agriculture Archives - Promised Land

Have you ever watched the 1983 hit Trading Places starring the beloved Eddie Murphy and Dan Akroyd? The movie's climax occurs when the United States Department of Agriculture releases the crop progress report as part of the World Agricultural Supply and Demand Estimates, also known as the WASDE for short. The monthly WASDE report provides annual forecasts for global crop production and use of cotton, oilseeds, rice, wheat, and coarse grains. I won’t spoil this classic film, but the WASDE report released in the film included market moving information on the orange crop in Florida. Traders dressed in specialty jackets in the trading pits immediately reacted, causing the price of orange juice futures to fluctuate. Even in 2024, the WASDE brings potentially significant market movements for agricultural commodity prices and financial impacts to the suppliers and users of those products.

The movie does an excellent job of depicting how important the WASDE and other USDA reports are and how the USDA works to keep it confidential until the report’s release date. In preparation for the WASDE, USDA analysts are locked in one room where they aren’t allowed to leave sometimes for more than 24 hours. USDA analysts complete data collection from domestic and foreign sources to estimate the supply and demand for corn, soybeans, wheat, and other crops. Ultimately, the USDA determines an average price based on supply and demand factors. The supply for crops is based on current plantings and/or harvested acres, the amount exported, and also on the ending stocks from the previous month. The demand or use forecasts are determined discretely by each crop. Corn for example has three main uses: animal feed, industrial uses like ethanol, and food production.

The report is closely watched year-round, however, American farmers pay extra close attention during the growing season as it can have decidedly favorable or unfavorable impacts on their bottom line. 2024 is no different. The United States has largely had a favorable growing season so far. Late June and early July rains in the Midwest have not only kept the grass green but the corn and soybean crops are thriving. Some areas in Texas and the Dakotas haven’t been as lucky but the largest producing corn and soybean states also known as the “I” states, Iowa, Illinois, and Indiana, have experienced mostly positive growing conditions. Strong growing seasons are a double-edged sword, however. On one hand, farmers will always want their crops to do well but if everyone raises a strong crop then that means the prices are likely to decline as crop yields rise across the board. In some competitive respects, Illinois corn farmers hope there will be a drought in Iowa or Nebraska while Kansas wheat farmers hope for excessive rains in North Dakota. The loss for one geography means potentially better income opportunities for another.

The strong growing conditions across the “I” states have bred less-than-ideal commodity prices with the average cash price of corn coming in at $3.95/bushel for 2024. Just for reference, the average price of corn in 2023 and 2022 was $4.88/bushel and $7.43 respectively. This equates to billions of dollars in lost farm revenues. Soybean markets are experiencing a similar story with the average cash price of soybeans so far in 2024 at $11.10/bushel. In 2023 and 2022 the price of soybeans per bushel was $14.16 and $14.50. Even though crop yields are looking to be favorable relative to recent crop years, the low prices have USDA analysts expecting 2024 net farm income to drop to 24.1% from 2023. Thankfully the Federal Crop Insurance program includes Revenue Protection features that largely protects farmers against severe losses but it is unlikely that farmers will achieve close to record-breaking income levels like the past few years.

Markets are often built around USDA reports such as the WASDE and other crop progress reports. The most recent WASDE was released on July 12^th which showed some opportunities on the demand side of the balance sheet. Both corn and soybean ending stocks were lowered based on increases in forecasted demand greater than estimated production increases. Ending stocks represent the estimated production less demand/uses for a particular crop and the USDA is forecasting greater uses for 2023/2024 corn. On the other hand, both corn and soybean production are up from the June report which is based on acreage reporting and yield estimates. As the growing season continues, it is common for forecasted ending stocks to be adjusted as more acreage reports come in and crop yield estimates are tweaked. Some analysts believe the USDA’s production numbers may be overly ambitious however it is difficult to truly tell what average yields will be until we are well into harvest.

The next WASDE will be released on August 12^th and this month will also kick off the Pro Farmer Crop Tour, a highly anticipated event for farmers across the Midwest. Scouts in Illinois, Indiana, Iowa, Minnesota, Nebraska, Ohio, and South Dakota report corn and soybean production estimates on 2,000+ different fields. The tour helps analysts refine yield estimates as it occurs after pollination. The USDA watches this tour closely when adjusting its own reports.

As we head into August and September, supply and demand estimates will continue to shore up and farmers will be gearing up for harvest time. Farmers in the South will likely be heading into corn and soybean harvest in August while the Midwest regions typically kick off harvest in early to mid-September. The sky above Champaign, IL is now full of crop dusters spraying fungicides as corn and soybeans begin pollination and Illinois farmers are itching to see how their crop compares to the rest of the country. Farmers are watching markets closely hoping for a reversal of the downward price trend that has been the story for much of 2024. Many farmers have chosen to pre-sell their crops before harvest; however, the less-than-ideal crop prices so far may have some farmers playing a bit of the waiting game. It’s too bad farmers don’t have the likes Billy Ray Valentine (Eddie Murphy) and Louis Winthorpe III (Dan Aykroyd) to do their hedging.

“Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That’s the other guy’s problem. Nothing you have ever experienced will prepare you for the absolute carnage you are about to witness. Super Bowl, World Series – they don’t know what pressure is. In this building, it’s either kill or be killed. You make no friends in the pits, and you take no prisoners. One minute you’re up half a million in soybeans and the next, boom, your kids don’t go to college and they’ve repossessed your Bentley. Are you with me?” – Louis Winthorpe, Trading Places

Many of you are familiar with the U.S. Census survey that is taken every ten years to count the number of people living in the country. The Census is a big deal because it determines how many seats each state gets in the House of Representatives and used for the allocation of government funds and programs like schools, hospitals, and roads. However, many people are unaware that there is also an agricultural census. Unlike the decennial U.S. Census, the U.S. Census of Agriculture is conducted every five years. Initiated in 1820, the agricultural census provides a rich history of valuable insights into American farmers and the agricultural economy. Today, it not only tracks the number and location of farmers but also assesses land use and ownership, operator demographics, production practices, and farm income.

