 2006 and income levels were almost 3% higher in certain years.  Broadband service allows rural America to compete with urban areas since communicating at broadband electronic speeds shrinks the miles to almost nothing from a business standpoint.

Urban areas with low income levels still had broadband coverage of about 75% while rural areas with the same income only had about 50% penetration.  The gap for higher income levels in rural versus urban areas were much lower.

I am firm believer that countries such as Korea (with some of the fastest broadband service in the world), China, Brazil etc. that are deploying fast broadband service will catch up and possibly pass us much faster than if they did not have broadband.  This world is getting much flatter and the rural parts of America are catching up, but still have a ways to go.

All in all, farm debt levels have increased, however, farmers have done a very good job of not letting these levels get out of control.

The United States Department of Agriculture has a very good print and online magazine called Amber Waves.  Each issue generally has several good articles related to farming and I would highly recommend reading it each month.

In the December issue, the an article on how farm debt has increased and shifted in the last few years was highly informative.  Here are the highlights of the article:

• Farm debt levels have risen sharply in recent years, but the growth in farm asset values has outpaced the growth in debt. 
• Fewer farms end the year with debt outstanding than in the past; debt is more concentrated in larger farms
• Debt repayment capacity is expected to decrease this year, but remains well above levels seen in the later 1970s and early 1980s

US farm sector debt was estimated at $240 billion at the end of 2008, however it is expected to decrease by about $6 billion to $234 billion at the end of 2009.  Total farm assets are estimated at about $1.8 trillion for a debt to asset ratio of only 13%.  This ratio is about 2.7 times better than the low reached in the mid-1980s farm crisis.

In 1986, nearly 60% of farms reported having outstanding debt at the end of the year; by 2007, this figure had dropped to 31%.  Larger farms are more likely to use debt than smaller farms.  The majority of small farms indicated they have sufficient liquidity to finance their operations.  Livestock operations tend to have higher levels of debt than crop operations.

At the end of 2007, 65% of farmers reported having no outstanding on their business balance sheet, however, these farms only average about 258 acres in size.  14% of farms reporting between $1 and $5 million in sales also reported having no debt outstanding at year-end.

Farms that reported having multiple loans with multiple lenders only represented 6% of farms, however, they had more than 31% of total farm debt outstanding.

Farm debt has increased more slowly than income.  As a result, the ratio of debt to income has trended down from a ratio of five times annual farm income to less than three times annual income in 2007.

Debt repayment capacity utilization (DRCU) measures debt obligations in relation to maximum debt repayment capabilities.  The lower the DRCU number the better.  This measure has decreased from 27% in 2007 to about 18% in 2008.

The Kansas State University Department of Agricultural Economics periodically produces a recap of the high 1/3, mid 1/3 and low 1/3 of various farms in their state.  They just released the latest analysis for corn, sorghum, wheat, soybeans and alfalfa for the three years 2006-2008.  The total number of crop farms reporting for all three years during this analysis was 629 farms.  There are several pages of producer returns, but I thought I would try to recap the major trends that I spotted.  These trends are based upon the differences between the top 1/3 and the bottom 1/3.

CORN

• The yield per acre difference was about 16 bushels for non-irrigated corn or about 18% while the price difference was only 13 cents or 3.6%.  The total average revenue difference was $61 per acre.
• Major costs variances were in fertilizer and machinery with these costs being about $49 lower for the top 1/3.
• The overall net return to management in the top third was $150 more than the bottom third.

SOYBEANS

• Yields for good producers was about 6 bushels higher or about 20%.  The net selling price was about 55 cents higher or about 7%.
• Total revenue was $72 higher or about 31%
• Again, machinery costs were materially lower for good producers at about $30 per acre lower.
• Good producers returned $130 more per acre than the low producers.

WHEAT

• Yield was about 6 bushels higher or about 19% better for the top 1/3.
• Prices were only about 4% higher than the bottom third or 23 cents overall.
• Again, machinery and fertilizer costs were about $46 lower for the better producers.
• Overall, the best producers gained $120 per acre over the bottom producers.

Other trends are:

• In all cases, the lower 1/3 of farms reporting had negative net income for this three year period, with wheat and corn growers being the worst off compared to the other crops.
• For non-irrigated crops, soybeans appeared to be the best return per acre compared to the other crops, however, the difference between returns for each 1/3 was only about $25 plus or minus per acre.
• As we have discussed in other posts, it appears that the best way to increase your return per acre is to minimize your equipment cost per acre.  This is by far the most consistent cost that is almost always higher for the lower third than the top third.

How does your operation stack up.

For a farmer to be successful in using a hedging strategy, they must have an agricultural lender that understands and promotes hedging.  Many lenders are willing to finance margin accounts for bonafide hedgers since they understand that the farmer is reducing their exposure to pricing risk.  Some will also lend a larger percentage of the value of stored grain if it is hedged rather than held on an unpriced basis.  Lending 90% of the hedged value of grain is a common practice.  Good lenders will also help the farmer evaluate how various hedging opportunities will effect the financial condition of the farm and help determine an acceptable level of price risk.

Some agricultural lenders utilize a three-way hedging agreements between the farmer, broker and bank.  In this arrangement, the brokerage house will send the margin call to the bank.  The bank then automatically lends the farmer the amount needed to cover the margin requirement and the sends it directly the brokerage house.  In this way, the farmer is assured that the money is available to cover the margin risk.  If futures positions are liquidated, the profits are sent to the bank to be put into an interest bearing account for the farmer’s benefit.  These arrangements can help reduce the stress of receiving a margin call by the farmer.  The farmer will also get copies all transactions.

