During 2012, several unrelated events came together to create what might be referred to as a “perfect storm” in agriculture! The three main drivers that drove our markets to new highs include: monetary policy at the Federal Reserve holding interest rates near zero; renewable fuels standards or the ethanol market; and demand for our agricultural products from developing countries like China.
The 2012 crop year began with low inventories coming off of a below expected crop yield from 2011. Early in the growing season, the number of planted acres and ideal planting conditions indicated the potential for record crops. Then it quit raining at the end of June!
The exceptional demand for our products driven by the factors noted previously was now being measured against one of the worst droughts of the last century. As yields started to fall, grain prices began to escalate rapidly. The high prices eventually cut into profit margins for livestock producers.
The election and the inability of Congress to come to any conclusion on tax law or the farm bill just added to landowner concerns. The threat of tax law changes and the pending increase on capital gains motivated many landowners to sell before the end of 2012.
Intuitively one might expect falling crop size due to drought and a significant increase in the number of farms for sale to hold land values and rental terms in check. Instead the land market gained strength and the demand from farm operators to rent more acres increased rental values. One fundamental was crop insurance guarantees revenues for producers.
The net effect . . . a perfect storm. When all the possible factors that could drive this market came together and were viewed positively, it pushed the market higher and higher to what some consider dangerous levels.
The strength in the market remains as we roll into 2013 for all except certain segments of the livestock industry. Drought conditions continue in many key growing areas causing concern over next year’s crop prospects. Despite the weather concerns, agriculture remains strong, land is in strong hands, and balance sheets look very good.
Interest rates remain at historic lows and the renewable fuels standards remain in effect, so building on a theme that I used in the last Farm & Ranch Scene, I think the good times will continue to roll for crop producers well into the new year!
– Farmers National News Release