T. Marc Schober's  Instablog

Wet and cold weather persisted throughout the Corn Belt last week, although some farmers have been able to plant due to improving, regional, conditions. Anxious farmers sowed 16% of the 2013 corn crop last week alone. The weather forecast moving forward is warmer with a chance of a storm system moving into the Corn Belt later this week.

As of May 12, 2013 only 28% of the U.S. corn crop has been planted. Farmers are concerned as the five year average at this point of the year is 65% planted. Corn that has emerged was at 5%, down 23% from the five year average. Soybeans planted as of May 12, 2013 was at 6%, behind the five year average of 24%.

Winter wheat conditions are at 39% of the crop in poor or very poor condition, compared to only 14% at the same time last year. Winter wheat in good or excellent condition is 32%, compared to 60% last year. Last year at this time, 51% of winter wheat had headed, but only 29% has headed this year. As of May 12, 2013, 43% of the spring wheat crop has been planted, lagging the five year average of 63%.

The July corn contract increased by 3.0% over the past week ending at $6.55 per bushel, soybean prices increased by 3.7% over the past week ending at $14.19 per bushel, and wheat prices ended the week at $7.09 per bushel, a 1.0% increase from last week. Year-over-year corn prices are up 3.1%, soybeans are up 1.0%, and wheat is up 2.0%.

Please visit www.farmlandforecast.com for daily articles on farmland and agriculture.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Investing in agriculture has been one of the most popular investments over the last two years due to multi-decade low global grain supplies and growing demand from emerging markets. Grain prices and farmland values have risen substantially as capital has been attracted to agriculture's rapid growth. The demand for agricultural assets has made attractive investment opportunities in agriculture harder and harder to find.

We recommend investors start looking farther north for compelling investment opportunities. Canada, the world's seventh largest grain producer, is home to some of the world's best farmland and agribusinesses. Despite Canada's strong agricultural qualities, farmland valuations lag substantially behind the rest of the world.

For investor's looking for investment opportunities in farmland, we see Canada as a compelling investment opportunity due to its attractive valuation, potential for substantial increases in production, and improving profitability. Investing in Canadian farmland today could turn out to be equivalent to investing in Midwestern U.S. farmland in 2009.

Attractive Valuations

Capitalization rates (rental income/price) in Canada are very attractive compared to the U.S. and the rest of the world. With proper sourcing and due diligence, farmland in Canada can be obtained at 6-7% cap rates. This compares to farmland cap rates of 5-5.5% in the U.S. Corn Belt, 4% in Argentina, and only 2-2.5% in the U.K. There are many reasons for the difference in cap rates across countries, but we believe the primary factor for the above average cap rates in Canada is the lag in appreciation compared to the rest of the world.

Canadian farmland values have performed well over the past 12 months, but not as fast as the U.S. Corn Belt. Saskatchewan farmland values increased by 14.3% year over year, according to Farm Credit Canada, while prime U.S. farmland increased by 31% in Iowa, according to The Federal Reserve Bank of Chicago. Alberta farmland increased in value by 5.5% year over year and Manitoba by 3.7%.

Dissolution of Canadian Wheat Board

For 76 years, the government operated Canadian Wheat Board (CWB) has maintained a monopoly on purchasing and selling wheat and barley in Manitoba, Saskatchewan, Alberta, and parts of British Columbia. The grain market monopoly will come to an end in August of 2012 as Canada's Conservative Party passed a bill in 2011 to strip the board of its control.

Many farmers, investors, and businesses alike are excited to participate in a free market and benefit from market prices. Businesses will have more reason to build facilities and infrastructure if they can buy grain directly from farmers, rather than paying a premium through the CWB. Farmers will have the ability to turn a larger profit margin as they will be able to better time the market and sell grain at more opportunistic points throughout the year.

Higher revenues for farmers will directly affect the underlying farmland values. Farmers will be incentivized to increase production through planting more acres and investing in innovation to increase efficiency. Increased profitability, infrastructure, and efficiency are all tremendous ingredients to attract investors. Canadian grain will finally be free at last.

Rising Production

Weather in the southern plains of Canada is very similar to the U.S. Corn Belt with two major exceptions. The first difference is the length of the growing season. On average, the growing season is 52 days shorter, which requires shorter maturity seeds that result in substantially lower yields than the Corn Belt. The second difference is the amount of precipitation. Cedar Rapids, Iowa receives an average of 34.7 inches of precipitation per year, according to The Weather Channel, while Regina, Saskatchewan receives under half as much precipitation at 14.3 inches annually.