Before initiating any hedging strategy, check with your bank to see what type of hedging program they offer.  If the answer is none, either educate the bank or possibly find a new one that understands hedging.

The most recent AgLetter from the Federal Reserve Bank of Chicago indicated that good farm land in Iowa decreased about 7 percent from the third quarter of 2008.  The average decrease for the five state region was 4%.  The good news that the price of good farm land increased by 2% over the second quarter of 2009.

The forecast for the fourth quarter prices were an additional decrease in values, but not at a great rate.  Pockets of strength seem to exist in areas where farmers have built up financial capital over the last few good years.  These farmers are either expanding their farm operation or trying to reduce their exposure to hikes in cash rents.

On the financial side, loan repayment rates for non-real-estate loans fell to their lowest ranking since 2006.  The index had peaked in 2008 at 150 and fell to 89 in the third quarter which is about a 40% decrease in loan repayments.  Both real estate and operating loan rates were at very favorable being in the low 6% range for the quarter.

Bankers also did not see conditions improving into the fourth quarter and beyond.

 I have read several articles about the Department of Justice possibly looking into anti-trust concerns regarding the concentration of seed genetic traits by Monsanto.  Many experts believe that Monsanto uses their supplier contracts with other seed companies to unlawfully constrain competition in the seed industry.

Over the last 12 years, Monsanto has gone from having almost no seed business to a dominant position primarily due to their Roundup© Ready gene traits that they have licensed to hundreds of seed companies to use in marketing their seed.  These traits allow farmers to apply Roundup© directly without worrying about it killing their crop.  This can save substantial costs over having to spray on other chemicals at a later date or using less effective chemicals.

The Capital Press recently had an article on these practices.  I am not sure if I totally agree with the slant of the article especially when they talk about the price of seed corn going up by 25% last year.  Seed pricing has a very direct relationship to the overall price of corn since if you do not pay a market price, your grower will not grow seed corn, they will grow regular corn.  Therefore, since the average price of corn in 2008 was substantially higher than 2007, so seed corn should be much higher.

Also, I am not sure where you draw the line on letting a company enjoy the fruits of its patent versus being a monopoly.  The current patent system promotes the exclusive right to market and use your patent for a certain term of years.  This allows companies the ability to spend large amounts of money since they know that they will be able to recoup this money if they receive a patent.  Thus, they should be able to maximize this value during the limited years of the patent.  Monsanto will lose the patent in next 10 years or so and the market will be open to anybody that can make a generic and the price will drop at that time.

There is an overall limit as to how much Monsanto can charge since at some point it would become cheaper not use their seed if the price got too high.

I would be very interested to have feedback from our farmer clients as to whether you believe that Monsanto has an unfair competative advantage or if you are happy using these seeds and would not change.  Let us know!

In the latest issue of Business Week magazine is a very good article on the farm land rush that is occurring in Africa and other under-developed countries around the world.

There are many issues surrounding these investments in third word farming enterprises.  Although it may provide jobs for these people, it also is disturbing the economic and social structure of these societies.  It appears that with Africa being more than three times larger than the US and with lots of good farmland that has never been aggressively farmed, that this may be last land available to be developed on a large scale basis.

In the first half of 2009, more than $2 billion was raised to invest in farmland, according to Agcapita, a Calgary based ag fund.  A lot of this money will be invested into Kenya, Sudan, Tanzania and Ethiopia.  In June, 2009, the first annual Global AgInvesting was held which brought together these fund managers and investors looking to invest in farmland.

Although $2 billion sounds like a lot of money, it would only purchase about 400,000 acres of land in Iowa at $5,000 per acre.  This would be equal a county with about 625 square miles.

I personally think that we will see more of these investments over the next several years as we continue to add world population.  We have been the most technologically advanced farming country in the world, but these technologies change quickly and Africa can catch up.  However, it may take several decades.

Please read the article and let me know what you think of the issues raised.

After two years of steep increases, it appears that farmland values are either flattening out or starting to drop, according to the Federal Reserve Bank of Kansas City.

For example, Nebraska farmland values fell in the third quarter compared to a the third quarter of 2008 by about 5%.  The regional change was slightly lower at about a 2% negative change compared to last year.

In the third quarter, more District bankers reported weaker farm incomes primarily due to sagging protein demand and a summer decline in prices.  With shrinking margins, livestock producers have been cutting supplies by culling herds and consolidating feedlots.  In response to a special survey, bankers estimated that livestock returns would be about 10% lower than a year ago.

With lower incomes, farm credit conditions deteriorated in the third quarter.  More bankers reported lower loan repayment rates and a rise in loan renewals and extensions.  They expect this trend to continue to at least the end of the year.  However, bankers also indicated rising farm loan demand and they have plenty of money to lend to creditworthy borrowers.

Since farmland valuations spiked in the third quarter of 2008, year-over-year comparisons will show flat increases or moderate decreases.  This trend most likely will continue as long as farm income is lower than the previous year.

In the third quarter, the farm index fell to below 50, which is the lowest since 2003.  Closely tracking this index was the capital spending index, which also reached a survey low.  As you can see from the chart, these indexes peaked out in late 2007 early 2008 at levels which are about three times higher than the current levels.

 These trends need to be watched and make sure you have a good relationship with your banker and it may make sense to have at least another bank in waiting.