Agricultural conditions have worsened slightly since late February due to a variety of factors including wet fields, persistent drought, and a cold winter, according to the latest Fed Beige Book report.

In the Midwest, the value of "good" farmland fell 3% in 2014, the first annual decline since 1986, according a survey of bankers by the Federal Reserve Bank of Chicago. Half of the respondents expected farmland values to fall during the January through March period of 2015. Image: Chicago Fed

Prices for corn and soybeans fell. Contacts in the Federal Reserve districts of Chicago and St. Louis report that less corn will be planted this year, being replaced by soybeans. Kansas City district contacts note that feeder cattle prices have improved. Contacts in the Minneapolis Fed region say turkey producers are concerned about an outbreak of an extremely virulent strain of flu that has killed thousands of birds. Input prices for the upcoming spring planting season are reported as increasing in the Midwest. Drought conditions have improved, but still persist in some areas of the Atlanta, Dallas, and San Francisco districts, while wet field conditions have slowed planting in parts of Richmond, Chicago, St. Louis, and Dallas. Export demand for pork is declining, prompting lower pork prices and rising domestic supplies. Midwest contacts note that beef prices remain elevated, but off their highs, due to the rebuilding of cattle herds.

Prepared at the Federal Reserve Bank of Cleveland based on information collected through April 3, 2015. The Beige Book summarizes comments received from business 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 – Contacts report seasonal increases in agricultural activity, although adverse weather has caused some disruptions. Orders are up for sod, trees, and shrubs; however, wet weather has delayed harvesting to fulfill those orders. In South Carolina, the ground has been too wet to plant, potentially reducing crop yields in the fall. Crop prices are unchanged for sod, trees, and shrubs, and prices remain low for corn, cotton, wheat, soybeans, and peanuts.

Atlanta – Strong global demand for poultry coupled with lower corn and soy feed prices have allowed producers to experience favorable margins. Land rents are down from last year due to low commodity prices. The most recent USDA forecast for Florida orange production fell from the previous forecast. Dry conditions exist across much of Alabama, extreme northern Georgia, the panhandle and southern tip of Florida, as well as the southern portions of Mississippi and Louisiana.

Chicago – High stocks of corn and soybeans and slower export growth is putting downward pressure on most crop prices. Stockpiles of crops from last year’s good harvest have started moving for sale amid concern about low future prices. Wet fields in some areas and a cold winter have prevented most fieldwork from beginning. Still, generally favorable conditions should allow rapid planting once temperatures rise. Although higher input costs have prompted farmers to shift some acreage from corn to soybeans, corn still looks profitable in some parts of the Midwest, and many farmers continue to prefer normal crop rotations. Rising milk production is pressuring prices, leading many farmers to lock them in anticipation of further declines. Hog prices fell because so many have been brought to market, while cattle prices were up as herds are being rebuilt.

St. Louis - Farmers across the southern Midwest and northern Mid-South are expected to trim corn and cotton planting acres this year, and increase soybean and sorghum plantings. Arkansas and Mississippi farmers are significantly behind in their corn plantings as of late March due to very wet conditions. Persistent wet conditions may motivate farmers to switch additional plantings of corn to soybeans due to a later sowing window for soybeans. In western Arkansas, a contact notes that the ground is wetter than it has been in over 25 years.

Minneapolis – Agricultural conditions across the Northern Plains were weak overall going into the planting season. Crop farmers continue to feel the effects of lower prices, while conditions are better for livestock producers. Milk prices have fallen dramatically in recent months, but dairy producers are still benefiting from lower feed costs. Minnesota turkey producers are concerned about an outbreak of an extremely virulent strain of flu that has killed thousands of birds; the state is the nation’s largest producer of turkeys. Prices received by farmers in February are down from a year earlier for corn, soybeans, wheat, hay, milk, chickens, and hogs; prices increased for cattle, turkeys, and eggs. As farmer optimism over the economic outlook weakens, so have farm equipment sales. In South Dakota, a manufacturer of agricultural equipment plans to lay off more than 100 workers, and a North Dakota manufacturer of agricultural and construction equipment plans to lay off 80 workers.

Kansas City - Conditions also weakened in the western Plains somewhat in March, as growing conditions for wheat deteriorated, and profit margins narrowed for some livestock operations. Scattered showers have aided soil moisture in some areas, but more than half of the winter wheat crop in Kansas and Oklahoma is rated in fair to poor condition due to warm, dry weather. Although mild weather has aided spring fieldwork, farmers plan to plant slightly less corn and soybeans compared with last year, primarily due to lower crop prices. However, feeder cattle prices have edged up since the last survey, boosting profits for cow/calf producers, but reducing feedlot operator margins. Profit margins have also softened for hog producers as increased production and reduced export demand for pork have pressured hog prices.

Dallas - Rainfall has improved soil moisture and pasture conditions across much of the region, but severe drought persists in parts of Texas, particularly in the north. Wet field conditions have delayed planting in some areas of South and East Texas. Farmers are expected to shift some crop acreage from cotton to sorghum due to low cotton prices. Cotton prices are below break even levels, while cattle prices increased seasonally and remain very high.

