The IOWA FARMLAND rush continues on...........

[Groty]

I'm not arguing ethanol. It is simply a tailwind to the demand story.

We’ve gone from 1.5 billion people on the planet in 1900 to 6.5 billion today. During that time, the overwhelming majority of the global population lived in extreme poverty. The widespread participation in the current global economic boom is causing the standard of living of the world's population to dramatically improve. One study I read suggested that once a person (or maybe it was a family?) reaches an annual income of $3000, the first permanent change in behavior is to eat “better” (i.e., more meat consumption). Many millions of people have reached and exceeded that $3000 number in the past few years. I interpret the increase in per capita global wealth to mean the demand curve for grains (the raw material input for meat) is permanently shifting to the right irrespective of what happens with ethanol. And the longer the boom lasts, the farther to the right the demand curve will shift.

Part of the reason why grain has “always gotten more affordable” in spite of a rapidly growing population is that farmers have continuously improved their productivity. It seems to me that, at least domestically, the ability of farmers to squeeze out ever higher yields using better farming techniques is reaching a point of diminishing returns. The most productive farmers already plant the hardiest, highest yielding, most disease and pest resistant strains of seeds. And they use herbicides, install irrigation systems and apply fertilizer in optimal amounts to maximize yields. Over the long term, there’s a huge incentive for scientists and researchers to genetically engineer “super strains” and I’m confident they will. But that takes time. In the short to intermediate term, the opportunity to increase marginal supply is limited. So, we have a demand curve shifting to the right due to increased global wealth and a supply curve that is more or less fixed. That would seem to support a higher equilibrium price level for grains, which in turn derives the demand for and value of farmland.

However, the one major and very important supply issue I have no clue about is how much arable land outside the U.S. can be quickly and easily converted to growing grains.