Want to make a small fortune farming?
Want to make a small fortune farming?
If you want to make a small fortune farming, the saying goes, you should start with a large one. Everyone loves to poke fun at the poor old farmers, but it might finally be the farmers’ turn to laugh.
You can’t pick up a paper at the moment without reading about the global food shortage and the associated boom in soft commodities (ie the ones you grow rather than mine). We’ve seen rioting in Egypt, Mexico and Bangladesh, and Wal-Mart has taken the extraordinary step of restricting the amount of rice any one person can buy.
With increasing wealth in Asia comes increasing consumption of food. There’s only so much land in the world and large tracts of what is available have – due to some of the most idiotic government policy ever legislated – been devoted to the production of biofuels. Just as has happened in the world of hard commodities (precious metals, iron ore, oil etc) rising demand and limited supply will lead to sky-high prices: all we need to do is work out how to profit from it.
Or so the argument goes. But before you fall for the next investment bank marketing campaign (if we’re talking about it, they’re working on a product), there are some differences between soft and hard commodities that are worth bearing in mind.
Firstly, droughts and floods can periodically rock supply but, in stark contrast to the long development times in the mining world, farmers can adjust their production on an annual basis. Not only can they switch between crops depending on expected price, but they make decisions about how much to spend on fertiliser, water and more productive (but more expensive) seed varieties each and every year.
So, whereas it might take five years to add capacity to an existing mine or 10 years to build a new one, the supply of soft commodities can be altered significantly within 12 months.
Another crucial difference is that the substitution effect is a lot greater for food than it is for hard commodities. You need iron ore to make steel and, for now at least, you need steel to make buildings. But when it comes to choosing a fillet of steak or some prime lamb cutlets, most of us can be swayed by price. When there’s a shortage of one particular type of food, people use alternatives.
Farmers are already making the necessary adjustments. Plantings have increased, Australia’s prospects are looking better, the price of wheat is at a 5-month low and rice is 10% off its highs. If the world has a relatively trouble-free year of production, there will be plenty of food to go around – which would be bad news for the farmers but good news for everyone else.
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Hi,
Intresting article but somewhat simplistic.
1) Farming is not a Free market because of the effect of subsidies (Partcularly by the EU & USA). This creates an artificial demand for example the Corn market has been heavily impacted by the Ethanol subsidy.
2) Subsistution is possible in the top end of the market but for the poor the options are limited. Rice, wheat or possibly corn. Thus it may take some time for the market to react to higher prices. As the middle class develops in the Thirds world more of these
commodities go to Feed Animals and countries have to subsidise the basics or they have food riots.
3) Finally the Green Revolution is running out of steam and some land because of Global warming is less productive.
Greetings from Yokohama, Japan:
I read this article on Bloomberg.com on Monday about farmers not really cashing in that much on the high price of grain. One of the farmers noted that "It's the best of times for somebody speculating on grain prices, but it's not the best of times for farmers, the demand for futures exceeds the demand for cash grains." I think this really says it all actually. I don't know if there is a huge discrepency between cash prices and futures contracts in Australia though. History tells me though that our Aussie Cockies are normally on the wrong end of these deals.
Cheers,
James
Sorry forgot this:
http://www.blooomberg.com/apps/news?pid=20601109&sid=aDZej7GJjpjM&refer=...
Hello
Read with interest this article on farming investment.It seems very sexy at the moment to get caught in the soft commodities "boom".I grain farm is my soul source of income and have done so for about 15 years in buisness.I was born and bred on a farm as well. While this dosent make me and expert by any stretch I would be careful with your investment $ in this feild.I am not the best grain farmer in our area but would be in top 15% for cost of production and the numbers are tight as far as buisness profit are concerned.The only real money we are making has been from cap. gain and it certainly cannot keep going the rate it has been.I find it hard to understand some investors thinking when they go to an area they do not know ,out bid the neighours/locals and think they have got a bargin.You are effectively paying more than the bloke with decades more experience in localised climate ,soils etc .I sudscibe to II to spread my risk out of farming all together.That said it will be interesting to see the numbers that say MQG ag arm come up with as they certainly have scale / irrigation in there purchases.As with it all its ALL about risk and farming certainly has its fare share.By the way Steve's article is right on.