The results of the 2022 Census of Agriculture were released in February of this year, carrying significant implications for policy, agricultural decision-making, and investment interest. Farmers and stakeholders in the agricultural industry pay close attention to these results as the census can affect USDA Farm Bill allocations, technological innovation, and the economic outlook for agriculture. The full report can be located here. The USDA also does an excellent job of summarizing key data in a series of highlight reports.

Farms and Farmland

Will Rogers used to say, “Buy land. They ain’t making any more of the stuff.” These words have echoed across the agricultural sector for decades and it has never been truer. As of 2022, there are now 880 million acres of farmland in the United States which may sound like a lot, but it is down 20 million acres, or 2.2%, from 2017 and 40 million acres, or 4.4%, from 2007. Development pressure, renewable energy projects, and conservation programs are driving the reduction in farmland acreage. Consequently, the competition for land use has increased farmland prices which have been further buttressed by growing food demand for the world’s expanding population. The graphic below illustrates the concentration of farmland in the United States, with a significant portion located in the central part of the country.

Not only have the acres devoted to farmland declined but the number of farms continues to shrink due to industry consolidation. It was reported in the 2022 Census that the number of farms fell below 2 million for the first time. Family farms continue to dominate the sector, with 96% of farm operations still classified as family-owned. However, the number of family-owned farms is dwindling as the expensive nature of key inputs such as acreage and equipment needed for modern, efficient operations drive more people to leave rural America in search of job opportunities elsewhere.

Larger producers are eager to take advantage and expand their operations. The industry continues to become increasingly concentrated with the average size of a farm rising 5% from 441 acres in 2017 to 463 acres in 2022. It is important to note that the USDA classifies a farm as “any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been sold, during the census year.” This definition can cause skewness in the data as small backyard gardens selling produce at local farmer’s markets could constitute a farm for the USDA census.

The shift in the concentration of farm ownership means fewer farm operators control a larger percentage of acres. The USDA estimates that 42% of U.S. farmland is controlled by 2% of U.S. farm operators. These large farms dominate agricultural production and income. On the other side of the scale coin, 42% of farms control only 2% of all U.S. farmland. Like other sectors of the U.S. economy, as time goes on the sector has continued to become more concentrated with the largest 10% of farm operators controlling more and more acres. From an efficiency standpoint, this isn’t necessarily a bad thing as large-scale farms are often much more efficient allocators of resources and capital but there will remain concerns over whether these large farms will consistently be good stewards of the land.

Farm Producers

Farm operations are evolving and the producers/farmers running these operations are changing as well. A persistent concern in the agricultural community is the increasing average age of agricultural producers. Consider your own image of a farmer. Do you envision someone young, educated, or perhaps a woman or a person of diverse background? More likely, the image that arises may resemble the figures in Grant Wood’s “American Gothic” painting from the board game “Masterpiece,” one of the most recognizable images in American art.

Wood’s painting actually paints a fairly accurate depiction of what the average farmer today based on the USDA’s findings. The average age of farmers continues to rise, now standing at 58.1 years young, with 95% of producers being white. The concern over the average age of the farmer has persisted for decades. The reason behind this demographic statistic largely stems from the capital intensity of agriculture. The table stakes for land, machinery, and other agricultural resources keep rising for young and beginning producers. Unless facilitated as part of a farm succession and estate plan, it is very difficult for new blood to enter the farming sector. The USDA has tried to facilitate new entrants with several young and beginning farmer programs which have provided some relief.

Farm Economics

Favorable commodity prices and yield trends for agriculture during and after the COVID-19 pandemic translated into strong growth in the value of agricultural production. As of 2022, the USDA reported U.S. farms produced $543.1 billion worth of agricultural crops, up 40% from $388.5 billion in 2017. The share of production value is largely split evenly between crops and livestock, with grains and oilseeds dominating production value on the crop side. Cattle and calves are the top-ranked commodity in agriculture, making up 17% of total US agricultural production by value.

Moving onto state-level data, California dominates agricultural production value. California’s prominence is largely due to California’s favorable year-round weather, overall crop diversity, and ability to produce high-valued specialty products like wine and table grapes, almonds, and pistachios. In 2022, California raised 11% of all US agricultural production with Iowa, Texas, Nebraska, and Minnesota making up the remaining top 5 spots. However, recent legislation in California surrounding trucking emissions and livestock and water management could threaten its standing. The legislation calls for a phasing out of diesel-based trucks and has raised concerns among producers, as most agricultural machinery relies on diesel fuel. Although Tesla is developing the Tesla Semi for the trucking industry, Tesla has no near-term plans to develop harvestors and other ag equipment. Currently, there are few viable or affordable alternatives to replace diesel engines in agricultural machinery.

Agriculture has evolved tremendously over the past several decades and is likely to continue to become more efficient and dependent upon technology. One of the barriers to technological expansion and information dissemination is access to reliable internet services. The internet has made it possible for a tremendous amount of information exchange in everyday life and the same is true for agriculture. As of 2022, 79% of farms had internet access which is up from 70% in 2012. Part of this modest upward trend could be credited to Elon Musk’s Starlink low earth orbit satellite system which has provided millions of people living in rural or remote areas with reliable, high-speed internet. On a personal note, my family farm has licensed Starlink internet services within the last five years. This is the first time we have been able to stream videos and surf the internet with ease. The expansion of high-speed internet services is also providing remote employment opportunities for rural workers. Such technological advancements could have possible repercussions on the average farmer's age and diversity in agriculture.

Implications for Promised Land

The 2022 Census of Agriculture results highlight the attractive opportunity set for Promised Land’s mission of being the leading rural development partner for Opportunity Zones in American farming communities. The future of agriculture continues to be bright as U.S. farming remains one of the largest and most efficient producers in the world. Promised Land is committed to finding strong farmer partners who are seeking to expand their operations while providing for a more sustainable future for their rural communities. Opportunity Zone tax legislation provides a catalyst for growth and innovation in rural communities that may be struggling with stagnant economic activity and unfavorable demographics as the USDA data suggest. With the USDA expected to expand its funding for young and beginning farmers, conservation efforts, Federal crop protection, and broadband initiatives within the next Farm Bill and related legislation Promised Land plans to work alongside its farmer partners to ensure the promise of American agriculture for generations to come.