Canadian farmland does feature an extremely cold winter frost that will naturally deter insects, plant disease, and soil compaction. Even less pesticide is needed in Canada than in the U.S. which should help farmer input costs remain relatively lower.

Global demand for corn is rising substantially each year. As a result, more acres are being allocated to corn production in the Midwest and soon the trend of planting corn will be spreading into Canada. Cold tolerance is an issue in Canada as the growing season is shorter than that of the Corn Belt. Seed companies invest millions of dollars each year into research and development for new and improved cold and drought tolerant hybrids. Due to advances in biotechnology, scientists have been able to produce cold tolerant hybrid seeds that are able to be planted earlier in the spring season. These cold tolerant seeds have allowed corn to be planted in regions of Canada where we never thought possible and the area will continue to spread.

Seed varieties are expanding into shorter maturity dates as well. 120 day corn grows well in central Illinois, but much shorter maturity is needed moving north as the growing season shortens. Companies such as Monsanto, DuPont, and Croplan Genetics continually shorten the maturity dates of field corn allowing for such expansion of the traditional Corn Belt.

Strategic Location

Emerging markets of China and India will continue to demand an ever increasing amount of corn and soybeans, which will need to be shipped through the Pacific Northwest ports of North America. Canadian farmland poses an excellent competitive advantage over U.S. farmland as Canadian farmland is located substantially closer to the ports in the Pacific Northwest.

Rail lines, including Canadian National and Canadian Pacific, will help transport valuable grain grown in the southern plains of Canada to the western seaboard for export to China and other emerging markets in Asia.

Due to the expanding grain logistics along the current rail lines in British Columbia, Alberta, Saskatchewan, and Manitoba, grain offtakes such as elevators and ethanol plants will compete for grain and drive the local commodity prices higher, translating to higher farm income and farmland values over time.

Excellent Soil Quality

The southern plains of Canada are comprised of the same top quality Mollisol soil types as the Midwestern U.S. Mollisol soils are only found in four areas in the world; central North America, the Pampas region of Argentina, the Steepes of Ukraine, and the Yellow River Valley of China. These soils are thick, contain excellent top soil, and have large amounts of organic material which efficiently hold moisture and fertilizers. These characteristics make Mollisols ideal for producing row crops like corn and soybeans.

There is variance across Mollisols, but strong yielding corn and soybean crops will grow on all Mollisol soils leaving climate as the limiting factor in Canada. High quality soil in the southern plains of Canada is very similar to 200+ bushel an acre corn soil in Iowa and Illinois, yet currently valued at a 75% discount.

Crop Diversification

The variety of crops grown in the southern provinces of Canada provides diversification for farmers as upwards of 14 major crops are grown annually. Chiefly canola, wheat, oats, and rye are grown on the ancient tall grass prairies of Canada stretching from Alberta to Manitoba.

These key crops are in high demand for the manufacturing of food products for animal and human consumption worldwide and domestically. Saskatchewan, in particular, produces the most of these crops, as 44% of Canada's total cultivated farmland is located inside the province. In addition to crops being used for food, there is an increasing demand for Canadian grains to be used in biofuel production.

The U.S. has a goal to produce 36 billion gallons of renewable energy by the year 2022. In 2011, the U.S. produced 13.5 billion gallons of ethanol. In order to meet their goal, the U.S. is going to have to look elsewhere, and Canada is a prime candidate neighboring to the north. In September of 2011, the Environmental Protection Agency approved the use of Canadian crops in U.S. biofuels. Canada became the first country, outside the U.S., to gain such approval. The biofuel approval will generate a new demand for Canadian grains primarily driven by the U.S., to serve as a safe and local back-up.

Conclusion

We believe that growing demand for agriculture is going to create a substantial amount of wealth across the globe. The popularity of agriculture over the last two years has made it more difficult to identify attractive investment opportunities and we believe investors need to be selective.

We see Canadian farmland as the next frontier for investors as valuations on a relative basis to the U.S. and the rest of the world are very attractive. Improving technologies driving the expansion of the Corn Belt and better pricing due to the dissolution of the CWB, will continue to drive farmland values higher in Canada.

For Daily Articles on Farmland and Agriculture, Visit farmlandforecast.colvin-co.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The debate about the use of grain for food vs. fuel continues, but should there even be a debate? Critics of ethanol argue that the large amount of corn used in ethanol production is a poor use of the food supply. Congress recently pointed to ethanol as the major contributor to increased prices of feed and food.

