Politicians in Washington were able to avoid going off the fiscal cliff at the last moment, but in 2013, farmers are staring at a new cliff of their own. Expectations for record corn production in South American and the U.S. in 2013 may send grain prices, and farmers, off a cliff. The fiscal cliff had negative long-term implications, but the good news is that the corn cliff may be temporary and result in a race back to the top for prices.

Corn (CORN) prices are near record highs and U.S. corn supplies are at their lowest since 1995. If the U.S. stopped producing corn, we would run out in a quick 21 days. In order to capitalize on the high corn prices, U.S. farmers are expected to plant 99 million acres of corn in 2013, according to Informa Economics. This is the highest acreage since the 1930s and a

High commodity prices and net farm income have driven U.S. farmland values to record highs. The Federal Reserve Bank of Chicago reported that farmland values rose 13% over the last twelve months. Strong demand for farmland from farmers and investors has led to some irrational prices, including a $21,900 per acre sale in Sioux County, Iowa.

What do these record prices and strong appreciation in farmland mean? Is farmland overvalued or is the increase a function of the improving fundamentals?

The short answer is we think the U.S. farmland market is fairly valued based on the current fundamentals and near-term outlook for agriculture. Futures markets are pricing in $6 corn through 2015, which makes a strong argument that farmland values are actually underpriced.

We think we are in the second-to-third inning of a long-term bull market in agriculture.

What is exciting about farmland is the agriculture thesis hasn't even played

Global economic concerns and expectations for a strong harvest have sent coffee prices lower in the last few months, but strong demand and potential weather issues during harvest may give coffee the jolt it needs to get back to $3.00 a pound.

Despite a rise in prices from several coffee companies, U.S. coffee demand increased 2% from June 2010 to June 2011, according to the International Coffee Organization. The world's largest consumer of coffee has put pressure on already low supplies, especially in good quality Arabica coffee. Increasing coffee consumption from emerging markets will also continue to keep supplies tight.

Supply Concerns

Supply concerns have been prominent in some of the world's top coffee producing and exporting countries. Brazil, the world's largest producer and exporter, had an August frost that will have little effect on this year’s harvest, but could decrease yields in 2012. Columbia, the third largest producer and

Farmland values grew 12% in 2010, the second largest increase in the last 30 years, according to the Chicago Federal Reserve Bank of Chicago. In the fourth quarter of 2010, farmland values rose 6%, the largest rise in any quarter since 1977.

The annual index of nominal farmland values set a record high, but adjusted for inflation, the index is a tad below its peak of 1979. 2010 was one of the best years for agriculture in decades, except in the dairy industry due to weak milk prices.

Iowa farmland values led the pack, with an 18% return in 2010, followed by Indiana and Illinois, which had a 12% and 11% annual return, respectively. Wisconsin and Michigan only appreciated 7% and 4%, primarily due to the diversity of agriculture in the regions.

Credit conditions also improved in the district as strong farm

Record grain prices and farmer income drove farmland prices to double digit gains in the last twelve months, according to the Federal Reserve Bank of Kansas City. The farmland market displayed the strongest year-over-year gains since 2007-08, as high farm income attracted farmer and investors to the market.

The Fed expects the momentum to continue into 2011 with farmland values and farmer income to rise in the coming months, although land values may not continue their rapid pace. Kansas and Nebraska had the strongest gains in 2010, with non-irrigated farmland appreciating 19.5% and 17.6% respectively. Ranchland also benefited across the district, with an average gain of 9.2%.

Brian Briggeman, Kansas City Fed economist, commented,

Rising farm income, especially for crop producers, drove nearly 20% annual value gains for Kansas and Nebraska farmland. In Oklahoma and the Mountain states, annual farmland value gains were not as sharp due to extremely dry

The USDA announced on Monday that net farm income for 2011 is expected to be $94.7 billion, up 19.8% from 2010 due to rising grain prices, partially offset by higher production costs. 2011 net farm income is the second highest inflation-adjusted value recorded in the last 35 years.

Sales of corn for grain are expected to increase 23% in 2011 and to be roughly 87% of 2011 feed crop receipts. The quantity of corn sold in 2011 is expected to decline slightly, but will be more than offset by an estimated $1.09 per bushel increase. Increased demand for corn in 2011 is primarily driven by higher ethanol production and exports.