On the legislative front, OZ extension and Rural OZ proposals remain top of mind for U.S. Rep. Mike Kelly, Republican from Pennsylvania and chairman of the Ways and Means Subcommittee on Tax. In this recent Op Ed in Go Erie, he wrote:

“Moving forward, I want more communities to benefit from this legislation the way Erie has. In September 2023, I introduced the Opportunity Zones Transparency, Extension, and Improvement Act. This bipartisan legislation builds upon the success of the 2017 tax law. It would require mandatory data reporting of Opportunity Zone investments to increase transparency and streamline the reporting process. It also extends the investment and deferral window to provide more time to drive more investment into high-impact projects in low-income communities. We are also finding ways to expand Opportunity Zones to rural communities, as well.”

The Promised Land team had the opportunity to attend the 2024 Land Investment Expo in January where we listened to a series of enriching conversations about the current geopolitical climate, legislative updates, and the future of agriculture. One keynote session that was of particular interest to the Promised Land Team was Dr. David Muth’s discussion titled, The Opportunities for US Farmland in a Net Zero World. Dr. Muth, Managing Director of Capital Markets at Peoples Company, discussed agricultural land’s central role within renewable energy transition and how best to monetize these real options. At Promised Land, we foresee a rich opportunity set under development in organic farming, climate-smart ag, conservation practices, and renewable energy. These evolving ecosystem services generally strive to minimize the environmental impact of farming through more eco-friendly practices such as reduced water usage through appropriate tillage, irrigation, and precision grading. We see continued interest among investors and stakeholders in these environmental, social, and governance (ESG) friendly investments and farming practices. To this end, we thought Dr. Muth’s perspectives on the future of energy transition and agriculture were worth sharing.

“The beginning of the end of fossil fuels.” – Simon Stiell, Executive Secretary, United Nations Framework Convention on Climate Change.

“The beginning of the end of fossil fuels.” – Simon Stiell, Executive Secretary, UNFCCC (United Nations Framework Convention on Climate Change). Dr. Muth began his presentation with this quote from the Conference of the Parties (COP) Meeting through UNFCCC where Mr. Stiell gave an overview of the current status of carbon emissions and opportunities for the future. Globally, we consume 137K terawatt-hours of fossil fuels annually, resulting in total global emissions of 58.2 billion tons of CO2 (carbon dioxide). One terwatt hour will fully power 70K homes for a year. Currently, nations across the world are spending a total of $1.7 trillion towards the transition from traditional fossil fuel sources to renewable energy sources. Dr. Muth believes that spending needs to be closer to $4.3 trillion if the world wants to hit its net zero goals. Put simply, net zero means cutting carbon emissions to a small amount of residual emissions that can be absorbed and durably stored by nature and other carbon dioxide removal measures, leaving zero in the atmosphere. China leads the world in energy transition spending with the United States and Germany coming in second and third. Interestingly enough, while China is investing the most in the renewable energy space, they also are building coal-fired electricity plants at a staggering rate. This contradiction suggests that China’s interests aren’t just investing in sustainable energy, but they are investing in energy capacity, period. (Watt a concept!)

Dr. Muth divided his energy transition presentation into four buckets: wind turbines, solar, renewable fuels, and carbon storage. These key pieces to the energy transition are known to have the largest potential effect on agriculture as abundant land plays a foundational role in the broad deployment of these technologies.. If you drive across the great plains of the Midwest, you will likely see tall wind turbines spread across the countryside amongst the farm fields and ranch land. Since the Land Investment Expo takes place in Iowa, many of the examples used in Dr. Muth’s analysis are related to Iowa. Dr. Muth also discussed how energy transition could affect the entire country. Nationwide there are 73,352 active turbines with 6,293, or 9%, of those spinning in the state of Iowa. If wind energy was expanded to meet the nation’s demand for electricity in combination with other renewable sources, Iowa would need around 47,900 to meet this demand, or almost 8 times the current resource.

The other common renewable energy source popping up across farm fields and commercial and residential roofs is solar panels. Nowadays, it is impossible to make a trip to Costco without someone trying to sell you a pair of solar panels for your home. Currently, there are 3.5 million acres of solar panels across the United States but that is not enough to meet our nation’s net zero goals. Dr. Muth projected that solar acres would need to grow by 3 to 4 times if the U.S. wanted to meet its energy transition goals. There has been considerable debate on whether to use high-quality farming acres for food or energy purposes when it comes to solar panels. While farmers can still operate around wind turbines, covering a field in solar means that farming is no longer viable. The Midwest is home to some of the most productive soil in the world and Dr. Muth projects many of the solar panels would likely not be placed in Iowa and other states in the Corn Belt. He expects solar farms to be built in the Southwest and Southeastern states where there are long days of sunshine and less productive soils.

Dr. Muth next transitioned his talk to renewable diesel which has been all the buzz in agricultural markets but it comes with some valid concerns. Soybeans can be used for a variety of food, fiber, and feed products. Recent advancements and legislative pushes in soybean biodiesel and sustainable aviation fuel have brought about new opportunities in the space. Currently, the United States has 22.75 billion gallons of capacity for renewable diesel and would need to double that number to meet the expected future demand for renewable diesel. That also means that U.S. farmers would need to produce 24 billion bushels of soybeans. Currently, the United States produces around 4.5 billion bushels of soybeans and while renewable show promise, people are still hesitant to fully move away from traditional petroleum-based diesel due to costs and infrastructure challenges. The costs of producing soybean biodiesel are substantially higher due to the refinery process and there are also concerns that it isn’t all that sustainable. Even though it comes from plants, soybean biodiesel produces more emissions than traditional oil-based fuels. The other concern with soybean biodiesel is that wide expansion would end up hurting the consumer on food prices. Soybeans and soybean oil are key ingredients in a majority of processed foods that you would find in the grocery store. Adding to the competition demand from soybean biodiesel could disrupt our food supply which is known for being secure and relatively cheap. While the space has promise, it is going to need continued research and advancements before wide adoption.