Steve's article is spot on. Remember the banana growers a couple of years ago. A cyclone and most of the banana's in North Qld were wiped out. The only beneficiaries were those banana growers not in North Qld. Prices went from $2 a kg to $24 a kg. But people stopped buying them and the price steadily dropped. Within 6-12 months production was back, and the price is back to where it was, around $2 a kg.
Farm production is distorted in many ways. Remember the wine glut. Tax subsidies to plant grapes, then a wine glut and now they want another tax/subsidy to pull out the grape plants and convert to some other form of farm production.
I'd be very wary of investing any $'s in soft commodities, but wish all those currently making any $'s on the lift in prices the best. They will need it.
Many crops need managed bees for pollination. In UK the value of this service is about GBP160 million p.a.but bee numbers are declining very dramatically. and this is happening in many parts of the world. Already beekeepers in USA are having to buy bees from Australia in order to pollinate the almond and fruit crops and the cost of this operation is not cheap.
Obviously the airlines are not keen enough in handling bees to be tempted to offer discount rates and insurance is a real big expense.
So, unless solutions to the problems in the bee industry can be sorted out, this is another big expense that will have to be passed on to the consumer.
Spot on article. Add to that the previous article about the high $A - another risk. We had a dream year some time ago when the $A dollar was low, the price of wheat high, and we grew a record crop. Rare combination. For soft commodities to be a reasonable risk for non-farm investors, you need to have the above three running with you. At preset they are not.
I expect prices to stabilise at higher prices than consumers have been used to. In theory this should usher in a new era of profitability for farmers, however climate variability is the wild card. Reduced rainfall will simply increase the risks associated with farming. Also the loss of the single wheat desk in Australia will expose farmers to increased market volatility. For investors capital gains increases rather than income may prove to be the better prospect.
Your article looks at primary production on a supply and demand perameter only! One big factor not discussed and very pertinant for future primary production in Australia is the impact of Carbon Taxes - most primary producers (graziers particularly) will bear the brunt. Price will have to increase as there will be either no one producing or the consumer will have to wear the taxes paseed on as a result. Go Kyoto and Kevin 07?????? At least the Kiwi's have seen reason and are rapidly trying to back out of Kyoto styled utopia's becuase of the economic impacts!
Farming needs to adopt scientific methods to increase productivity and decreease environmental foot print. Can the structure of farming as it is now do this? Maybe corporatisation maybe required to generate entities with the resources for this.
A few brief notes.
JOE: Generally, farmers are early and enthusiastic adopters of new technology. There is a sweet spot between economies of scale and micro-management that I doubt is in reach of large corporations except in the most reliable areas- where land prices are already at a premium.
Regarding biofuels: the majority of market distortion occurs due to subsidies- EU and US, in descending order. Corn, as the US' most subsidised crop, will likely distort the market LESS, not more, due to biofuel production.
Regarding market distortion: consider that the Kyoto calculations disproportionately penalise the agricultural sector and agriculturally productive economies; consider the thousands of hectares being taken out of food production to plant trees for on-paper-only carbon "gains", consider the spiralling cost of fuel and fertiliser.
Perhaps, in the midst of a 'soft commodities' boom, this represents a prime opportunity for many "asset rich/cash-flow poor" farmers to balance the ledger and downsize or sell into such a strong market (not unlike many retirees could of done during the property boom - who may of had similar asset valuations and cash-flow issues). However, there is a distinct 'emotional' attachment to the land - especially when the property has been in the family name for many years which makes it difficult to make important decisions with the head and not the heart. Not for everyone, given the emotional attachment associated with some property - be it rural, residential or otherwise, but an option nonetheless.
On the other hand Todd, most farms highest yielding investment is the land itself. You might find that a great many farming families are doing just as you suggest, but others are holding on. The soft-commodities boom is meaningless for those farmers who do not have commodities to sell and is not necessarily reflected in valuations on land, which still owe more to local demand or proximity to substantial shopping centres than to outright productive capacity.
In short: yes, you're right, and a great many farmers are doing just that. In fact a great many already have.
Point taken and I guess I should of grouped leasing in with selling, as an option for current farmers. However, if you really believe the 'soft-commodities' boom is 'not necesasarily' reflecting higher valuations in land prices (especially in marginal cropping areas) then you must still believe in the tooth fairy !
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