Sales of soybeans are expected to increase roughly 27% in 2011, driven by a 5.5% increase in sales and an expected rise in price of over $2 per bushel. Soybean exports are expected to reach record levels due to high

The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates report on Wednesday. February’s report is typically quiet, but strong corn demand has driven corn supplies to dangerously low levels.

The cut in corn stocks was substantially higher than analysts’ estimates, which should pressure corn prices higher in today’s session.

Corn

U.S. corn supplies continue to tighten as demand was increased by 70 million bushels. Ethanol usage was increased by 50 million bushels and food, seed, and industrial was increased by 20 million bushels. Production and yield estimates were unchanged.

Ethanol production is now at an all time high of 4.95 million bushels, up from 4.568 billion bushels in 2009/10.

Ending corn stocks for 2010/11 are now at 675 million bushels and leaves the ending stocks to use ratio at 5.0%, matching the pervious lowest ratio in 1995/96.

Cotton prices are at record levels, near $1.70 per pound as supplies are at their lowest levels since 1993. We expect prices will continue to appreciate in the first half of 2011 as there is not enough cotton to go around and the deficit in supplies will continue to widen due to reduced production estimates.

The price of cotton is up over 100% in the last six months and up 150% over the past 18 months. Supply concerns have been prominent around the world as floods in Pakistan, heavy rains in China, and India capping exports have led global inventories to decline to roughly 44 million bales. Demand for cotton has outpaced supply the last five years.


Emerging Market Demand

Robust demand from emerging markets such as China and India is putting upward pressure on prices. China is the world’s largest consumer of cotton and in 2010 consumed 40% of

Global inventory levels of corn are nearing record lows in 2011, driven by a disappointing U.S. corn production in 2010, one of the strongest La Nina weather patterns in the last 50 years, higher than expected ethanol use, and strong demand from emerging markets. As we look towards our outlook for corn in 2011, our continued focus is China’s insatiable demand and short supply of corn.

China is one of the world’s top importers of grain as rapid population and economic growth have driven China’s growing demand for grains. Economists have long shown that as GDP rises and a middle class develops, consumption of protein also rises. The USDA estimates that of every new dollar spent in China, 40% is allocated to food.

The Brookings Institution estimates that by 2021, China’s middle class could grow to over 670 million, compared to only 150 million in 2010. As the middle class

The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates [WASDE] report on Wednesday. January’s report is typically one of the most anticipated and it was not a letdown.

U.S. grain supplies were substantially reduced for the 2010/11 marketing year due to lower grain production estimates and higher use. A late harvest in the U.S. led the USDA to reduce U.S corn yield estimates to152.8 bushels per acres from 154.3 bushels. Grain supplies are now critically tight and discussions may turn to rationing.

Corn

Bullish news for corn continues into 2011 as the 2010/11 U.S. corn production was decreased by 93 million bushels to 12,447 million bushels due to lower corn yields across the country. Ethanol and industrial use was both increased by 100 million bushels, partially offset by a 100 million reduction in feed and residual.

Ending

The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report on Friday. The USDA made few changes in the December WASDE, which is to be expected.

U.S. soybean ending stocks were tightened by 20 million bushels from November’s estimate and global soybean ending stocks were decreased by 2% due to strong demand. Small changes were made to U.S. ending corn and wheat stocks, which increased 5 million bushels and 10 million bushels, respectively.

Corn

The only change made in the December WASDE to corn estimates was a 5 million bushel increase to corn imports from Canada, which had a larger crop than expected this year. Ending U.S. corn stocks increased to 832 million bushels from November’s estimate of 827 million bushels. Despite increasing reports of higher ethanol production, ethanol usage was left unchanged at 4.8 billion

As the Chinese growth engine continues to propel forward, the government is faced with the dilemma: How do we feed our growing and developing population? China’s middle class is expected to double over the next 10 years and will demand a higher protein diet. China has roughly 20% of the world’s population although only 7% of the world’s arable land.