The final portion of Dr. Muth’s presentation centered around finding a place to sequester the carbon so that it wasn’t harmful to the environment. Soil provides us with many things and is an essential ingredient in agricultural production but it can also be used for carbon storage. Carbon can effectively be pumped and stored underground just like oil and natural gas have been stored for millions of years on Earth. The state of Illinois has been at the forefront of the discussion around carbon storage as its rich black soil makes it ideal for storing carbon. If the United States were to store all of its carbon emissions underground it would cover 27 feet of depth in the states of Texas, New Mexico, Arizona, California, Nevada, Utah, and part of Colorado just as a frame of reference. There are several environmental and safety concerns over carbon storage as it can be very dangerous if the carbon leaks. A recent push to develop a carbon storage pipeline through Iowa has been met with concern over the potential safety concerns and impact on the land itself from digging and equipment compacting the soil. The pipeline would carry carbon emissions from ethanol plants which are known to be substantial emitters of carbon. While there could be a large opportunity for landowners to earn additional income sources from carbon storage, there still needs to be more research on its effects on the surrounding communities.

The closing punchline to Dr. Muth’s presentation was that a significant requirement to meet the U.S.’s “net zero” goals will require large swaths of land. With several hundreds of millions of acres of U.S. land presently devoted to agriculture, farmland is a natural target for the deployment of these technologies. There will always be concerns over the use of land for food or energy but when examining the monetary effect of the possible energy transition, the potential economic benefits of rural farming communities could be quite large. Producers and landowners alike stand to benefit substantially from the opportunities at hand. Dr. Muth estimates a combined $400 billion effect on farmland values and agricultural income. He put forth a staggering estimate that land values in the Midwest, where much of the energy transition will be centered, could triple or quadruple in the next 25 years. However, these projections are not that farfetched. A compound annual growth rate (CAGR) for a farm that triples in value over 25 years is 4.5% which is in line with our estimate of the 10-year appreciation potential of farmland computed as 2.0% spread over consumer price inflation (CPI). All items CPI rose 3.4% in the twelve months ended February 2024 while the 10-year TIPs/Treasury breakeven is presently 2.4%. The CAGR for a farm that quadruples in value over 25 years is 5.7%, also plausible in an ongoing era of money printing.

Promised Land is dedicated to staying on top of these energy transition developments and their value creation potential for our landowner investors. We will continue to look for properties that may have wind or solar development opportunities as well as ways to capitalize on stranded energy and/or energy storage potential. We hope to be at the forefront of this evolving landscape and help usher in the new promised land of abundant, cheap, sustainable energy while revitalizing rural American farming communities located in Opportunity Zones.

(Image of Promised Land’s Broadland PLOZ Farm in downstate Illinois with its 3 wind turbines)

Farmer’s Daughter’s Harvest Update

The rumble of the combine going through the field, the flutter of dust and debris through the air, and long hours spent working the same land that my family has farmed for 5 generations are all signs of my favorite time of year, Harvest. Fall is such a special time of year for me as students return to my classroom at the University of Illinois at Urbana-Champaign and the promise of another harvest season comes to fruition. I spent my childhood on the floor of a combine or tractor playing with my miniature versions of equipment and taking the best cab naps while my father, grandfather, and great uncle worked tirelessly to provide for our family. At fifteen, my brother went off to college at the University of Illinois giving me my first opportunity to truly be an active part of the farming operation. That year I learned to drive the combine and have spent every fall since behind the wheel of a John Deere Combine or a grain cart. While my grandfather and great-uncle have since passed, it is incredibly special to me to get to continue my family’s farming legacy while also educating the next generation on the importance of food and agriculture and sustainable farming practices.

United States Harvest Progress and Supply and Demand Estimates

Elmore farms finished up harvest in the middle of October while several farm operations in Illinois are still wrapping harvest up this month. We were blessed with adequate rain and growing conditions correlated to strong yields however not every farmer in the U.S. has been quite as lucky. Unfortunately, parts of Iowa, Kansas, Nebraska, and the Southern part of the U.S. have been facing an intense drought affecting crop yields in these areas. These areas have been plagued with extreme drought the past few years meaning crop yields in these areas have been unsatisfactory for multiple years. As of November 6th, the USDA reports that the top 18 corn producing states are 81% complete while soybean harvest in those states is 91% complete. Most farmers in the Midwest should be finished by the time the turkey is cut on Thanksgiving Day.

The United States Department of Agriculture (USDA) released its November World Agricultural Supply and Demand Estimates on November 9th showing slightly improved yields from last year with an average yield of 174.9 bushels/acre compared to 173.0 bushels/acre last year. On the soybean side, yields remain similar with a projected U.S. average of 49.9 bushels/acre compared to 49.6 bushels/acre last year. On the demand side of the equation, supply is currently rising more than demand as foreign corn production is forecasted higher in Ukraine, Russia, Burma, and Paraguay. The ongoing conflict in Russia and Ukraine had an initial strong impact on global corn markets as Ukraine has historically been a large supplier of commodities for the rest of Europe. However, as the conflict persists, markets have adjusted shifting to strong dependence on South America’s growing production. USDA concluded in August of 2023 that Brazil overtook the United States as the world’s leading corn exporter. Brazil is already on the podium as the largest soy exporter with much of its demand meeting China’s growing commodity needs. The United States is allocating more of its share of corn production towards growing domestic biofuels and vegetable oils while exports are lower. The world’s shift toward more biofuels and larger food production continues to reflect a strong future for U.S. agriculture.

Farmland Markets Update

In August, our farmland values update showed that farmland values in the United States remained strong with US farmland appreciating 8.1% on average from 2022 to 2023. Transactions have started to slow recently, and prices are starting to level off in some areas of the U.S. Some economists believe we may be in for a correction in farmland values. Farmland values are determined by a variety of factors with one of the main drivers being farm incomes and cost of capital considerations. 2021 and 2022 were record years for farm income as strong commodity prices boosted farmer returns which in turn put upward pressure on farmland values. However, 2023 incomes are not looking quite as strong. Growing input prices made planting commodities more expensive while commodity prices have declined from peaks in 2021 and 2022. While net farm income is projected to back off from a peak in 2022, it is still projected to remain modestly above the 20 year averages for net farm income and net cash farm income.

