Our farmer clients are cautious about exuberant over-investing in land and equipment amid the adrenaline rush of $7 corn and $15 beans. They’re wise. Here’s some perspective from a farmer who over-leveraged into the late 1970s farmland boom, which went bust in the early 80s.
May 19, 2021 By Jerry Carlson Today’s my 85th birthday. I sometimes wish, as Ben Franklin did, “Oh, to be 70 again!” But here’s one advantage of age. I have a veteran’s viewpoint of megatrends — the huge economic tides that first beckon, then break, aggressive farmers.
I see three megatrends stimulating farmland investment. But they’re also shrieking for caution. I’m encouraging farmer clients: Don’t make your farm bigger and more brittle. Get more resilient against production and political shocks. Don’t leverage into land. Invest a little more in soil health and what I label “resilience.”
Here’s my short list of encroaching megatrends:
1. China’s awesome emergence as a global economic and military power.
2. This commodity price explosion, from grains to canola to lumber to copper.
3. America’s government and financial stampede to debase the U.S. dollar with unpayable public debt, and degrade traditional American cultural values.
1. First, China.
I developed strong respect for Chinese farmers beginning in autumn 1979. Their work ethic and their sense of humor appeared much like American growers. I led a group of American Pro Farmer members on a month-long study through some of China’s most productive agricultural regions. Economic enthusiasm was dawning on Chinese farmers. They had endured Chairman Mao Zedong’s disastrous 1958-1960 “Great Leap Forward” and 1966-1976 “Cultural Revolution.”
Mao died in 1976. That opened the ideological pathway for Mao’s most trusted ally, Deng Xiaoping, to freely launch a free-market economy which he’d advocated — against Mao’s fierce resistance.
Deng quickly rose as China’s paramount leader. In 1979, we saw farmers already selling produce from privately run street kiosks. The farmers we visited were optimistic; eager to know Americans. Their hopes were well-founded. Deng led China through a series of dramatic market reforms for 11 years, earning him the label “Architect of Modern China.” Even now, Chinese repeat a favorite Deng motto: “It doesn’t matter if a cat is black or white, as long as it catches mice.” Translation: Forget communist ideology. Make a profit.
Our visiting American farmers sensed this wave of optimism. I summed up their expectations in a LandOwner newsletter article dated October 29, 1979. You can download a PDF of that article at this link (Please adjust the PDF size to fit your screen). Since then, China’s purchases of U.S. ag products have earned it as one of our top four food customers. See the nearby table, which shows total Chinese ag purchases at $26 billion for 2020, a 91% increase over 2019.
However, Current massive grain exports to China could signal a peak, not an extended uptrend in future annual sales.
The current surge in China’s grain buying arose not only from the strong demand of expanding pork production, but in China’s 2020 crop shortfalls from torrential flooding. Last summer, we signaled that China’s grain production suffered more from 2020’s flooding than officials disclosed.
Now, U.S. and Canadian grain analysts are confirming our instincts. Here’s an excerpt from Mike Jubinville’s May 7 report on Glacier Farm Media:
“More on China’s efforts to stabilize grain supplies… Yesterday we reported China plans to increase subsidies for corn and soybeans to boost production. The country also plans to expand winter wheat area for the first time in four years, according to Chinese Premier Li Keqiang. China will also ban the use of arable land for non-agricultural purposes. These efforts, paired with steps to broaden farm insurance coverage, improve storage and prevent pests/disasters are part of China’s overall effort to stabilize grain production. China’s aggressive purchases of corn and other feed grains this year signal its crops were likely harder hit by last year’s typhoons and other weather events than Beijing let on.”
USDA announced yesterday that China has booked another 1.36 million metric tons of new-crop U.S. corn for delivery in the 2021-22 marketing year. That lifts prospective sales to 12.5 million tonnes, more than double the 2012-13 record. China also booked 621,000 tons of grain sorghum. USDA shows yet another 570,000 tonnes of sorghum as sold to “unknown destinations” — likely China. These are signals that China will remain a reliable grain client well into the next two, possibly three years. But — please think strategically, as the Chinese do. President Xi will seek to avoid dependence on his U.S. “adversary.”
