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Brakes Being Applied To Rapid Rise In Farmland Values?
August 28, 2013 8:30 am • By Jane Fyksen Crops Editor Is the party coming to an end? That is the question raised by the Federal Reserve Bank of Chicago’s August farmland values and credit conditions report. Even though for second-quarter 2013, “good” farmland was up 17 percent from a year ago in the Seventh District, which includes three-fourths of Wisconsin, ag land values registered no gain in the second quarter relative to the first quarter this year, according to 211 ag bankers in the district. “The last time there was no quarterly increase in agricultural land values was in 2009,” says David Oppedahl, business economist with the Chicago Reserve. “Generally, the stellar year-over-year gains in farmland values across the five district states masked the comparative weakness of the quarterly results.” Further, Oppedahl reports that the percentage of ag bankers in this quarterly survey anticipating farmland values to fall during the present third quarter (July-September) is the same as those predicting land value to rise (both 7 percent). Eighty-six percent think farmland values will be stable in the third quarter. As noted, the Seventh District’s survey of ag bankers includes three-quarters of the state, generally all but the northwest section. From July 1, 2012, to July 1, 2013, they saw land values in Wisconsin up 7 percent, 6 percent in the more southeasterly counties, 11 percent in the more central portion of the state and 16 percent in the southwest, which is generally included with northeast Iowa in the survey; however, in the second quarter (April 1 to July 1, 2013), ag bankers say the value of “good” farmland in Wisconsin only rose 1 percent. That is based on a 6 percent rise across the state’s midsection, but a 3 percent drop in southeastern and eastern counties up along Lake Michigan. Southwestern counties, lumped in with northeast Iowa, saw a 2 percent second-quarter hike. Year-to-year changes and second-quarter 2013 changes, respectively, for other district states are as follows Illinois (the northern two-thirds), up 17 percent, down 1 percent; Indiana (up 21 percent, up 5 percent); Iowa, up 18 percent, unchanged in recent months; and Michigan, up 18 percent, down 7 percent. Oppedahl highlights the second-quarter pause in what is been a rapid rise in farmland values in recent years, and he points to the quarterly decreases in ag land values in Illinois and Michigan. While farmland values on a year-over-year basis “still appear to be soaring,” he notes that “changes in farmland values on a quarterly basis may be presaging shifts in the year-over-year pattern in the latter half of 2013.” The year-over-year increase in farmland values for the second quarter was larger than that for the previous one – 17 percent versus 15 percent reported in June. Ag bankers, like producers, are seeing key crop prices starting to slide, and wondering if land values With larger harvests anticipated this fall to bolster crop supplies, USDA estimates price intervals for the 2013-2014 crop-year of $4.50 to $5.30 a bushel for corn and $10.35 to $12.35 for soybeans. “Given these price ranges, the district’s 2013 corn and soybean harvests would be lower in value compared with its 2012 harvests,” notes Oppedahl. While some of the lost revenue will be recouped via crop insurance payments for prevented plantings and revenue protection policies, this Federal Reserve economist cautions that “the anticipation of lower crop revenues – especially combined with potentially rising interest rates on farm loans – portended softness in future farmland values.” As for credit conditions in the district, he reports they were generally better in the second quarter than a year earlier. Ag bankers had more funds for lending, and repayments rates for non-real-estate farm loans were higher than a year ago. Ninety-four percent of responding bankers said their ag loan portfolios were having no significant repayment problems during April, May and June, and they perceived non-real-estate loan demand for the period to be below what it was during the same three months last year. Interest rates on farm loans rose in the second quarter for the first time since early 2011. That followed record-low rates in the previous quarter. As of July 1, district averages for interest rates on new farm operating loans and real estate loans were 4.94 percent and 4.65 percent, respectively, both lower than a year ago. “The uptick in interest rates on farm loans may mark an important shift in the district’s agricultural credit conditions,” Oppedahl warns. “Demand for non-real-estate loans relative to a year ago fell during the second quarter of 2013, but not as sharply as it did during the first quarter,” says Oppedahl. “With 17 percent of survey respondents reporting higher demand for non-real-estate loans compared with a year ago, and 30 percent reporting lower, the index of loan demand was 97 for the second quarter of 2013 – higher than its reading of 67 for the first quarter. Moreover, in the first six months of 2013, the amount of farm operating loans generated by banks was lower-than-typical, whereas the amount of farm mortgages was higher than typical.” Given such low demand for non-real-estate farm loans, it’s “not surprising,” he notes, that the district’s average loan-to-deposit ratio remained quite low at 64.5 percent – “well below the ratio desired by responding bankers (77.2 percent).” Bankers anticipate operating loans and livestock loans to shrink in this third quarter, relative to July-September last year; however, falling crop prices should bring some relief to livestock producers, who have suffered in recent years with high feed prices, Oppedahl says. Continue reading
