Michigan Farm News

Market Outlook: Dr. Jim Hilker

Columnists, Markets & Weather

2018-10-30 Christopher Wolf | Michigan State University

Michigan State University has collected information on land values since 1991 using a mail survey of appraisers, lenders and others involved in Michigan agriculture. The goal of the MSU study is to provide information on the value of land based on agricultural and non-agricultural uses. The survey questionnaire was mailed in May with responses coming in through July 2018. A total of 157 responses were received.

Respondents were asked to provide current agricultural-use value of the farmland, expected change in value during the next year, and cash rental rate for their geographic area. Estimates on agricultural-use values for farmland were reported separately for tiled (non-irrigated) field crops, non-tiled field crops, fruit, sugar beets, and irrigated land. Price data on non-agricultural use land values were collected for residential, commercial, and recreational development.

Land-Value-Table-1_MFN_10.24.18

Average agricultural farmland values are reported in Table 1. For the entire state, tiled cropland averaged $4,900 per acre with much variation depending on location, geography, soil type and other factors. Land that was not tiled was worth about $1,000 less per acre on average. Land for sugar beets was worth $6,885 per acre. Land with bearing fruit trees was worth about $8,000 per acre while land suitable for fruit production was worth about $6,000 per acre.

The state was also divided north-south basically splitting the Lower Peninsula at Clare. In the Southern Lower Peninsula, the average value of tiled field cropland was $5,121 per acre while non-tiled field cropland averaged $4,092 per acre. In the Upper and Northern Lower Peninsula tiled and non-tiled field crop land averaged $2,443 and $2,219 per acre, respectively.

With respect to land rental rates, tiled field cropland averages $165 per acre in cash rent. Irrigated and sugar beet land rented for $220 and $215 per acre, respectively. Land rent in the Upper and Northern Lower Peninsula was considerably lower on average at $70 per acre for tiled land and $60 per acre for non-tiled crop land.

Land-Value-Figure-1_MFN_10.24.18

Figure 1 displays the trend in average per acre price of land for Southern Michigan from 1998 through 2018. In general, the land prices have consistently increased in price when inflation is not considered. The average values trended upward at an increased rate from 2012 to 2015 but had adjusted downward in 2016 and 2017 before an increase in 2018.
Land-Value-Figure-2_10.24.18

Figure 2 displays the average land price and rental rate for tiled field cropland in the southern lower peninsula of Michigan from 1991 through 2014. From 1992 through 2018, Michigan farmland value increased at an average rate of 6.5 percent. Agricultural land price and rents move together over that time period with a correlation between the two series of 97 percent.

The survey also solicited opinions about factors driving land values. Respondents were provided the opportunity to indicate their perception of the importance of agricultural-related factors that influenced farmland values and cash rents. For the state and all districts in Michigan, expansion by farmers, grain prices and milk price were the highest-ranked agricultural factors influencing land prices. The most important non-agricultural factors influencing land values were interest rates, home sites, and small farms. This pattern was consistent across districts although hunting and water access were also important particularly in the Upper and Northern Lower Peninsula.

The full report is available online at: https://www.canr.msu.edu/telfarm/land-value-reports/2018%20MI%20Land%20Values%20Leasing%20Rates_final.pdf

Columnists, Markets & Weather

2018-09-30 Trey Malone | MSU Extension

The first cup of coffee I can remember drinking was with my grandad at the Farmers Co-op in Laverne, Oklahoma. Every Wednesday for the past few decades, he’s brought the donuts and gossiped with the other farmers and ranchers. 

I’m pretty sure that’s where he gets most of his agricultural production information. When I moved to Michigan last year, I knew the climate, the soils, and the production would be unlike what I’d known, but I also knew that one characteristic would remain consistent. Regardless of where they call home, those who labor in the agricultural value chain care about the people with whom they do business. Just like the value and trust my grandad places in his co-op friends in Oklahoma, I knew I could assume that growers in Michigan also rely on other farmers and friends to make their growing choices.

By overlooking the social relationships embedded throughout the agricultural value chain, businesses and researchers alike risk missing magical moments from the farm to the fork. We have all experienced it at the fork level: think about how much tastier an apple is if you pluck it in an orchard with your family as opposed to when you buy one from the local grocery store.

