Travelling scholars field report
Posted by: Bruce Watson	Date: 18 August 2009

The USA really is a powerhouse in world agricultural production. I have been through California, Washington State (the NW corner of the USA) and through the Midwest and western edge of the cornbelt. I have also been through Canada, but it was only for 4 days so I won’t concentrate too heavily on agriculture there as I only witnessed dryland production around Calgary in the province of Alberta.

The thing that has probably impacted me the most over my time in the USA has been the water they have available. Whether it is irrigation in California (although that is changing), the Snake and Columbia rivers in Washington State, the aquifers under Nebraska or the sheer amount of rainfall in the central cornbelt, the climate and rainfall give the USA incredible production potential – something that I don’t think they realise or otherwise Australia really is a godforsaken place to farm and maybe we shouldn’t be doing it!!

I started in California again with a large Tomato/Almond grower. I commented quite heavily on agriculture in California back in March/April when I came through and don’t have a great deal more to add except that the water issue (or lack thereof due to the Delta Smelt’s continued endangered status) is beginning to hit home. This particular grower identified water as their biggest risk and although they can continue to pump from aquifers, given the rate of extraction there is only a limited life that they can continue to do this – it maybe 5 years or 50 years but there is only so much water to go around, especially when its extraction is unregulated (for now). It was also interesting that this particular grower had removed 800 acres of an older variety of almonds but hadn’t replaced them yet as he wanted to see how the water issue was going to pan out.

From there I went to Washington State out towards the Palouse (eastern Washington) where I witnessed an incredible amount of irrigation (mainly horticultural crops such as grapes, apples, pears, cherries and some potatoes and irrigated corn) as well as dryland crops like wheat (spring and winter), barley and peas. The scenery around Dayton (where I was staying) truly is incredible and I am not sure how they farm the hills they have there. Typical wheat yields (winter wheat) are around 6-8t/ha with spring wheat being around 5-6t/ha. Freight is quite cheap as they just barge it down the river systems to Portland where it is exported. Rainfall is around 12-18 inches but that is over 6-8 months as the rest of the year they are under snow. Furthermore, because it is so cool (this year has been one of the coolest on record for the cornbelt and will probably result in record yields) their evaporation rates are quite low and they can fill grain in cooler weather, rather than 35 degrees like us in Australia. I could quite comfortably farm in the Palouse area (also extends out to Idaho) if I could get enough land, which is a problem although land was only around US$1,500-$2,000/acre, which given the production potential and if the US$ keeps depreciating, makes investing in these areas on a cashflow basis not so bad.

If I could diverge here for a moment, the vast majority of land in the USA is cash rented or sharecropped, something that is very different to Australia. It seems to me that rents have really appreciated, particularly in the cornbelt where rents in the US$250-$350/acre are common. As a result, despite all the talk of capital tie up, the farmer here is continually chasing their tail as rents are normally on a one year cycle and if the farmer has a significantly profitable year (like 2007 and to a lesser extent 2008) cash rents get bid up and the value gets passed from the farmer to the landlord. Whilst land is expensive, I feel that you have to own the asset, particularly after the capital gain growth we have seen internationally in agricultural land values over the previous decade. This system of quasi ad-hoc renting and agriculture also demonstrated to me why I think leasing doesn’t have a major part to play in Australian agriculture as landlords are normally greedy and leases are for a time period that is too small (commonly 3 years). As a result, particularly if we get a year of drought when you lose money, profitability is low because it takes time to get the land to produce and the risk of multiple failures is high. Thus, Australian farmers need equity in their balance sheet as if they tried to lease a large amount of land (unless they were doing it over diverse production and climatic areas, which brings its own execution risk), two years of drought (like 2006-2007) would send you bankrupt as you wouldn’t be able to finance the losses.

Unfortunately I didn’t get a chance to look at a lot of the irrigation in Washington State as I didn’t have time. However they have the world’s largest single vineyard (Snake River Wines) and also produce in excess of 4 million tonnes of apples (not to mention other irrigated horticultural crops). They also have great water resources that aren’t going to run out in a hurry and assuming you can get a senior water right, irrigation appears to be pretty safe, although green pressure is even beginning to extend into an area where the extraction of the river system is minimal (compared to Australia) to say the least. The irrigation here makes the Murray-Darling system appear to be a muddy creek (which I think it is) and maybe we are over extracting too much irrigation water in Australia and have to reduce it further? In terms of water security, this is the best area I have seen globally.

