Farming contacts in many regions across the U.S. are reporting record-high crop yields, prompting price declines for cotton, corn, soybeans, and other agricultural commodities. The lower prices are cutting income expectations for crop producers, while reducing feed costs for livestock producers. The Federal Reserve Bank of Dallas reported that record high cattle prices are slowing the efforts of Southern Plains cattle producers to rebuild their herds. The Chicago Fed notes that Midwest hog and cattle prices have slipped since early July; however, higher milk prices are helping the livestock sector remain profitable. Contacts report drought-related disruptions in the Southeast, Southern Plains and Pacific West. The San Francisco Fed notes that shipping costs for produce growers are rising because locomotives are being diverted to the Midwest to haul oil and gas rail cars to refineries in Texas

Prepared by the Federal Reserve Bank of Philadelphia and based on information collected through August 22, the Beige Book summarizes comments received from businesses and other outside contacts.

The following is a Fed region-by-region summary of farm sector economic conditions, starting in the Mid-Atlantic and moving west:

Richmond – Prices for some crops continued to decline, while input prices were unchanged. Cotton prices decreased in the last six weeks and corn prices fell year over year. However, farmers reported no change in input prices in recent weeks. Planting and harvesting continue on schedule. A Virginia producer reported completion of summer soybean planting and barley harvesting, while corn harvesting has begun in South Carolina. A sod farmer notes that he expects high demand and tight supply to end soon.

Atlanta – Parts of Georgia, Florida, and Alabama experienced abnormally dry to moderate drought conditions since early July, while the rest of the Southeast ended the period drought free. USDA designated several counties in the Florida Panhandle as primary natural disaster areas due to damages and losses caused by excessive rain earlier this year. Lower corn prices are benefiting livestock and poultry producers that rely on corn for feed.

Chicago – Corn and soybean production in the Midwest should exceed last year’s levels. Although much of the region recently weathered a dry spell, cool temperatures have so far helped reduce the stress on crops. Nonetheless, crops in the northern parts of the Midwest may not fully mature before the dates of normal first frosts. With national records expected for the corn and soybean crops, prices have moved down since the July 7th report. To avoid selling crops for lower prices than in recent years, farmers have explored options for storage and livestock feeding. Higher milk prices are helping the livestock sector stay profitable even though hog and cattle prices have slipped. Ethanol prices have eased, but production remains profitable.

St. Louis – As of mid-August, around 73% of the southern Mid-South and northern Delta region’s corn, rice, and sorghum crops was rated in good or excellent condition. In contrast, only 56% of the region’s pasturelands was rated in good or excellent condition. Farmers will likely produce close to 9% less corn in 2014 than in the previous year. However, District rice, cotton, and sorghum production will be 34%, 17%, and 11% higher than last year, respectively.

Minneapolis – Agricultural conditions have been mixed since the July report. Most of the Northern Plains region’s corn and soybean crops were in good or excellent condition through mid-August, with strong yields forecasted. Livestock and dairy producers continue to benefit from higher output prices and lower feed costs. A majority of lenders responding to the Minneapolis Fed’s second-quarter (July) survey of agricultural credit conditions reported lower farm incomes compared with the previous quarter. Relative to a year earlier, prices received by farmers in July were lower for corn, soybeans, and wheat; prices increased for hay, cattle, hogs, poultry, eggs, and milk. A mildew outbreak in North Dakota may reduce sunflower yields.

Kansas City – Crop prices, along with farm income expectations, were lower due to improved growing conditions and elevated crop production levels. Improved growing conditions and the potential for record crop production this fall depressed prices and lowered farm income expectations since the July report. The majority of the Plains region’s corn and soybean crops are in good condition but improved yields may not offset the effect that recent price declines will have on income. Farm income expectations remain well below year-ago levels even with strong profits in the livestock sector, due to rising cattle and hog prices. Demand for farm operating loans rose further, but loan-to-value ratios remain relatively conservative. Still, some bankers report loan repayment rates have weakened since last year and also note a rise in loan renewals and extensions. Despite lower farm income, cropland values are generally holding steady, while strong demand for high-quality pasture is supporting modest gains in ranchland values.