The result of these social relationships can be even more profound at the farm level. Research by my colleagues Lindon Robison and Bob Myers suggests that the social relationship between the buyer and seller significantly influences the sale price of agricultural land. Farmland sellers are often willing to discount prices to friendly neighbors and family members.

Friendly neighbors and family members aren’t the only ones who experience a grower’s good graces. To explore how these social relationships influence agricultural producers, I recently collaborated with Ph.D. candidate Braeden Van Deynze on an experiment with soybean growers in the region.

In the survey, we asked growers how they would manage a new invasive insect pest in their fields. We were most interested in who they would hire to spray their field: a co-op, another farmer, or an input dealer? Or perhaps would they choose to spray themselves?

We then asked a series of questions about how they trusted the options provided in their area. The results of our experiment unveiled an interesting pattern. Across all aspects of trust that we measured (expertise, reliability, connection to your operation, focus is on you as opposed to on themselves), neighbor farmers were viewed with the lowest regard and were least likely to be chosen to aid in spraying.

Growers were far more likely to choose cooperatives to spray instead of other farmers, even though cooperatives typically sprayed later than the growers anticipated.

That is not to say that the social relation- ships between growers and other growers do not also weigh heavily on a farmer’s decision-making. Consider the tillage intensity of soybean farmers. At first glance, a producer’s tillage decisions should not be determined by the tillage decisions of his friends. To test this, I collaborated with James DeDecker, newly appointed director for the MSU Upper Peninsula Research and Extension Center (UPREC) on an analysis of the relationships between groups of Michigan soybean growers.

In the study, we asked growers to identify how well they knew other growers within the agricultural community. With those linkages, we could connect farmers to one another in a social “map” of sorts. We found that even the no-till growers were tightly linked with the conventional tillage growers in their com- munities. In fact, those social relationships were so important that they significantly influenced a grower’s tillage intensity.

What does this look like on the farm? Over the past year, I have had the privilege of attending meetings across the state and have witnessed firsthand the enthusiasm of leadership teams of grower groups. While the influence of those leadership teams varies from commodity to commodity, these leaders are all passionately dedicated to assisting in the development of their fellow growers. A few weeks ago, I attended the annual meeting of the Midwest Chestnut Producers Council. One might think that farmers in this nascent industry might be less willing to collaborate, but my impression of the group is that they view one another as compatriots rather than competitors.

As an agricultural economist who spends the majority of his time on the MSU campus in the Morrill Hall of Agriculture, I find solace in the interconnectedness of the people in agriculture. Unfortunately, sometimes that solace is cold comfort when I think about agricultural policymaking in the United States.

At the beginning of 2018, Dr. Brandon McFadden and I sent out two surveys: one to a representative panel of voters and one to a group of agricultural workers. The results were disheartening. Relative to agricultural workers, the voting public clamored for more government involvement in nutrition, food safety, and food prices, while agricultural workers wanted less government involvement in how and where food was produced. The gap between the opinions of the voting public and agricultural producers suggests that we as an industry need to do better at developing relationships with those who are not involved.

These survey results also suggested that there is hope for public perceptions of the agricultural value chain. For example, consider the survey responses related to the question of environmental sustainability. While the phrase “environmental sustainability” is likely to conjure dissimilar utopias for a farmer and the average voter, it is also likely to be a concept with which both are familiar. We asked both groups if they thought environmental sustainability would benefit more from a combination of incentives and regulations. Where the agricultural workers were more likely to believe neither incentives nor regulations would promote environmental sustainability, more than 20 percent of the voters acknowledged that they did not know.

This uncertainty of opinion creates a clear opportunity for “agvocates” to inform their fellow Americans about the trials and tribulations constantly confronted within agriculture.

One of the best mechanisms for engaging with consumers and voters alike is to provide learning opportunities for these folks. For instance, in collaboration with generous sponsors such as Farm Bureau, MSU Extension hosted its annual Break- fast on the Farm event on Sept. 15. At this event, thousands of people had the opportunity to explore the MSU Beef Center, where they actually experienced facilities from the ultrasound to the squeeze-chute. MSU experts were on hand throughout the self-guided tour to answer questions.