The topic of ethanol is not as cut and dry as one would imagine and many critics are forgetting about an important bi-product of ethanol production. When corn is processed at an ethanol plant, ethanol is not the only product; 1/3 of all corn gets recycled into a rich and nutritious feed for livestock, which is called DDGS (Dried Distillers Grains with Solubles).

Ethanol at its basic form is an alcohol, the same type found in beverages. It is also used in pharmaceuticals, paints, lacquers, food, personal care products, and cleaning products. To produce ethanol, only the starch is used from corn and grain sorghum. The remaining nutrients of protein, fiber, and oil are by-products called DDGS and are used as livestock feed. Ethanol plants make up 98% of DDGS production in North America and the other 2% comes from the alcoholic beverage industry.

According the University of Minnesota, "Historically, three types of residual co-products were produced: distiller's dried grains, distiller's dried solubles, and distiller's dried grains with solubles. Once the fermented mash was distilled, the soluble portion of the remaining residue was condensed by evaporation to produce condensed distiller's solubles. The course material remaining in the fermentation residues was the Distiller's Grains fraction. Both of these fractions were subsequently dried to produce either distiller's dried solubles (DDS) or distiller's dried grains (DDG)."

Ethanol plants dry and blend these two residues to produce DDGS to be used in the feed industry. Approximately 1/3 of grains that are used in ethanol refining come out as DDGS. A bushel of grain makes 2.7 gallons of ethanol, 18 pounds of DDGS, and 18 pounds of carbon dioxide. 80% of DDGS are used for ruminant diets (cattle and sheep). The remainder is fed to poultry and swine due to the excellent nutritional value of proteins, energy, minerals, and vitamins.

Due to its high nutritional value, one metric ton of DDGS can replace 1.22 metric tons of feed consisting of corn and soybean meal. In one bushel of corn used for ethanol production, 32% of it comes out as DDGS, but that amount equates to a 39% nutrient output due to the DDGS high concentration.

Countries such as China, Mexico, and Canada have an increasing demand for DDGS due to the high nutrient content. U.S. exports of DDGS stand year-to-date at 5.25 million metric tons, and is on pace to ship almost 8 million metric tons by the end of 2011, according to Ethanol Producer Magazine.

Forgetting About DDGS

There has been damaging misconceptions of the relationship between corn supply and ethanol production, as DDGS were not taken into consideration. So damaging, the USDA altered the World Agricultural Supply and Demand Estimates (WASDE) report to include DDGS.

"For the first time, the April 8th monthly report on U.S. corn supply and use specified that corn used to produce ethanol also produces by-products such as DDGS, corn gluten feed, corn gluten meal and/or corn oil. In addition, the category that was previously labeled 'ethanol for fuel' now says 'ethanol & by-products,” noted Ethanol Producer Magazine.

Previously, the report only took into account the gross usage of corn for ethanol, implying that all corn going to ethanol production resulted in ethanol fuel. Geoff Cooper, vice president of the Renewable Fuels Association said, "This has led to the inflated claim that the ethanol industry is using nearly 40% of the corn supply when in fact, if coproducts are taken into account, only 23% of the 2010-11 U.S. corn supply and 3% of the global grain supply will be used for ethanol production.”

The DDGS taken from ethanol plants make a positive impact on the feed industry. According to the Renewable Fuels Association, the ethanol industry will produce more than 39 million metric tons of animal feed in 2010-11. To put this in perspective, that is enough to produce 50 billion quarter-pound hamburgers or seven patties for every human on this planet.

Growth Energy recently sent a letter to the House Agriculture Committee noting, “More than one-third of all grain used in the production of ethanol is returned as a nutritious distillers grain, which is 25% cheaper than corn and can displace a greater amount of corn in feed rations, ultimately saving livestock producers’ input costs."

A July 2011 report from Informa Economics found that ethanol is only one factor behind rising corn prices and that speculation, monetary policy, and global demand has driven prices higher. The report concluded that “Statistical evidence does not support a conclusion that the growth in the ethanol industry is the driving force behind higher consumer food prices.”

The Future of Ethanol

Incremental production of ethanol will most likely not take root in America’s corn fields, but with cellulosic ethanol from sources such as switch grass, straw, pulp, and algae. "If this country is going to go big into ethanol, we need to tap into cellulosic ethanol," says UCS Research Director of Clean Vehicles David Friedman, "because it's cleaner and requires less fossil fuels than corn (to produce)."

Global demand for grain and diminishing supplies will continue to make the food versus fuel debate a hot topic, but critics need to make sure they analyze all the data. Ethanol production provides two valuable bi-products to the marketplace and both need to be factored into future decisions.

- Colvin

For Daily Updates Visit farmlandforecast.colvin-co.com



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.