Dallas – Agricultural conditions are improving as the severity of drought conditions in the Texas Panhandle and southern New Mexico eased since early July. Texas’ cotton crop was mostly in fair to good condition and harvesting started in some areas. Most crop prices declined over the past six weeks due to expectations of very high U.S. corn, cotton, and soybean production. Domestic demand for beef remains solid despite continued record-breaking cattle prices. Some cattle producers have started to rebuild their herds after the sharp liquidations that took place over the past few years, but progress has been slow because of historically high cattle prices.

San Francisco – Contacts reported good agricultural conditions in the District overall. Excellent cotton and grain harvests are expected. Produce supplies are somewhat constrained due to the drought in California, and prices of some products, including grapes and nuts, are high. Growers in California were able to tap underground aquifers this year but are concerned about water sources next year should the drought continue. Contacts reported a spike in growers’ shipping costs due to the diversion of locomotives to the Midwest to haul oil and gas rail cars to refineries in Texas. ■

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The Second Swedish National Pension Fund (AP2) committed another $750 million to agricultural real estate investments in the U.S., Australia and Brazil. The allocation is part of last month’s initial $1.4 billion raise for TIAA-CREF’s Global Agriculture II farmland investment company.

AP2's $750 million commitment to TIAA-CREF's second Global Agriculture farmland investment company represents a 54% stake, based on initial commitments of $1.4 billion.

The follow-on investment comes after AP2 committed $450 million for a 23% stake in TIAA-CREF’s first Global Agriculture investment company between 2011 and 2012. The first Global Agriculture fund also invests in cropland in the U.S. Brazil and Australia, and was valued at $2.99 billion at the close of 2013.

Earlier this month, TIAA-CREF agreed to purchase 30,959 acres of farmland in Hendry County, Fla. from Alico Inc. for $91.4 million.

AP2 has also invested $100 million for an 11% stake in Teays River Investments LLC, a Zionsville, Ind. manager focused on U.S. agricultural real estate and agribusinesses. Teays River Investments portfolio was valued at $931.4 million as of June 30. ■

© 2014 Farmland Investor Letter All rights reserved.

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USDA’s August forecast for the 2014 farm sector economy is more optimistic than the one issued last February. Forecast net cash income for 2014 has been revised upward, due to improved prospects for the value of both crop and livestock production. The more favorable forecasts for crops and livestock reflect more optimistic price expectations over calendar-year 2014, relative to expectations in February.

Net cash income is forecast to decline 6% from the 2013. Crop receipts are expected to decrease more than 7% in 2014, led by a projected $12.8-billion decline in corn receipts and a $6-billion decline in soybean receipts.

Land Values: Land prices have risen sharply over the last several years in principal crop producing regions due to strong demand for crop production; however, land price gains are expected to moderate in 2014 as farm commodity prices and net income, particularly in corn growing regions, retreat from recent levels. Nominal farm property values are expected to rise 2.9% in 2014 (current inflation rate is 2%), down from an estimated 8.7% rise in 2013, 10.7% in 2012 and 8.7% in 2011.  Land price growth is flattening due to reduced farm income expectations, lower crop prices, and higher interest rates. Still, continued growth in farmland values reflects expectations of favorable net returns from both the market and government programs, including crop insurance, in 2014 and the future.

Interest rates are also expected to increase slightly in 2014, raising the cost of debt-financed land purchases. However, real estate debt is still expected to grow as both borrowers and lenders continue to view land as a good investment, supporting continued demand for real estate loans and the availability of funds.

Rents: Net rent to non-operator landlords is forecast to fall 5.7% in 2014. This decline follows a near 30% increase over the previous two years, spurred by the expansion in the value of crop production. Cash rent is forecast to increase 4.2%, based on a relatively small increase in total real estate values and higher planted acreage. Share rent is forecast down 10%, following the decrease in the value of crop production. ■

© 2014 Farmland Investor Letter All rights reserved.

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