The other factor impacting farmland values are changes in interest rates. Interest rates have remained relatively low since the mid-1980s making financing options in farmland relatively cheap and putting upward pressure on farmland markets. The figure below shows how the current return to farmland typically tracks with the ten-year contact maturity treasury rate. However, times of extreme interest rate hikes tend to have an adverse impact on farmland values. As the Federal Reserve fights to control inflation through interest rate hikes, it has become more expensive to finance farmland purchases for farmers and investors alike. If the FED continues to raise rates, it will likely put downward pressure on farmland values. However, recent inflation numbers suggest price pressure for consumers is starting to abate suggesting the FED’s interest rate hikes may have come to an end.

Opportunity Zone Legislation Update

Since the inception of the Opportunity Zone (OZ) legislation from the Tax Cuts and Jobs Act of 2017, low-income communities designated as OZ’s have seen an influx of capital moving in to help boost local economies and revitalize life for people living in these areas. On September 27^th, legislation titled the Opportunity Zones Transparency, Extension, and Improvement Act was introduced to the house by Representatives Mike Kelly and Dan Kildee along with Representatives Carol Miller and Terri Sewell. The legislation is aimed at strengthening the Opportunity Zones policy with more reporting and measuring requirements while expanding incentives to invest in these areas. The legislation aims to reinstate the program and establish a State and Community Dynamism Fund to support public and private investment in qualified opportunity zones. The Economic Innovation Group released a full report with a summary of the legislation here. The legislation has yet to move forward as the House is still backlogged from weeks of trying to find a new Speaker of the House. However, we are hopeful that legislation will be passed within the next year given its broad, bipartisan support.

Final Thoughts

Harvest time for me is always a time of reflection of where we have been and where we are going. At the start of each year there is uncertainty about the prospects of the new year’s harvest and what the future of agriculture looks like. Every person involved in agriculture has their perspective of what the future looks like for the food and agriculture industry. For me, the future of agriculture is visible in my own classroom among the faces staring back at me each day. I am constantly reminded of the bright future agriculture has, seeing young minds so energized to take on issues like food insecurity, environmental concerns, and continued profitability and innovation within the industry. In my mind, agriculture remains one of the safest asset classes as traditional food and fiber will be an essential part of our needs as long as humans roam the Earth. Some see alternative food sources such as insects and worms as the future however I do not foresee providing much competition to traditional large-scale farm production as the consumer’s mindset towards these protein sources is largely still dismissive.

In high school, I spent much of my time participating in my school’s FFA (formally known as the Future Farmers of America) chapter where at each meeting we would recite the organization’s creed. I still look at it from time to time to remind me why I do what I do and why there are many, many like-minded farming families across rural America working to ensure the success of the U.S. Agricultural Industry.

The FFA Creed

I believe in the future of agriculture, with a faith born not of words but of deeds – achievements won by the present and past generations of agriculturists; in the promise of better days through better ways, even as the better things we now enjoy have come to us from the struggles of former years.

I believe that to live and work on a good farm, or to be engaged in other agricultural pursuits, is pleasant as well as challenging; for I know the joys and discomforts of agricultural life and hold an inborn fondness for those associations which, even in hours of discouragement, I cannot deny.

I believe in leadership from ourselves and respect from others. I believe in my own ability to work efficiently and think clearly, with such knowledge and skill as I can secure, and in the ability of progressive agriculturists to serve our own and the public interest in producing and marketing the product of our toil.

I believe in less dependence on begging and more power in bargaining; in the life abundant and enough honest wealth to help make it so–for others as well as myself; in less need for charity and more of it when needed; in being happy myself and playing square with those whose happiness depends upon me.

I believe that American agriculture can and will hold true to the best traditions of our national life and that I can exert an influence in my home and community which will stand solid for my part in that inspiring task.

The creed was written by E.M. Tiffany and adopted at the Third National FFA Convention. It was revised at the 38th and 63rd Conventions.

August 2023 Agriculture Industry Update

The sun is beginning to set on summertime, meaning farmers nationwide are gearing up for Harvest. Harvest has already begun for some southern states and growers in the middle part of the country are preparing machinery for another fall reaping. 2023 has brought unique challenges and opportunities to farm producers from an ongoing Russian-Ukrainian conflict to varying drought conditions in parts of the United States. Long-term estimates for agricultural commodity demand remain strong as the world population grows demanding more food and new energy sources. Technology advancements in soybean’s potential as a biofuel and jet fuel have unlocked new potential demand for one of the United States’ largest cash crops. As a result, farmland values have remained strong in much of the United States, particularly the Midwest. The 2023 USDA Land Values Summary showed slowing growth rates compared to 2022 however cropland values continued to rise 8.1% from 2022 to 2023 to an average of $5,460 per acre. This United States Department of Agriculture (USDA) report suggests a promising future for the Promised Land Opportunity Zone Fund I (PLOZ Fund I) as we execute on our rural development mission to revitalize rural communities while providing investors with a tax-advantaged investment vehicle.

Crop Progress Update

Agriculture is unique because it is one of the few sectors whose output is largely dependent on weather conditions. Not only do weather conditions affect the size of the crop, but they also can affect the prices received as futures markets react to incoming news of rain, drought, wind, or other weather changes. 2022 brought about drought concerns throughout the United States as California, Kansas, and several western states suffered from exceptional drought conditions. The drought decimated water supplies and yields of a variety of crops such as vegetables, fruits, bulk commodities, and nut trees. The American Farm Bureau estimated more than $20 billion in crop losses due to drought or wildfires, pressing farm incomes and profit in certain geographies. On the flip side, the Corn Belt saw strong net incomes and yields as more favorable weather conditions left many states in that region unaffected.

The drought that affected much of the West in 2022 has started to work its way east toward key bulk commodity states, bringing concerns of a diminished harvest in 2023. While parts of Texas are still suffering from last year’s drought, California, Nevada, and Utah have largely emerged from their concerning situations. Farmers in these areas were beginning to feel pressure from communities and local officials as they debated whether to use water for irrigation of crops or human consumption. One region that has remained mostly unscathed is the eastern United States which is good news for Promised Land as our largest farm in the PLOZ Fund I, the McCotter farm sits on the east coast of North Carolina in Pamlico County. PLOZ Fund I also has three farms in South Carolina and two farms in Mississippi. Geographic diversification was an important consideration in the construction of the Promised Land farm portfolio.

