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Greyson S. Colvin
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Mr. Colvin is Managing Partner and founder of Colvin & Co. LLP, an agriculture-focused investment manager. Mr. Colvin’s family has owned and operated farmland for over 120 years. Previously, he was an analyst at Credit Suisse in the Portfolio Management Group and at UBS Investment Research.... More
My company:
Colvin & Co. LLP
My blog:
Farmland Forecast
My book:
Investors' Guide to Farmland
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  • Rising Farm Income Drives Rural Economy

    For the first time since June, the rural economy expanded due to higher farm income, strong farmland prices, and improving confidence in economic conditions, partially offset by weak employment. In the November survey, bankers reported that farmland price have increased roughly 8% over the last year and farm equipment sales are the highest since May, 2008.

    The overall Rural Mainstreet Index (RMI) improved to 53.3 this month from October’s 48.4 and September’s 47.6, according to the survey of bank CEOs in a 10-state region. This is the first time since June the overall index has been above growth neutral 50.0 and is the highest reading since May of this year.



    “The Rural Mainstreet economy is behaving like the nation with a lot of zigzags in growth. However, I expect very healthy farm income to begin to have positive but somewhat muted impacts on businesses on Rural Mainstreet. Businesses heavily dependent on the farm economy continue to do quite well though,” said economist Ernie Goss, co-author of the report.

    Agriculture

    High grain prices and expectations for higher farm income have driven the farmland price index to 68.1 in November from 60.0 in October. This is the tenth straight month the index has been above growth neutral. The RMI survey is consistent with the Chicago Fed’s third-quarter survey which reported farmland values rose 10% in the last year in the Seventh District.



    “While growth for businesses on Rural Mainstreet has been fragile at best, farm indicators remain very strong, including farmland prices and the sale of agricultural equipment. This month, we asked bankers how much prices for irrigated farmland had expanded in their area over the past year. Approximately 23 percent indicated that prices had grown between 11 percent and 20 percent with average growth of almost 8 percent,” noted Goss.

    The farm equipment sales index also improved to 68.7 in November from 61.0 in October, and is at its highest level since May, 2008. Scott Tewksbury, CEO of Heartland State Bank added, “One area farm equipment dealer told me he had record sales for October.”

    Banking

    Loan volumes declined for the second straight month in November to 35.2 from October’s 48.4. Strong farm income in 2010 has significantly reduced farmer demand for borrowing. The other two banking indicators, checking deposits and certificates of deposits, were above growth neutral for the ninth straight month.

    Bankers noted that hiring still remains weak in the rural economy as the November hiring index rose to a still weak 46.8 from 46.0 in October. Goss commented that “Many areas in the Rural Mainstreet area are still losing jobs.”

    Bankers were also asked about the federal blenders’ tax credit of 45 cents per gallon of ethanol produced, which is set to expire on Dec. 31. Responses were mixed on what action Congress should take regarding the program. Roughly 1/3 of respondents would support extending the credit for three to five years, 36% supported a one to two year extension, 13% supported a permanent extension, while 18% called for the expiration of the tax credit.

    Outlook

    The November survey showed that the rural economy is beginning to recover, driven primarily by rising farm income. Bankers are confident about the economy over the next six months, as the confidence index improved to 63.8 in November from October’s 57.3.

    Read more about farmland and agriculture at Farmland Forecast.



    Disclosure: No positions
    Tags: JJG, DBA, MOO, CORN, Agriculture
    Nov 19 11:08 AM | Link | Comment!
  • Agriculture Rewards Investors in August
    Fears over a double dip recession have created an unstable equity market while farmland has continued to yield steady returns. Farmland values have increased across the Midwest United States due to increasing grain prices and demand. U.S. crops have continued to remain in above average condition, based on historical USDA averages. This is not the case in other areas of the world. Droughts in Europe, Russia, and into China have caused a significant tightening of grain supplies, translating into higher grain prices this summer.

    La Niña has recently caused concern in parts of South America, calling for a dryer growing season ahead. Unseasonably cool temperatures in parts of Alberta have early frost concerns rising in Canada as well.

    Commodity Prices

    Grains have fared well during August. September corn prices increased by 7.9%, closing at $4.24 per bushel this month. Wheat prices decreased by 1.0%, closing at $6.52 per bushel while soybean prices also decreased, by 4.5%, closing at $10.08 per bushel. The rally in corn was due to the mediocre weather that the Corn Belt has received lately, and lower yield estimates arising from a number sources. Wheat prices are still being primarily affected by the droughts in Eastern Europe and Russia. Soybean production looks to be at record levels here in the U.S., which has caused the decrease in price.

    Local elevator basis prices have nearly doubled in some areas in the Midwest, limiting farmer income during this current rally in grain prices.