Caution signs are flashing over China’s long-term market for U.S. grain because of its massive shift in geopolitical strategy. That began in 2012 with the rising power of China’s current president and paramount leader, Xi Jinping. Xi’s “Belt and Road Initiative” invests heavily to diversify its food and raw material sources — and to reduce dependence on American ag commodities and technology. Several Asian countries such as the Philippines, Australia and Vietnam are already recoiling from China’s “infrastructure” loans and investments. They’re seeing that China’s “Belt and Road” program is often a direct route to economic captivity and Chinese ownership of productive assets. Africa, however, is far more vulnerable to China’s “partnerships.”
Xi’s near-dictatorial rule and urge for global dominance, backed by China’s aggressive military leadership, confronts U.S. trade relationships with long-term uncertainty. China is investing billions of dollars in ag production, ports and transportation across the entire Southern Hemisphere, especially in Africa (See a global map of Chinese megaprojects at this link). China is also negotiating for a naval port on the west coast of Africa to extend its military presence in the Atlantic and protect expanding trade routes to and from Africa.
Update May 25: Epoch Times details China’s huge investments in Africa, along with embedded espionage infrastructure.
A new meme is circulating on Chinese social media: “Deng made us rich. Xi made us feared.”
2. Second, this outbreak of higher grain prices is hopeful, but…
In any farm commodity boom, temptations lure farmers to borrow and buy land. But only, of course, “just the land that joins me.” Farmland prices are rising again across the Midwest. But we see no frenetic bidding like the land-buying binge of the late 1970s, which collapsed in the early 1980s. Memories of the farmland bust, which bottomed in the late 1980s, are seared into farmers’ memories. Then, the urban real estate crash after 2008 reminded them: Keep liquid, not leveraged.
Remember farmers’ enthusiasm when Iowa corn prices tripled from $1 to $3 per bushel from 1970 to 1974? Then after a three-year correction to $2, the late 1970s launched a new boom. I recall attending many “land buying” seminars — all of which cautioned eager land buyers to write non-recourse contracts for any highly leveraged land. Most land buyers used conventional mortgages, encouraged by temporarily generous Land Bank lenders.
The 2005-2012 surge in corn prices from $2 to almost $7 spiked another round of farmland euphoria. Fortunately, most lenders and farmers have expanded debt slowly. And Fed policy has kept interest rates much lower than in 1980-81 when Paul Volcker crushed inflation with high interest rates. I remember borrowing $40,000 for crop expenses in 1981. My banker (also named Paul) asked: “Do you want our 18% floating rate, or 20% fixed?”
You know the rest of that story.
As I travel through the central Corn Belt this spring, it’s easy to see how most cash-grain growers have updated tractors, tillage gear, planters and sprayers in spite of enduring sub-$4 corn and other stagnant grain prices the past seven years. Many growers have accumulated enough owned and rented land for near-optimum efficiency. I get the sense that most grain growers will build cash reserves and retire debt in the next couple of years, even if corn, soybeans, wheat and grain sorghum remain near current levels. That makes sense.
3. Third, inflation phobia temps farmers to convert cash into land.
A logical pretext for buying farmland is the U.S. dollar’s relentless loss of value. That’s dramatized by the nearby chart on the purchasing power of the dollar. You can see the chart full-sized on the Visual Capitalist website.
Consumer price inflation surged to 4.2% in April, the steepest gain in 13 years. Consumer prices lag the Producer Price Index, which accelerated to a 12-month rise of 6.2%. That’s the highest annual gain since 2010. It’s far above economists’ expectations of 3.8%. Farmland prices are rising at the fastest rate in years.
Federal Reserve experts cling to the hope that outbursts of producer prices such as lumber and computer chips and fertilizer and copper are “temporary dislocations” triggered by Covid-19 shutdowns.
The Fed has far fewer options to slam the inflation brakes now than did Paul Volcker in 1980. Volcker’s 20% interest shocked the economy into a 6-month recession, but even a point or two higher rates now could create a “cascade of defaults,” as former Fed chairman Alan Greenspan once warned. Farmers are vulnerable to higher rates, too — see the chart at the end of this article.
Today, U.S. National Debt is climbing toward $29 trillion, surpassing America’s $22 trillion gross domestic product. Higher interest rates would further drain the federal budget, so near-zero bond interest rates allow manageable service of federal debt.