The varying drought patterns have impacted the upcoming harvest expectations as many of the operators farming the properties in PLOZ Fund I portfolio will begin harvesting within the next month. In the most recent World Agricultural Supply and Demand Estimates (WASDE) report, the USDA estimated that the average corn and soybean yield (the primary crops in the PLOZ Fund I portfolio) would be 175.1 bushels per acre and 50.9 bushels per acre, respectively. These yield values are lower than the previous report in July which reported corn and soybean yields of 177.5 bushels per acre and 52.0 bushels per acre, respectively. These adjustments came as no surprise to many producers in the Midwest as crucial commodity states such as Iowa, Kansas, and Nebraska are still suffering from drought. Thankfully, for the farms in the PLOZ Fund I portfolio rains came at crucial times and harvest expectations are looking promising.

Financial Update

As a result of the varying drought patterns and other global factors, agricultural commodity prices have fluctuated throughout 2023. Corn and soybeans prices have been trending downward making it unlikely that farmers will reach peak net incomes like they did in 2021 and 2022. Farming is a unique industry in that farm incomes are entirely determined by an uncertain production amount for an uncertain price, meaning farm incomes are not consistent from year to year. However current prices and yield expectations remain favorable for positive farm incomes in the United States. The USDA has estimated national farm incomes to drop off from 2022 however will still remain above the 20-year average net cash farm income. Note that Promised Land tenant's generally pay fixed cash rents. These tenant’s primarily bear the risk and rewards of their labors and the fluctuations in yield and crop prices.

Agricultural commodity markets are influenced by a variety of factors that impact the prices of corn and soybeans. As with any product, it’s all about supply and demand. We have already discussed the supply side, but what about demand? One of the major factors impacting markets since February 2022 is the Russian invasion of Ukraine. Ukraine is known as the breadbasket of Europe as it is one of the top producers for major agricultural commodities such as wheat, sunflowers, and corn. As the conflict persists, commodity markets have adjusted prices and introduced market risk premiums over concerns of whether Ukraine will be able to export its typical substantial amount. Thus far, Ukrainian farmers have remained resilient and are expected to produce a strong harvest in 2023 however it is still unclear whether or not Ukrainian farmers will be able to export their crops. In July 2023, the Kremlin terminated the Black Sea grain deal which previously made it possible for Ukraine to export its grain by sea even while the war ensued. The Black Sea ports are crucial to the export of these large bulk commodities and without access to these ports, parts of the world may go hungry without Ukraine’s crops.

Another major factor that will continue to impact commodity markets in the future is the increased demand for biofuels. As the United States and other developed nations look to reduce their dependence on traditional energy sources such as coal and oil, advancements in biodiesel and aviation biofuel have markets looking toward one staple crop in the Midwest, soybeans. In the past, soybeans have been looked at as “the crop you plant when you don’t plant corn” as it provides the soil with essential nitrogen needed to produce corn and other crops. Many farmers adopt a standard corn and soybean crop rotation as a result. Yet, new demand for soybeans has created price incentives for farmers to consider planting more soybean acres rather than corn in upcoming years.

These demand factors will continue to impact global commodity market pricing; however, the biggest driver remains domestic supply and yield expectations as we have already discussed. 2023 corn and soybean yield numbers will begin to become more concrete in the coming months as the harvest progresses and USDA updates WASDE figures.

Nov ’23 Soybean Futures as of August 14th, 2023

Dec ’23 Corn Futures as of August 14th, 2023

Source: Barchart

Farmland Values Update

For Promised Land OZ investor, a significant determinant of investment performance is expectations surrounding changes in farmland values, driven by farmland cash yield and appreciation potential. 2020-2022 brought about some of the most significant gains in land appreciation and farmland returns as world uncertainty surrounding COVID-19 reminded people that regardless of the world’s status, people still need to eat. Real estate investors became increasingly interested in evaluating farmland as an investment alternative, spurring increased demand for an asset class with a limited supply. Food inflation caused commodity prices to rise which in turn created a positive benefit for farm cash rents and land appreciation. As a majority of the properties in the PLOZ Fund I portfolio were acquired in 2021 and 2022, Promised Land’s portfolio has appreciated nicely.

Early 2023 projections concluded that cropland values would continue to remain strong, but gains would begin to moderate due increasing costs of capital from the Federal Reserve’s interest rate hiking campaign. The USDA confirmed these early estimates in its 2023 Land Values Summary which was released in early August. Much of the United States saw strong increases in values with US farmland appreciating 8.1% in 2023 from 2022 with large gains occurring in Midwest and Eastern states where PLOZ Fund I has a strong presence. While this is still a strong appreciation value, it shows slowed growth from the previous report which reported a 14.3% appreciation nationally from 2021 to 2022.

The estimated fair value of Promised Land’s ten farms purchased in 2021 has appreciated $5.5 million, or 8.5%, above historical cost through June 30, 2023. The two most recent Illinois farms purchased in October and December of 2022 remain at cost.

The USDA reported the following year over year cropland values and per acre average values for each of the states represented in the Promised Land portfolio: Illinois (+7.0%, $9,580), North Carolina (+6.4%, $5,000), South Carolina (+4.8%, $3,300) and Mississippi (2.1%, $3,410). Promised Land OZ will incorporate the latest 2023 USDA Land Values Summary and other valuation inputs into its valuation analysis for the quarter ended September 30, 2023 and anticipates further overall net appreciation in its farm portfolio.

While appreciation has slowed, the data indicates there is still strong demand and interest in U.S. agriculture as an industry and an asset class. Farmland appreciation may continue to moderate towards the end of 2023 and into 2024; however, farmland continues to be an attractive inflation-protected asset class over the long-term hold period for PLOZ Fund I.

