Down on the Farm, Up on the Stock Market
I'm in Seattle for the annual meeting of the American Farm Bureau Federation, where farmers say they're under siege by environmentalists who want to impose living standards on livestock and push cap and trade limits on carbon emissions. Farmers are also smarting from generally low food prices this year as consumers pulled back on eating out or buying meat.
Still, farmers will be the first to tell you that even though it's been a terrible year (no matter what year it is), they're always cautiously optimistic. They also have a pretty good sense of humor. The keynote speech on the crop outlook for 2010 started with a joke about Tiger Woods. I didn't hear the whole joke, something about a teacher asking kids who's the best golfer, and one boy bugged by some girls talking says something like, "I wish the girls would shut up," and the teacher says, "Exactly. Tiger Woods!" You know it's bad for Tiger Woods when he's being use to warm up a crowd of farmers.
2010 looks to be better for agriculture, especially if there's a global recovery. 2009 was actually pretty good, too, except for livestock. There's still too much milk, too much pork, and now the Russians have banned U.S. poultry. Overall, meat and dairy prices were below break even for the year, according to John Anderson at Mississippi State University. He says more thinning of herds will continue in 2010 to get supply in line with demand. "On a per capital basis, total meat availability in 2010 could be the smallest since 1997."
On the crop side, corn prices are up nearly 30 percent since September, though not anywhere near the $7 a bushel two years ago. What's strange is that prices are rising even though yields may reach a record, around 13 billion bushels. That may be partly due to the fact that about 600 million bushels of corn are still in the ground at this late date due to earlier weather problems.
The USDA will release its 2009 crop production report tomorrow. It's expected to show less corn than expected due to bad weather, further driving up corn prices. In 2010, more farmers may then switch from planting soybeans to corn, which should be good for fertilizer companies, as corn needs nitrogen.
This morning Sterne, Agee upgraded nitrogen supplier CF to a Buy. Morgan Stanley released a note saying, "We would buy Monsanto and Mosaic in 2010 as a new Ag cycle has begun."
On the equipment side, U.S. tractor sales fell 21% in 2009 as food prices fell, according to the Association of Equipment Manufacturers. "Companies are telling us that things are going to be flat," for 2010, says Stephen Volkmann at Jefferies & Co. "I think it's going to be a little bit bitter than that." The weak dollar will help. Volkmann also says agriculture is one of the few industries running at full capacity, and any uptick in demand will improve sales. "Once demand starts to recover, crop prices are likely to go back up rather than down." He thinks shares of John Deere could rise 30 percent in the next year, 50 percent in 24 months. Shares have already risen over 30 percent the past 52 weeks, in a down market. Stock prices for most ag-related companies are up double digits over 52 weeks: Potash up 49 percent, tractor maker CNH up 54 percent, Mosaic up 68%, even though it missed the street when it reported a profit drop last week.
Then there's California, the number one agriculture state, yet one with very little influence in the national federation because the industry is made up of a million different specialty crops. Paul Wenger is the President of the California Farm Bureau, and he says the number one issue in the Golden State is water, which is scarce not only due to a natural drought, but a man made drought brought on by diverting water to save fish in the Sacramento Delta. "I've never seen people so discouraged as folks that have ground, they have the expertise, they have the labor force, and they can't grow a crop because there's no water," he says, adding that some people have let 90 percent of their land go fallow this year.
As for cap and trade, farmers say carbon limits could force millions of acres out of operation. In California alone, Wenger says agriculture takes twice as much carbon out of the air--through photosynthesis of crops--than the industry puts in. "The environmentalists, unfortunately, are saying, 'You're doing that not to take carbon out of the air, you're doing that to grow crops, you shouldn't get credit for it.'"
Of course, it's in a farmers DNA to complain. As one ag official told me, "Never ever ever ever tell a farmer he's making a profit, because he won't believe you."
Still, when you're losing money for every pig you raise, or every cow you milk, those are real losses. How can such a situation happen year after year? It's because farmers don't set their own prices. This is the only industry where sellers have almost no say in what buyers pay. Is it because no industry gets as much government help? "It's the market structure," explains Bob Young, Chief Economist with the American Farm Bureau Federation. Agriculture remains the only industry where you have literally thousands of sellers and only a handful of buyers. "It's Econ 101."
California almond ranchers call their crop "a-monds", with short "a", like "hat".
Why are almonds grown on ranches? I mean, where are the almond herders? The dogs which round up the nuts? "This is California," Paul Wenger told me. "We don't farm, we ranch." Got it.
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