Wednesday, August 08, 2007

Another reason land prices may not be out of line...

According to Mike Walsten at Landowner newsletter (subscription required) land prices show no signs of backing off.
The highest-selling tract, totaling 165.44 acres, sold for $9,500 an acre and the lowest-selling tract, 62.31 acres, brought $4,950 an acre. That 62.31-acre-tract was only 70% tillable, says Dave Klein, vice president and managing broker, Soy Capital Ag Services, Bloomington, 309-665-0961, whose firm handled the sale. [More]
The driving force, I believe is clearly ethanol. Even though its immediate impact is on corn prices, the competition for land to grow corn forces other commodities higher. Interestingly, this is occurring just when global demand is ramping up, fed by economic growth in the less developed countries of the world.
For the first time, dairy farmers could threaten to sell their products elsewhere since the global dairy market is suddenly thirsty for German milk. And there's particular interest in powered whey. Prices for the yellowy stuff, which is the foundation for many packaged food products, have more than doubled within a year. Globalization has finally reached a sector that for a long time was organized regionally. While the dairy sector in Germany is still connected with the image of the quaint Bavarian farmer and his bell-wearing cows, in reality it's become an industry of multinational corporations, stock prices and commodities markets.

Milk is in demand. The inventories of food producers have dried up. So too has Europe's proverbial sea of surplus milk. The much-maligned mountain of extra butter is also gone. Such positive developments have even encouraged the European Commission to consider reforming Europe's bloated agricultural policies further.

EU Agriculture Commissioner Mariann Fischer Boel wants to increase the bloc's milk quotas, which have been frozen in place for years. The intention is to push along the decision made by EU agriculture ministers to do away with the convoluted quota system that regulates Europe's milk production. But the quotas will only be completely eliminated in 2015. While that might not seem very ambitious, at least the basic laws of supply and demand have been reestablished for the first time since the regulations for the milk market were implemented in 1968. [More]
Meanwhile, one dairy subsector is challenged by rising raw milk prices: organic. It seems consumers may be more price sensitive than originally thought, or that the organic buying public is smaller that forecast.
Dean sells organic milk and soy products through its WhiteWave Foods division. The organic milk is specifically sold under its Horizon brand, a segment battling the industry-wide oversupply of raw organic milk.

Organic milk costs more than regular, making retail competition aggressive as companies use lower pricing, marketing and expanded distribution to try to sell off excess supply. [More]

My goodness - supply and demand! Are they still teaching that stuff? If the EU takes this opportunity to even mildly reform its dairy quota system, it will add significant pressure to WTO calls for US reform as well.

We are only beginning to measure the fallout from ethanol mandates. The results may surprise us.

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