Introduction

Growing up on a family farm in rural Illinois, I was taught the importance of taking care of the land to preserve it for the next generation. Farming is not only about maximizing profits, but also about adopting sustainable farming practices that benefit the soil and environment to preserve the land for future generations. The soil is a living, breathing organism, and if cared for correctly, it can have both favorable environmental and economic impacts. Farmers did not always have the right technology and sufficient knowledge about these complex and delicate ecosystems to be able to properly care for the soil in the past. For example, the Dust Bowl of the 1930s was partially caused by harmful agricultural practices that left the soil exposed and vulnerable to erosion. The Dust Bowl is an extreme example of a man-made ecological disaster. Naïve farmers of the 1920s conducted extensive deep plowing of the virgin topsoil of the Great Plains.

The technological advancement of the combustion engine led to the widespread use of the combine harvester and the rapid and extensive conversion of naturally arid grasslands to cultivated cropland. The native, deep-rooted grasses of the Great Plains would normally trap soil and moisture during periods of drought and high winds. However, the unanchored cropland soil turned to dust in the drought of the 1930s and prevailing winds blew the soil into huge dust clouds that blackened the sky. The ecological and human tragedy of the Dust Bowl was famously retold in the novel The Grapes of Wrath (1939) by John Steinbeck. And if you think an agricultural-based ecological disaster like the Dust Bowl can not happen in this day and age, check out the organic-focused, mini-dust bowl called Gunsmoke in South Dakota.

As agricultural technology has evolved, and researchers have learned more about the ecological interplay between crop production, the soil, and the environment, more emphasis has been placed on preserving soil health. In the 1980s, a movement to reduce the amount of tillage on farms began to grow, and now no-tillage or reduced tillage is used on many farms today. Tillage is the preparation of soil prior to planting and the cultivation of soil after the harvesting of crops. A new focus on the environmental impact of agriculture also began at this time. Today, farmers have more technology than ever to benefit the environment, and there is still a lot of research being conducted around sustainable or “climate-smart” agricultural practices.

This trend culminated in the January 27, 2021, Executive Order 14008: Tackling the Climate Crisis at Home and Abroad from the Biden Administration which promotes climate-smart agriculture as a way to mitigate climate change. The Executive Order specifically mentions agriculture and states: “America’s farmers, ranchers, and forest landowners have an important role to play in combating the climate crisis and reducing greenhouse gas emissions, by sequestering carbon in soils, grasses, trees, and other vegetation and sourcing sustainable bioproducts and fuels.” So, what exactly does climate-smart agriculture mean, and what practices are considered climate-smart? The USDA’s Climate-Smart Agriculture and Forestry Strategy: 90-Day Progress Report defines climate-smart practices as activities that store carbon and improve resilience and soil health. Some examples of these activities from the report are: reduced and no-till, planting cover crops (crops grown for the protection and enrichment of the soil), managing the grazing of cattle, managing the way cows are fed, manure management, fertilizer management (efficient use), improved irrigation efficiency (reduced water usage), reduced fuel use, energy conservation, and improved forest management. The most widely used definition for climate-smart agriculture is from the Food and Agricultural Organization of the United Nations (FAO) which defines climate-smart agriculture as “agriculture that sustainably increases productivity, enhances resilience (adaptation), reduces/removes GHGs (mitigation) where possible, and enhances achievement of national food security and development goals1.”

Current Practice Adoption

Many different agricultural practices are considered climate-smart agriculture. But how many farmers are actually using climate-smart practices on their farms? USDA’s National Agricultural Statistics Service (NASS) and ERS (Economic Research Service) conduct a national-level survey of farming operations called the Agricultural Resource Management Survey (ARMS). Three of the most commonly used climate-smart practices on US farms are reduced and no-till, cover crops, and fertilizer management. Cover crops are crops planted on fields when there is not a cash crop growing. Cover crops keep the soil covered to slow erosion, improve soil health, prevent nutrient losses, and a host of other benefits. Farmers apply fertilizer to their farm to ensure plants have the proper nutrients to grow. The most commonly applied nutrients are nitrogen, potassium, and phosphorus. However, if improperly managed or applied, these nutrients can be lost into the environment through the air or water and cause environmental damage.

Information about the adoption of these practices is available in the ARMS survey data. The chart below shows the most recent survey data regarding tillage in the US.

The survey suggests farmers use conservation tillage on 70% of soybean (2012), 65% of corn (2016), 67% of wheat (2017), and 40% of cotton (2015) acres in the US².

Although conservation tillage adoption is high, cover crop adoption in the US is still very low, but increasing. Cover crop adoption totaled 15.4 million acres in 2017, a 50% increase from the 10.3 million acres planted in 2012. This is equal to only 3.9% of US cropland³. The survey also found farmers use nitrogen at higher rates than the recommended benchmark application rate on 36% of corn acres, 19% of cotton acres, 22% of spring wheat acres, and 25% of winter wheat acres⁴. There is a lot of opportunity for future adoption and improvement when considering climate-smart agricultural practices in the US, particularly in the use of cover crops.

Increased Incentives to Promote Adoption

Farmers can receive financial incentives for the adoption of climate-smart agricultural practices on their fields. The policy focus on climate-smart agriculture could also lead to new opportunities and increased governmental financial support for farmers. One option for farmers is the USDA’s Environmental Quality Incentives Program (EQUIP) which provides financial and technical assistance to farmers and forest managers. The USDA’s Natural Resources Conservation Service (NRCS) administers EQUIP. Through EQUIP, NRCS provides farmers with financial resources and one-on-one help to adopt conservation practices⁵. NRCS has identified a sub-set of conservation practices critical to climate change mitigation to encourage farmers to adopt these specific climate-smart agricultural practices. Another governmental program that can provide financial support for farmers who adopt climate-smart agricultural practices is the Conservation Stewardship Program (CSP). The CSP helps farmers adopt conservation practices on grazing and pasture lands⁶. Farmers also may be able to receive benefits from adopting climate-smart agricultural practices through Federal crop insurance programs managed by the USDA. For example, the USDA’s Pandemic Assistance for Producers initiative will provide a $5 per acre reduction in crop insurance premiums to farmers who plant a cover crop. Illinois, Indiana, and Iowa have existing programs for farmers to receive a payment for planting cover crops as well⁷.