    Farmland

    Farm real estate, cropland, and cash rent values all increased over the past year. The USDA recently released its Land Values and Cash Rents 2010 Summary which tracks land and cash rent values in the U.S. Across the country, farm real estate, which includes all categories of farmland, appreciated 1.4% during 2009. The average price of U.S. farm real estate is now at $2,140 per acre.

    The total return (cash rents plus land appreciation) on U.S. cropland during 2009 was 4.9% which is significantly higher than last year’s 0.5% total return, but still below the 10-year average of 10.4%. We believe that the return on cropland will continue to grow as the demand for farmland is increasing at an alarming rate due to rising ethanol and food demands.

    Farmland values increased 6% in the Midwest during the past 12 months. North central Iowa and portions of east central Illinois reported that “good” farmland values increased by 14% and 8% respectively, according to the Federal Reserve Bank of Chicago. Farmland values have been steadily increasing due to elevated grain prices and increased buyer demand.

    WASDE

    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 in mid-July. Extremely hot and dry weather across Europe and the former Soviet Union have lead grain prices on a rally and global supply to decrease. Estimates of U.S. corn yields were increased to a record 165.0 bushels per acre, but domestic supplies were lowered to a four-year low of 1.3 billion bushels.

    The USDA did not change their July estimate of soybean ending stocks of 360 million bushels due to an offset lead by increased exports and increased production. U.S. soybean production was estimated 88 million bushels higher than last month’s estimate, up to 3.4 billion bushels due to an increase in yields to last year’s record high, 44 bushels per acre. Exports were increased by 65 million bushels to 1.435 billion on an increase in buying from China, and lower ending stocks in South America making U.S. soybeans a more attractive buy.

    Demand

    The rising demand for grains, specifically corn and soybeans, by the Chinese has continued to increase. The primary problem facing China’s ability to feed itself is its land imbalance. China has roughly 20% of the world’s population although only 7% of the world’s arable land. The supply of arable farmland in China is decreasing rapidly as well. China has lost 20% of its arable land due to erosion, desertification, and development, and is expected to lose 10 to 15 million more hectares by 2020.

    To solve this imbalance, China committed $5 billion for agricultural development in Africa in 2008. China is sending expatriate farmers to Africa to cultivate the land and export the grain directly back home to ensure a consistent supply of grains. According to the Chinese Ministry of Commerce, over one million Chinese are farming in Africa dispersed throughout 18 countries.

    Outlook

    Colvin & Co. LLC cordially invites you to attend the Farmland Outlook for 2010 and Beyond conference on September 20, 2010 at The Allerton Hotel in Chicago, Illinois. The conference is an exclusive event, open to the public at no cost.

    The conference will address the world’s growing demand for grains and the developing agriculture boom over the next decade. Rapid population and economic growth in emerging markets has driven the country’s insatiable demand for grains. Economists have long shown that as GDP rises and a middle class develops, consumption of protein also rises. The transfer to protein will have a significant impact on the demand for grain as roughly one pound of meat requires seven pounds of grain.

    Read more about the conference at: http://farmlandforecast.colvin-co.com/2010/08/18/invitation-farmland-outlook-for-2010-and-beyond.aspx.

    Disclosure: No positions
    Tags: JJG, CORN, DBA, DE, CNH
    Sep 01 8:37 AM | Link | Comment!
  • Chinese Imports to Change Grain Markets

    China is entering a “new era” of corn buying. The world’s most populous country may import as much as 15 million tons of corn in 2015, according to the U.S. Grains Council. China has historically been self-sufficient in corn production, but demand is starting to outpace supply as the nation continues to consume more protein.

     

    Chinese imports of corn will grow from 1.7 million tons in 2010 to 5.8 million tons in 2011, and to 15 million tons in 2014-15 according to Hanver Li, Chairman of Shanghai JC, speaking to the U.S. Grains Council. 15 million tons of corn translates to the U.S. exporting roughly 600 million bushels of corn, which will have a substantial impact on corn stocks.




    Mr. Li expects that meat consumption per capital will grow 6.9% by 2015, and milk consumption will grow by more than 50% over the same period. Rural areas will drive meat demand, while urban centers will drive milk demand.

     

    Historically, China has been self-sufficient in corn production and a net exporter, but strong demand and poor weather this year has led to production shortfalls. As the population continues to expand and diets transition to more protein, Mr. Li believes that “China’s ability to produce corn can’t keep up with that growth.”

     

    To ease domestic prices, the Chinese government has been selling reserves. In 2010, the government has sold 5.7 million tons of corn from reserves so far and sold 9.6 million tons in 2009. The amount of government supplies is unknown, but the government can only temper prices for so long. Imports of corn will be the primary solution to solve the shortfall.

     

    Substantial Imports of Soybeans

     

    We see China’s transition to a net importer of corn very similar to China’s transition to becoming a net importer of soybeans. Before 1995, China was a net exporter of soybeans but by 2010, it is the world’s largest soybean importer and is expected to import more than 40 million tons of soybeans this year.