Here are some leading signals that frothy, leveraged speculation is starting to crack:
First, a 30% plunge in BitCoin and other digital currency. Plunging values whacked almost $1 trillion from total capitalization of all digital currencies. China essentially banned speculation in Bitcoin and similar “coinage.” A Wall Street Journal editorial writer urges outlawing cryptocurrencies, to thwart ransomware threats.
Second, home prices and mortgage lending show early signs of peaking. The setback probably won’t be as shattering as the 2008 crash in home values, as today’s buyers are generally more qualified, and there’s little overhang of homes on the market. But high lumber prices and scarce construction workers are freezing many first-time buyers out of the market. In many suburban areas, average mortgages are reaching $400,000. American household debt has doubled since 2003, approaching $15 trillion or $118,000 per household. An upward twitch of interest rates, or tighter lending standards, would squeeze the flow of lending.
Third, the new Administration’s intent to spend roughly $2 trillion on “infrastructure” shows signs of bogging down in Washington. And if the Biden-Harris tax proposals are enacted and begin to bite, general economic growth is likely to slow or even stall.
Fourth, inflationary pressures have historically stunted gains in the stock market. Reason: Inflation intensifies corporate costs faster than the companies can raise selling prices — squeezing margins and dividends. I’ve been a little puzzled as to why more stock investors haven’t diversified into gold. That could be changing, as gold prices are again trending up.
However, inflationary forces almost certainly have abundant upward momentum for a year or so. For perspective, this link takes you to an update as of May 26, where analyst Stephen Roach sees the current inflation as a rough replay of the early 1970s under Fed Chairman Burns.
For further detail on current inflation, see the chart at the bottom of this report, and visit the source website, https://inflationdata.com
So — here are takeaway points on investing to make your farm more “resilient” over the next few years, not just bigger.
1. Expand your understanding of all things “Renewable,” “Regenerative,” “Biological.” Major farm magazines like Farm Journal are widening their coverage of “Biological Farming;” even surveying readers to take soundings of farmers’ interest and understanding of this trend.
2. Learn how to manage cover crops. I’m seeing many patches of fall-seeded cereal rye following corn and soybean crops in central Iowa. I cringe that the typical grower terminates the rye with glyphosate, which further decimates beneficial soil organisms. Other growers with more experience are raising multiple species of covers which winterkill. Retired USDA/ARS microbiologist Dr. Bob Kramer found that each cover crop species stimulates about 10 natural species of beneficial soil organisms.
One of the best-known advocates of Renewable management and soil health is North Dakota farmer Gabe Brown. You can watch him on several YouTube presentations, making the case for restoring soil biological life and reducing costs of NPK and pesticides. In one such talk, Gabe reports a project that analyzed soil from 100 locations across America. Researchers almost always found adequate NPK. But they consistently found nearly lifeless soils, lacking in living organisms from earthworms to beneficial bacteria. That’s a consequence from decades of NPK and chemicals, especially glyphosate.
I’m encouraged to see more no-till growers “planting green,” such as roller-crimping a cereal rye cover after planting corn or soybeans.
3. Review our website’s “News Archive” tab for articles which report on new microbial products you can use to enrich soil life, enhance residue breakdown, fix more nitrogen naturally and help crops endure stress. I’m especially hopeful for further acreages of “endophyte” bacteria and fungi, such as BioEnsure and BioTango from Adaptive Symbiotic Technologies.
4. Browse websites of these “bio” companies and products, looking especially at field-test results:
Vitazyme, a biostimulant with 20 years of field research.
Biodyne USA, which formulates a wide range of microbial products. These are based on more than 30 years of research.
Spraytec, a Brazilian-based firm which has expanded its biological and micronutrient product line in the the U.S. in recent years.
ACRES Magazine, a seasoned eco-ag publication which can point you to many sources of bio-farming technologies.
5. Gradually shift your cropping program to season-long nutrition, not just plant/spray/harvest. Yield champions foliar feed, Y-drop nutrients, tissue test and keep crops growing all season. With this extra management, they virtually eliminate early die-down of corn. That can add another 40 bushels of corn yield with deeper kernels and higher test weight.
For further information on any of the products from these firms, contact us.