Ethanol: Logic Of Circular Biofuel Trade Comes Into Question
http://www.ft.com/cms/s/0/e4baefbe-b0d6-11e2-9f24-00144feabdc0.html#ixzz2TSTQBQ4m By Greg Meyer Despite having the world’s biggest ethanol industry, the US imported 9.6m barrels of the biofuel from Brazil last year. Brazil, the ethanol pioneer, imported 2m barrels from the US. The US and Brazil, the giants of the market, together produce 87 per cent of the world’s output, according to analysts FO Licht. The US product is largely distilled from corn, while Brazil makes ethanol from its sugar cane crop. For the engine of a car, the two vintages are virtually identical. Yet in the eyes of the law they are quite distinct. This helps explain why the US and Brazil are shipping one another ethanol at great expense rather than simply using it at home. Washington is weaning its domestic ethanol industry off subsidies. In 2011 a tax credit for ethanol blenders expired, as did a corresponding import tariff. But the industry still has the support of a government mandate requiring domestic ethanol consumption to grow each year. The mandate is indirectly helping to drive imports from Brazil. The mandate, known as the renewable fuel standard, is split between volumes for traditional corn-based ethanol and “advanced biofuels” whose production releases less greenhouse gas impacts than ploughing fields for grain. Corn ethanol has the biggest share, but the advanced biofuel requirement is growing more rapidly. US production of advanced biofuels has not matched government expectations. To meet the mandate, fuel companies are allowed to import sugar cane ethanol, mainly from Brazil. The US Environmental Protection Agency estimates about 15.9m barrels of sugar ethanol imports will be needed this year. “As the mandate grows, ethanol imports rise accordingly,” say economists at the University of Missouri’s Food and Agricultural Policy Research Institute. Another US policy encouraging Brazil to export ethanol is set by California. The state, known for standard-setting vehicular pollution controls, welcomes the use of sugar cane ethanol to satisfy its low carbon fuel standard programme. In the reverse direction, US ethanol exports to Brazil are well below a peak of 9.4m barrels reached in 2011 when the South American country suffered poor sugar harvests. The Brazilian ethanol industry has also been hurt by domestic government policies that have kept petrol prices artificially low to fight inflation. This year, Brasilia raised the required ethanol blending rate to 25 per cent from 20 per cent of motor fuel in a bid to help the domestic biofuel industry. But imports from the US are expected to continue nonetheless. The US corn-based ethanol industry has more capacity than needed for a domestic fuel market where demand is weak and most fuel companies refuse to blend more than 10 per cent ethanol with petrol. Brazilian imports arriving under the advanced biofuels mandate further add to supplies. So a portion of the relatively cheap, unwanted corn ethanol barrels flows back to Brazil. The Energy Information Administration, in a note last year, called it a “complex environment” where blenders and ethanol producers “not only have to produce enough corn ethanol to meet the overall renewable fuels mandate, but … must also import significant volumes of sugar cane ethanol to meet the advanced biofuel mandate, all in the face of demand constraints”. The American and Brazilian ethanol industries are squaring off as regulators consider how to apportion this year’s US ethanol mandate. The Renewable Fuels Association, the main US corn-based ethanol lobby, argues the EPA should lower the advanced biofuels mandate to insure against unreliable supplies from Brazil. Furthermore, tight corn stocks and slowing output suggest the US may not be able to export as much ethanol as in years past, the association says. The circular trade between the companies is “economically absurd”, the RFA added. Unica, the Brazilian sugar cane industry group, contends that the US should uphold its advanced biofuel targets, which would support ethanol imports from Brazil. “The fact that there is two-way trade in ethanol between the US and Brazil demonstrates both the complexity and success of government intervention into fuel markets,” Unica wrote to the EPA in April. There is nonetheless an irony in the fact that biofuels promoted to reduce greenhouse gases are being ferried between the US and Brazil in ships belching petroleum exhaust. As the EPA notes: “This two-way trade of ethanol engenders additional transport-related emissions.” Continue reading
The Question the Fed Should Be Asking
