Agricultural prices have exploded upwards
For those of us who have been around long enough to remember, the current economic climate for agriculture is reminiscent of the mid-1970s. After being in the doldrums for a while, prices for grains and farmlands have all exploded on the rise.
Since September, December ethanol futures have gone from $ 1.80 per gallon to $ 3.00 per gallon. The profitability of ethanol plants has now returned to 2014 levels (see graph below). Many in the industry believed that it was not possible to make it happen. This has resulted in the strongest corn base in recent memory across the Midwest as ethanol plants scramble to buy corn during a slow harvest amid farmers unwilling to sell.
Land prices are exploding
The sharp increase in the prices of raw materials, cheap money / credit and many others also resulted in the largest increase in the value of farmland since the mid-1970s. The graph below does not fair to the market because USDA data is only up to date until August. Starting in September, productive farmland across the Midwest hit new highs. Productive land in Illinois, for example, regularly sells for between $ 16,000 and $ 17,000 an acre. Some sales where three people start bidding against each other in several Midwestern states have exceeded $ 20,000 an acre. It takes madness to a new level. But combine cheap credit, very profitable farming, and farmers with a lot of money, and all of a sudden we have tulip madness.
How long can this last?
Many wonder where will the “black swan” come from that could burst what many see as a bubble? There can always be some kind of natural disaster. War. Political upheaval. In today’s political climate, literally anything can happen, but nothing is visible between here and the near horizon.
Global demand for protein remains extremely strong. Due to runaway inflation, which has also impacted food prices at the retail level, consumers continue to shell out money. As long as beef, pork and poultry move into the market at incredibly high prices, the expansion of livestock will be encouraged, which will increase the demand for grain, and the domino effect will continue.
Historically, with this type of scenario, it can be assumed that these trends can continue, with some severe corrections along the way, for at least two to three years. The long-term cycle of spot corn prices since 2012 has indicated that a major peak could occur in 2023/24. It may well still be in the right direction and the peak reached in 2021 was only a temporary sticking point.
One thing is certain, the trends of all agricultural commodities are well established on the upside. It is never healthy to stand in front of a freight train.