As I wandered through the crowd, I eavesdropped on one animal scientist engaged in a discussion with a grandmother and granddaughter. The grandmother was under the impression that the cows standing behind the animal scientist lived their entire lives in a feedlot (they don’t), and that feed- lots are a horrifying place for beef cows (they aren’t). By the end of the conversation, she was nodding in agreement with the animal scientist as he explained that ranchers have a genuine interest in the welfare of their livestock. Indeed, just as social relation- ships sustain the working relationships in agriculture, so too might social relationships sustain good consumers and voters.

Dr. Malone will be presenting these findings and others at the National Conference for Food and Agribusiness in West Lafayette, IN, on Nov. 6-7, 2018. You can follow him on Twitter at @TreyMalone3.

Malone is an Assistant Professor and Extension Economist for the Department of Agricultural, Food, and Resource Economics at Michigan State University.  

Columnists, Markets & Weather

2018-09-15 Dr. Jim Hilker

David Ricardo came from a London stockbroking family, made most of his considerable fortune from speculation during the financially turbulent Napoleonic war-era, cashed in and retired to an English country estate.

In his leisure he made two important contributions to our understanding of agricultural markets. One was to develop the law of comparative advantage which underpins the view that international trade is generally beneficial to both trading countries.

Although a landowner, he advocated for the repeal of Britain’s grain tariff laws and his logic on the benefits of trade was influential in eventually opening up European markets to North American grain. The other contribution, that of cash rent determination, is the matter of this article.

Ricardo’s view of cash rent in agriculture is based on the assumption that land is essential for crop production. Moreover, it holds that land is the single most important factor in production.

To understand the importance he attached to land rents, consider an example corn land budget under alternative assumptions as laid out in Table 1. The table is intended as illustration, so please forgive the economist’s tendency to disregard such details as crop insurance, how rotation needs affect rent, etc. Labor costs have been inserted to account for returns to both management and operation effort.

With expected yield at 170 bushels per acre, a spring-time locked-in forward price at $3.50/bushel and an assumption of no program payments, Scenario A involves expected revenue at $595/acre and costs at $400 leaving the residual, or surplus, at $195/acre.

As all costs have been paid for except that of acquiring access to the land, then this amount could be paid out in order to break even. It is the amount that the owner-operator can ascribe to returns on owning the land and it is the amount that the renting operator might be prepared to pay as cash rent.

Scenario B continues to hold program payments at zero but has a higher forward price, namely $4/bushel. We assume that the operator, whether owner or not, will increase fertilizer inputs in response and so expects 172 bushels/acre. The residual then becomes $283/acre. Ricardo’s view was that rent should increase by this difference, or $283-$195=$88/acre. Most of this comes from the price increase but some also comes from adjustments to production. Of course, the above logic should also work in reverse. Were the corn price to decline to $3.00/bu. then cash rents would decline by an amount just short of 0.5x170=$85 when one allows for a bit of a pull-back in inputs and yield.

Scenario C returns to the price and yield expectation assumptions in Scenario A but introduces a $20/acre program payment that is not tied to production, as in the direct payments that were in place between the 1996 and 2014 farm bills.

As the $20 is received regardless of production choices, all costs are held fixed and yield remains at 170 bu./acre. The $20 passes through entirely to the residual, which increases from the Scenario A value of $195/acre to become $215/acre. Comments on Scenario B* are deferred until after comparing scenarios B and C with A.

As with most theories, including Newton’s theory of gravity, Ricardo’s theory of cash rent can be picked apart upon closer inspection. What is it about land that, in Ricardo’s view, allows the owner to be the residual claimant on the profit effects of good and bad shocks?

His view was that land is the ultimate scarce resource for crop production and scarcity provides the owner with strong bargaining power. His view was that, upon allowing enough time to adjust, the other factors in production, including nutrients, seed and labor/management, could be readily replicated or diverted from outside agriculture.

Consequently their prices would not shift as a result of a change in crop sector profitability. But much has changed in crop production since Ricardo’s day. Is Ricardo’s extreme stance on the special nature of land really tenable?

The assumption is likely largely true for some inputs. For example, nitrogen is abundant in the atmosphere. The cost of fixing it depends largely in the price of natural gas and is unlikely to vary too much with crop prices or government payments. However, for other inputs there are stronger grounds for debate. The few seed companies do compete with each other, limiting their bargaining power.