By Caroline Baum May 15, 2013 Ed Koch, the late mayor of New York City , used to stop residents on the street and ask, “How am I doing?” With next month marking the four-year anniversary of the end of the 2007-2009 recession , the longest and deepest since the Great Depression, it seemed like a good time to ask the same question — of the Federal Reserve . The Fed’s actions to right the economy, once described as “unprecedented,” now seem ordinary. The various emergency-lending facilities have been closed, but the overnight rate is still at zero to 0.25 percent, and the Fed is engaged in its third round of quantitative easing, or large-scale asset purchases, which this time is open-ended ( until it isn’t ). So how’s the Fed doing? Based on standard metrics, economic growth has been tepid as far as expansions go. Real gross domestic product has increased at an average 2 percent pace since the second quarter of 2009. The unemployment rate has inched its way down to 7.5 percent from a peak of 10 percent in October 2009, a stark contrast to the rapid doubling of the rate from the recession’s onset in December 2007. In other respects, the economy is doing just fine. Asset markets are elated at the Fed’s liquidity provisions. And to the extent that the goal of policy was to encourage risk-taking, inflate asset markets and hope for a spillover to the broader economy, I guess two out of three isn’t bad. The risk is that Nos. 1 and 2 create problems before No. 3 takes hold. Credit Risk Some background first. Fed chief Ben Bernanke has gone out of his way to explain how monetary policy works once the traditional policy tool, the overnight interbank rate , hits zero. When the Fed buys long-term Treasuries, it depresses yields and forces investors to buy assets that carry more credit risk, such as stocks and corporate bonds. Lower yields make housing more affordable. Higher stock prices work through the wealth effect to increase consumer spending , leading to higher corporate profits and personal incomes in what he called a “ virtuous circle .” Let’s take a look at the results. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index set new highs this week, a reflection of either the Fed’s liquidity provision or record corporate profits , take your pick. ( Price-earnings (SPX) ratios remain well within historical norms.) Credit spreads have narrowed, just as the Fed wished. Home prices have come roaring back, posting large gains in parts of the country that were hardest hit by the housing bust. Phoenix led major U.S. cities with a year-over-year jump of 23 percent, followed by San Francisco (up 18.9 percent) and Las Vegas (up 17.6 percent), according to the S&P/Case-Shiller Home Price Indices for February. And the National Association of Realtors reported that the U.S. median price rose 11.3 percent in the first quarter from a year earlier, the biggest increase in seven years. Then there’s the art market. After “giddy competition” last fall, the spring art auctions at Sotheby’s and Christie’s in New York featured catalogs that “weigh as much as a phone book and contain relatively hefty price tags,” according to the Wall Street Journal. Apparently there are a lot of new collectors, many from abroad, with money to throw at trophy art. Another example: The average price of a New York City taxi medallion topped $1 million last month. The Federal Advisory Council , a group of 12 bankers who advise the Fed, warned about a bubble in U.S. farmland prices and excessive risk-taking at their Feb. 8 meeting, according to minutes obtained by Bloomberg News reporters Craig Torres and Joshua Zumbrun under a Freedom of Information Act request. Horse Race Fed officials have started to walk back from their asset-price/virtuous-circle policy prescription, sprinkling recent speeches and press conferences with references to “reaching for yield” and “excessive risks” and invoking the central bank’s dual mandate of full employment and stable prices instead. At his March 20 news conference, Bernanke said the Fed isn’t “targeting asset prices.” Rather policy makers are “trying to identify, much more so than in the past, whether major asset classes are deviating in terms of their price or valuation from historical norms.” The degree to which assets are leveraged, something the Fed is monitoring, is crucial to determining potential systemic risk. This is all good. But there’s a more important consideration. Four-and-a-half years of an overnight rate near zero and aggressive securities purchases by the Fed have succeeded in raising asset prices. The question is whether higher asset prices will deliver jobs and economic growth before they become destabilizing. This is what policy makers are referring to when they talk about the costs versus the benefits of QE: the horse race between risk-taking and economic growth. It sounds as if Bernanke and the Federal Open Market Committee are getting ready to re-handicap the race at their meeting next month. ( Caroline Baum , author of “Just What I Said,” is a Bloomberg View columnist. The opinions expressed are her own.) To contact the writer of this article: Caroline Baum in New York at cabaum@bloomberg.net To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net Continue reading