San Francisco – The pace of output in the region’s agricultural sector is steady. However, drought conditions continue to challenge many farmers. Those with adequate access to water are benefiting from favorable weather conditions. Reduced water availability is affecting annual crop plantings such as rice, corn, and cotton. The need to purchase water or drill for water is putting upward pressure on crop production costs. Some farmers’ outlooks have deteriorated, given weakness in certain drought-related metrics, such as snow pack levels, recorded at only 8% of their historical average. Exports have increased somewhat since the labor disputes at West Coast ports were resolved. ■

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The Washington State Investment Board is expected to boost its agriculture oriented investments when it meets April 16th to consider a $300 million commitment to Teays River Investments LLC, a U.S. farmland and agribusiness investment company. The board’s Private Markets Committee recommended the investment April 2nd. If the deal is approved by the board, it will be subject to further negotiations of terms and conditions, board spokesperson Liz Mendizabal said in an e-mail.

Teays River, based in Zionsville, Ind., was launched in 2007 by Richard Halderman through sponsorship from Ospraie Special Opportunities fund. Teays raised $903 million between 2009 and 2012 to invest in farmland and agribusinesses. Investors include New York retirement fund sponsor TIAA-CREF, Teacher Retirement System of Texas and the Second Swedish National Pension Fund, known as AP2.

In addition to more than 500,000 acres of U.S. row-crop holdings, Teays River owns five operating companies. They include Hartley Dairy Company, Hartley, Texas; Steveco Inc., a California-based grower, packer and distributor of table grapes acquired for an estimated $150 million in 2011; Aurora Dairy Group, an Aurora, Colo. integrated organic dairy producer and processor purchased in 2011 in a $250 million leveraged buyout; and, Remington Hybrid Seed Company, an Indiana-based producer of corn and soybean seeds, acquired in June 2013.

Teays River Investments is an open-ended investment holding company with operating subsidiaries. If Washington State Investment Board approves a proposed $300 million investment, it would have a seat on Teays' nine member fiduciary Board of Managers.

The pending Teays River commitment would lift the Washington State Investment Board’s allocations to cropland and agriculture facilities to $1.1 billion since the board entered the sector 18 month ago. Those investments include $100 million to veteran farmland manager UBS AgriVest to assemble a portfolio of U.S. permanent and vegetable cropland; a $50 million commitment to ACM Permanent Crops LLC, a new private fund investing in permanent cropland in Calif., Ore. and Wash., and related mid-stream assets; $250 million to Steelhead Midstream LLC, managed by Wood Creek Capital Management, which will make seven to 10 primarily U.S. agriculture-related investments such as vegetable hauling equipment and rail grain hoppers, grain elevators, water rights, and irrigation infrastructure; $150 million to Cascade Midstream Partners I LLC, a separate account managed by Bunge North America that will invest in grain storage and processing facilities in the U.S. Northern Plains and Canada; and a $250 million commitment to International Farming Corp.’s U.S. Farming Realty Trust III, a U.S. cropland fund seeking to attract $1 billion in capital.

These investments are part of the board’s $1.4 billion tangible asset investment program aimed at generating a long-term, stable income stream. The program targets investment returns that outpace inflation by at least four percentage points over a rolling five-year period. The board manages total assets of $104.5 billion. ■

© 2015 Farmland Investor Letter All rights reserved.

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Publicly traded farmland fund Farmland Partners Inc. (NYSEMKT:FPI), Westminster, Colo.,  has entered into an agreement to acquire eight row-crop farms in North Carolina, South Carolina, and Virginia totaling 15,042 acres for an estimated average $5,565/acre or $83.65 million, according to a regulatory filing.

Since Farmland Partners' April 2014 intial public offering, the farmland fund's shares are down 11.6%, versus a 14.9% rise in the S&P 500 Index. Image: Yahoo Finance

The sale agreement includes a combination of $49.8 million in cash, 824,398 shares of the company’s common stock valued at $9,356,917 based on FPI’s trading price of $11.35 on 3/24/15, and 2,157,573 units of limited partnership interests in Farmland Partners Operating Partnership which we value at $24,488,454.

Farmland Partners expects the sale to close in May 2015. Upon closing, the initial three-year flat lease rate will be $4,312,189 annually, suggesting a 5.2% income yield. It is telling that FPI apparently sees the risk of lower crop rents sufficiently significant that it intends to lock in minor 2% annual rental rate increases—even with the Fed’s annual inflation rate target—in 2018 and 2019 on this property, as opposed to waiting to negotiate new rates when the flat lease rate—equivalent to an average $287 per acre—expires in 2017.

The purchase can be terminated if the market price of Farmland Partners’ common stock falls outside a range set in the purchase agreement. Additionally, the seller has an unusual option to repurchase the property after five years for total sum of: 27.63% above the original purchase price, 10% times the cost of any farm improvements, and 15 times the annual rental income in excess of $4,150,000.

While this pending deal will help address this fund’s significant structural conflicts of interest—namely that at its IPO, more than 90% of the company’s rent revenues were tied to property Farmland Partners’ organizers CEO Paul Pittman and consultant Jesse Hough sold to the fund and then leased back to entities they control. This financial conflict endures: At the close of 2014, 31% of Farmland Partners’ 2015 contractual rent comes from land leased to entities controlled by Messrs. Pittman and Hough.

© 2015 Farmland Investor Letter All rights reserved.

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