But that competition is far from perfect because there are so few; because they also own important scarce resources in the form of patents and elite genetics; and because firms with specific hybrids/varieties well-adapted to a region may dominate the local market. More so than, say, 50 years ago, seed companies can bargain for some of any additional surplus in the sector.

Bargaining power is also likely present in the tenant labor/management input. Modern crop production is a technologically and cognitively challenging business where prospective tenants will differ greatly in how they are positioned to extract profit from the land.

Better management is also a scarce resource and, because it is scarce, can expect to obtain some of any additional surplus.

In addition, location of tenant home base and transportation costs matter when seeking to make best use of expensive cropping equipment.

In reality the landlord has available only a limited number of prospective tenants to bargain with. With crop land in less crop-intensive areas, say on the Corn Belt’s periphery, tenants may have more bargaining power when compared with those competing for Central Corn Belt land.

The small number of landlord-tenant matches also means that cash rent responses are likely sluggish. Formal fixed-rate cash rent contracts may extend to multiple years. In addition, when commodity prices move to a persistently higher range, landlords may be reluctant to press a good tenant for an upward adjustment. When prices fall, tenants may worry that efforts to bargain down the rent will lead to loss of very accessible crop land.

Scenario B* adjusts to allow for some bargaining power on the part of seed companies and prospective tenants as markets settle down to a new long-run equilibrium.

In B* the effect of a $0.50/bu. corn price increase relative to Scenario A still creates the same surplus but only about half of it ultimately passes through to the landlord. Upon allowing time for adjustment, fifty percent pass-through is around about what academic research on the matter finds.

Similarly, the alternative to Scenario C would be for the tenant to share some of the extra surplus. In the case of a government payment, though, seed and other input-side companies would have little leverage to share additional surplus because demand for these inputs should not change by much when payment is not tied to production.

Ricardo’s rent theory has found applications elsewhere in agriculture: for example in understanding water rights as well as the right to produce or market quotas for milk, tobacco or peanuts. Before Uber upended the medallion system in big city taxi markets, the approach was a very useful way to understanding medallion pricing.

Seats on trading exchanges can also be viewed this way. In each case, however, closer inspection will reveal that the market is a little more complicated so that less than 100% of profit shocks will pass through to the owner of the right. So what do you think? Maybe two thumbs up to Ricardo for a thought-provoking way to think formally about the matter, and one thumb up for the validity of his claim?

 Market-Outlook-Table1_September 15
Click to enlarge 

Acknowledgement: This work was supported by the Elton R. Smith Endowment in Agricultural and Food Policy.  

Columns

Weather Outlook: Warmer and drier days ahead…

Jeff Andresen | November 30, 2018

Jeff Andresen pngThe development of an upper air trough across central and eastern North America during the last week of October led to northwesterly flow across the Great Lakes region and to an extended period of early winter weather through much of the first half of November.

Field Focus- November 15, 2018

Welcome to the 2018 Field Focus feature. This year, six of our seven reporters are members of ProFile, a leadership development program of Michigan Farm Bureau. In each print edition of Michigan Farm News through the growing season, these young farmers will tell you about conditions on their farms and their regions. 

 

Weather Outlook: Above normal precipitation to continue

Jeff Andresen | November 15, 2018

Jeff Andresen pngSeasonably cool and drier weather developed across the Great Lakes region during late October, allowing a resumption and/or acceleration of fall harvest and fieldwork activities across Michigan. With a persistent troughing pattern in place during much of the latter half of October, temperatures fell to below normal values, slowing grain dry down and soil evaporation rates.


Drier days ahead for harvest?

Jeff Andresen | October 30, 2018

Jeff Andresen pngThe jet stream flow across North America changed dramatically during mid-October, with the transition of the highly amplified western troughing/eastern ridging pattern of the past few weeks to a western ridging/ eastern troughing pattern.

Uncovering the Drivers of Profitability on your Farm

As we continue another harvest with low commodity prices, most producers are wondering where to look next to maximize their profitability. In most cases, the low-hanging fruit of expense cutting has been done. Finding those areas where additional gains can be realized requires more insight and evaluation of your business.