The big problem is that China’s farmland has disappeared at an alarming rate and the country may no longer be able to self-produce its food supply. Between 1997 and 2007, roughly 755,000 hectares were lost each year to development, erosion, and desertification. Farmland that is lost to development or erosion is difficult to recover and put back into crop production.

In order to be self-sufficient in grain production, the Chinese government estimates they need to maintain 120 million hectares for crop production until 2020. Government figures estimate that the current

For the fourth straight month, the rural economy contracted due to home foreclosures, high grain prices, high unemployment, and healthcare costs, partially offset by strong farm income and banking. Despite the current weakness in rural economic conditions, bankers are much more optimistic about the economy six months from now.

The overall Rural Mainstreet Index (RMI) improved to 48.4 this month from September’s 47.6, according to the October survey of bank CEOs in a 10-state region. The RMI is well below readings earlier this year and is the fourth consecutive month below growth neutral 50.0.



“Unfortunately, very healthy farm income is not translating to healthy business activity for the Rural Mainstreet economy. Businesses heavily dependent on the domestic economy continue to experience pullbacks in growth,” said economist Ernie Goss, co-author of the report.

Agriculture

Agriculture continues its positive momentum as the farmland price index rocketed to 60.0 in October from 57.7

The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report on Friday. Wet weather in June and July, followed by a hot, dry August, has led to substantial reduction in U.S. corn yields to 155.9 bushels per acre from 162.5 bushels per acre last year. The USDA also now estimates domestic corn supplies for 2010 to be 902 million bushels, below the critical 1 billion mark.

Corn

2010/11 U.S. corn production was decreased by 496 million bushels to 12,664 million bushels due to lower yields, partially offset by a slight increase of 0.3 million acres planted. The USDA reduced yield estimates in all major corn producing states including (-14 bushels per acres), Indiana (-10), Iowa (-10), and Nebraska (-9). Despite the drop in estimated production, the 2010/11 corn crop is still expected to be the third

Cotton prices are above $1 per pound, the first time since 1995. Prices have risen more than 40% since July due to strong demand, tight supplies, and strong buying from speculators. Prices may continue to stay above a $1 per pound though 2011 as global demand exceeds supplies, creating an imbalance that will not be solved anytime soon.

Supply concerns have been prominent around the world as floods in Pakistan, heavy rains in China, and India capping cotton exports have led global inventories in 2010 to decline to roughly 45 million bales, the lowest since 1996.



Supply Concerns

China, the world’s largest producer and consumer of cotton, has been plagued with heavy rains, putting concerns on local supplies. Cotton production fell by 14.7% to 6.4 million tons in 2009 and is expected to be roughly flat in 2010. The USDA estimates that in 2010, China’s ending stocks of cotton will

Bankers continue to see weakness in the rural economy, driven by weak home sales, hiring, and retail sales. Despite the weak economic data, banker confidence is improving due to strong agriculture conditions and improving banking indicators.

The overall Rural Mainstreet Index (RMI) increased slightly to 47.6 this month from August’s 46.0, according to the September survey of bank CEOs in a 10-state region. The RMI is well below readings earlier this year and is the third consecutive month below growth neutral 50.0.

“While the farm sector is experiencing healthy growth, Rural Mainstreet businesses continue to report waning economic fortunes,” said economist Ernie Goss, co-author of the report.



Agriculture

Agriculture continues to be the bright spot in the economy as the farmland price index rocketed to 57.7 in September from 55.3 August. This is the eighth straight month the index has been above growth neutral. Goss noted, “Farm indicators remain very

Agriculture continues to outperform in 2010 and be one of the bright spots in a very uncertain economy. The USDA now estimates that net farm income will rise 24% in 2010 due to higher returns for soybeans, cotton, and livestock producers. The department also raised its estimates of U.S. farm exports due to strong demand for U.S. grain due to the drought in Russia and Eastern Europe and China’s unexpected transition to a net corn importer.

“Today's reports are encouraging news. They show that while American agriculture has struggled through difficult economic times…the hard work and resilience of America's farmers and ranchers have helped put American agriculture on the road to recovery,” said Agriculture Secretary Tom Vilsack.

We see yesterday’s report as a first step in the global agriculture boom. Rising farm income and cash receipts translates into more equipment purchases, higher fertilizer use, and the desire to increase production