Ecosystems markets are another way of promoting climate-smart agricultural practices and can bring additional revenue to the farmer. Agricultural carbon market programs pay based on carbon sequestered or emissions reductions achieved on farmland and can generate additional farm income and further incentivize sustainable farming practices. For example, Indigo Ag announced payments of $30 per credit to Carbon by Indigo farmers for verified credits produced and sold in both the 2020 and 2021 carbon crop years. Carbon credits are based on the amount of carbon dioxide the farmer either draws down into the soil and GHG (Green House Gas) emissions the farmer reduces above the soil (for example, through improved nitrogen timing) – beyond what was already happening on the farm. One carbon credit is typically issued for each metric ton of carbon dioxide sequestered or reduced. Other ecosystem services have similar pilot programs, such as Ecosystem Services Market Consortium (ESMC) ‘s water quality, water use conservation, and biodiversity credits⁸. These programs try to place a value on the benefits of environmentally friendly agricultural practices on water and biodiversity to generate a saleable credit. Many of these markets and programs are still in the development or pilot phases. There could be additional opportunities in the future for farms to generate incremental revenue by valuing the environmental benefits these practices provide. For example, the recently passed Inflation Reduction Act (IRA) will provide more than $20 billion to support climate-smart agricultural practices. The IRA legislation provides multi-year funding to the USDA’s EQUIP and other conservation programs to promote the reduction in greenhouse gas emissions from farming and for the capturing, sequestering, and storing of greenhouse gases in soils. These government-backed and ecosystem-backed climate-smart ag compensation regimes will eventually create more diverse and valuable revenue streams for farmers and farmland owners and potentially a significant valuation uplift for farmland.

Investing in Climate-Smart Agriculture

Promised Land Opportunity Zone is taking a pragmatic approach to investing in climate-smart agriculture. Recognizing the growing demand for organically produced grains, climate-smart agricultural practices, and carbon farming or carbon sink programs, we identified the Leading Harvest Farmland Management Standard as the most popular set of sustainable farming practices. Leading Harvest was formally organized in 2020 by and for all stakeholders across the agricultural value chain—from farmland owners to companies to communities. Leading Harvest provides assurance programs comprised of standards, audit procedures, training and education, and reporting that are optimized for flexibility, scalability, and community impact. More than 1.3 million acres across more than 100 crop types have enrolled in Leading Harvest’s Standard. Through Leading Harvest’s third-party certification process, farmers and landowners can demonstrate land management and operational practices are achieving a high level of sustainable stewardship, including in the areas of soil health, energy use and climate change, biodiversity, farm labor relations, and waste management.

Promised Land OZ’s first step in this climate-smart investment was to engage Averum, an accredited, third-party certification body, to conduct a pilot readiness assessment of the sustainability standards and requirements of Leading Harvest Farmland Management Standard. This baseline assessment commenced earlier this month with Averum’s site visit to Promised Land OZ’s 4,000 acre McCotter PLOZ Farm in Pamlico County, North Carolina. Averum’s auditor met with Manager John Heneghan, Farmland Partner’s farm manager Liz Strom, and our tenant farm operator Split P Farms. Averum surveyed the Promised Land team on Leading Harvest’s 13 sustainability principles:

Averum is wrapping up its field work and working through follow-up questions and information requests before issuing its readiness report to Promised Land.

Here is a video sneak preview of the sustainable farming practices of Split P Farms we expect to be deployed on McCotter PLOZ Farm over time. Please note Split P Farms has only been on McCotter since the beginning of this year. Split P Farms is a farmer tenant of acreage owned by our property manager Farmland Partners where he has successfully employed no-till and cover crop farming practices. As he says “We like to think that we are the curve and everybody’s trying to catch us.”

In addition, we believe Promised Land OZ’s focus on capital investments that improve the sustainable, productive capacity of the farmland acquired, such as drainage tile and water management, farmland conservation, irrigation equipment, and grain bin storage projects are naturally aligned with Leading Harvest’s sustainable farming principles. We look forward to receiving Averum’s feedback on the McCotter PLOZ Farm pilot assessment.

Conclusion

Promised Land OZ has made multiple investments in climate-smart agriculture on their farms because of a belief that preserving the land for the future is important. Soil, water management, and farmland preservation are prudential investments that we believe will pay off in the long run. Adopting these practices will add value to the land by improving the soil health and resiliency and has the potential to generate additional revenue streams for ecosystem services. Many of these programs and opportunities are still in development, but this will be a topic to watch in the future. These opportunities bring value for all involved: the environment, farmers, and farmland investors. I am proud of the way my family and Promised Land OZ are caring for the farmland under their stewardship, and I know their efforts will benefit the land for generations to come.

References

“What is Climate Smart Agriculture?” https://csa.guide/csa/what-is-climate-smart-agriculture
Claassen et al. 2018. “Tillage Intensity and Conservation Cropping in the United States.” https://www.ers.usda.gov/webdocs/publications/90201/eib-197.pdf?v=6118.1
Zulauf, C. and B. Brown. “Cover Crops, 2017 US Census of Agriculture.” farmdoc daily(9):135, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 24, 2019.
Wade et al. 2015. “Conservation -Practice Adoption Rates Vary Widely by Crop and Region.” https://www.ers.usda.gov/webdocs/publications/44027/56332_eib147.pdf?v=6515.1
USDA NRCS. “Environmental Quality Incentives Program.” https://www.nrcs.usda.gov/wps/portal/nrcs/main/national/programs/financial/eqip/
USDA NRCS. “Conservation Stewardship Program.” https://www.nrcs.usda.gov/wps/portal/nrcs/main/national/programs/financial/csp/
USDA RMA. “Producers with Crop Insurance to Receive Premium Benefit for Cover Crops.” https://www.rma.usda.gov/en/News-Room/Press/Press-Releases/2021-News/Producers-with-Crop-Insurance-to-Receive-Premium-Benefit-for-Cover-Crops
“ESMC Partners with the Conservation Innovation Fund to Create Innovative Water, Carbon, and Biodiversity Credit Opportunities in the Mid-Atlantic.” https://ecosystemservicesmarket.org/esmc-project-mid-atlantic/

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Introduction

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Increased Incentives to Promote Adoption

Investing in Climate-Smart Agriculture

Conclusion

References

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