    Soybean imports have become more attractive to China as domestic production is at a cost disadvantage compared to overseas production. Oil extraction rates for Chinese soybeans are 17-18% compared to 22% for imported soybeans. Average Chinese soybean yields are expected to be 25.3 bushels per acre (1.7 metric tons per hectare) in 2010/11, according to the USDA, which is substantially lower than the estimated U.S. average of 42.9 bushels per acre for 2010/11.

     

    Over the past few years, Chinese soybean yields have not changed much; yielding 1.72 MT per hectare in 2006, and 1.67 MT per hectare in 2009, according to the USDA. China’s priorities shifted away from soybeans and towards corn in the late 1990’s and into the 2000’s. Since South America and the U.S. were producing soybeans much more efficiently than China, the Chinese decided to focus on boosting corn production, and importing soybeans instead.

     

    Lack of IP protection

     

    Although Chinese soil and climate is not quite as fertile for agriculture as it is in the U.S. Corn Belt, yields could be higher in China if intellectual property rights were stronger and genetically modified seeds were permitted. Strong patent protection in the U.S. allows companies like Monsanto to sell their genetically modified seeds in the U.S., which are designed to tolerate droughts and weeds. Monsanto and its competitors will not enter markets with poor intellectual property laws, such as China, in fear that their patented traits will be copied.

     

    China currently does not allow genetically modified seeds to be planted, but they do import genetically modified grains and oilseeds. Once China revises its policy to allow biotech seed use, U.S. companies will still be leery of entering the market due to the lack of intellectual property rights.

     

    China’s Insatiable Appetite for Grains

     

    Rapid population and economic growth in China has driven the country’s insatiable demand for grains. Economists have long shown that as GDP rises and a middle class develops, consumption of protein also rises. The transfer to protein will have a significant impact on the demand for grain as roughly one pound of meat requires seven pounds of grain.

     

    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 world’s middle class continues to develop over the next decade, the demand for grains will grow exponentially.

     

    China has overtaken the U.S. as the world’s dominant meat consuming market in 2000. China’s meat intake per person went from 25kg per year in 1990 up to 50kg in 2000 and is at roughly 53kg in 2008 according to the World Resource Institute. The increase in meat consumption has lead China to consume four times as much additional grain since 1995.

     

    Despite the drastic increase in meat consumption, on a per capita basis, China significantly lags behind the U.S., which averaged 123.8kg of meat per capita in 2000. As China’s economy continues to develop, China’s meat consumption per capita will catch up with developed economies.




    China’s Income Elasticity

     

    Economists have recorded the effect on demand for goods as incomes rise among consumers in both developed and developing economies. For every dollar rise in income, demand grows rapidly when incomes are low and less rapidly when incomes are already high. China has an income elasticity of 0.47 while the U.S. has an incomer elasticity of 0.15. Historically, rises in income have precipitated rises in the consumption of higher protein foods including meat, dairy, eggs and poultry products.




    China’s State Council predicts that China’s annual GDP growth rate will increase roughly 7% per year from 2010 to 2020. This could lead to a per capita GDP of $5,900 in 2020, compared to $4,000 per capita in 2009. The USDA estimates that of every new dollar spent in China, 40% is allocated to food.

     

    China’s Land Imbalance

     

    The primary problem facing China’s ability to feed itself is its land imbalance. China has roughly 20% of the world’s population although only 7% of the world’s arable land. The supply of arable farmland in China is decreasing rapidly as well. China has lost 20% of its arable land due to erosion, desertification, and development, and is expected to lose 10 to 15 million more hectares by 2020.

     

    To solve this imbalance, China committed $5 billion for agricultural development in Africa in 2008. China is sending expatriate farmers to Africa to cultivate the land and export the grain directly back home to ensure a consistent supply of grains. According to the Chinese Ministry of Commerce, over one million Chinese are farming in Africa dispersed throughout 18 countries.

     

    U.S. to Benefit from Chinese Imports

     

    Where will China import all this corn from? The first place they will turn to is the U.S., which is the world’s largest corn exporter, accounting for 60% of global corn exports in 2009. Argentina and Brazil only account for roughly 10% of global exports each.

     

    If China imports an incremental 600 million bushels of corn in 2014 from the U.S., using the USDA’s baseline projections, U.S. corn ending stocks would be 960 million bushels. This would put the Ending Stocks to Use Ratio at 6.3%, the lowest level since 1995.

     

    2010 is a major turning point in the grain market. The Chinese transition to becoming a net importer of corn will have a substantial implication on the world’s corn supply.

    Read more about farmland and agriculture at Farmland Forecast.



    Disclosure: No positions
    Aug 09 2:52 PM | Link | Comment!
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