From Washington State I progressed into Alberta where they were in the middle of a “drought”. I suppose if last year you harvested 4t/ha of canola and this year you were looking at 1-2t/ha, you would think it was a drought too, but it was a little too green to be an Australian drought – I saw a crop of barley that had the potential to still do 7t/ha although they were excellent growers. The climate here is so soft and the growing season so short, despite the fact that rainfall is only 8-12 inches, there is very little chance for it to evaporate and as a result, they can grow excellent crops on very little moisture. I managed to take a trip in a small aircraft and the variability across the paddocks from the air was incredible. The compaction and straw spread (and the issues that posed in a year of tough emergence) were easily apparent and they could make some pretty easy leaps forward with inter-row seeding and controlled traffic farming, but when you farm in such a “safe” environment (at least compared to Australia) you probably don’t have to push as hard. In all my travels thus far I haven’t found anyone agronomically in broadcare agriculture that does as good a job as the leading Australian farmers in relation to conserving soil moisture and concentrating on water use efficiency. I guess when you have a soft climate and lots of rain (and hence low rates of evaporation), coupled with support payments (excluding Canada) you don’t need to push as hard. Notwithstanding this, the standard of agriculture in relation to no till was quite high in Canada, and penetration of guidance as well (but not RTK).

From Canada I entered the corn belt in southern Illinois via some meetings in Minneapolis and a trip to the Chicago Board of Trade. The corn crop looked magnificent (if not a little late due to wet weather) and their soils are also incredible compared to Australia. Rainfall is around 35 inches (not including snowpack) from April to October and this summer has been so incredibly cool – temperatures in the high 20’s most days and only occasionally getting into the low 30’s – ideal weather to grow corn. Land is expensive though (if you can get it), ranging from US$5,000 – US$7,500/acre but that will nearly guarantee you 200 bushel corn (approximately 15t/ha) – which are numbers we are flat out achieving under irrigation in Australia.

On farm storage is also gaining in popularity, particularly with the increase in grain prices and the attractive carries being available on the board. One farmer I saw had approximately 130,000t of elevated storage out the back of his house, a number that rivals the Parkes Sub Terminal operated by Graincorp at home. Storage is also needed to be able to dry corn as it commonly comes in at 20-25% moisture. This is all extra cost that we don’t commonly have to incur in Australia.

I then went to the Top Producer Seminars at Purdue University (one of the top agricultural universities in the USA) where I went through some agricultural economics and management information. One of the most interesting components was some time spent on the ACRE program, which is supposed to replace some of the Loan Deficiency Payments (LDP) programs that are currently in place. Corn prices had experienced quite a fall at the time and despite the fact a lot of these farmers were looking at one of their best crops on record and had several opportunities to hedge grain at attractive levels, they were still in line to receive US$75/acre as a payment from the government because the price of corn has fallen from absolute highs!! Essentially, with this acre program you can insure a percentage of your total revenue (say 70%) for a heavily subsidised price, so to me it appears incredibly difficult to lose money in farming in the USA.  It just defies belief to me, but if I had access to the program I would probably do everything I could to have access to it. However, what a lot of growers don’t realise is that these payments are simply capitalised into the land prices, as a lot of the risk has been removed from their business model, making it more difficult to expand. Despite this, I heard from a banker I visited that a number of smaller growers may have difficulty getting credit if the grain prices come off their highs because cash rents have been bid up so much.

From here I had more meetings in Kansas City before heading into the western and central corn belt (Nebraska, South Dakota and Iowa). There is a lot of tillage, particularly in Iowa and Illinois as there is a significant amount of corn on corn. I enquired why they couldn’t just use RTK guidance to plant inter-row to get away from the stubble, but this seemed too difficult. It also appears that farmers here like to plough to warm up the soil before planting in spring and to help dry it out (there is huge amounts of tile drainage going in to remove excess water and more needs to be done). This system defies everything I know in Australia, but maybe their soils are different and with the rainfall they receive and the resilience and quality of their soils, water isn’t as big an issue.

In summary the USA is, as a generalisation ,an expensive but very secure place to farm (at least in the parts I saw). Land is expensive but if we continue to see US$ depreciation it may open up opportunities for outside investment because it still has the most developed markets and infrastructure (both for storage, inputs, etc) I have seen globally. The USA will still remain one of if not the number one grower of corn and also a major player in the soybean and wheat markets and thus if you want exposure to those markets, one nearly has to be in this market.