Each year, prognosticators put together trend forecasts for stakeholders in almost every industry. But one of the biggest pitfalls to such measurements is that few companies and individuals are altering their budgets and business strategies well into January. For this reason, monitoring trends in the month’s first year as they pertain to the concluding months of the previous year can provide a better expectation of the next 11 months on the calendar.
1-AgTech Investment is Absolutely Booming
The AgTech gold rush essentially took off after Monsanto purchased Climate Corp. for $1 billion. In response, John Deere, Syngenta, BASF and other companies established their own technology suites. Whether the buy or build model is a better business decision for the companies, time will tell. However, it is clear that Silicon Valley, venture capitalists, and private equity companies are poised to continue massive inflows in pursuit of the next big technology startup, although, the bulk of AgTech companies provide returns of 2 to 3.5x at best, according to bioeconomy executive Vonnie Estes..
That’s a stark change from yesteryear. Prior to 2012, little money flowed into AgTech. Investment hit roughly $150 million in 2012… but in 2014 the sector exploded to a whopping $1.8 billion. Money is increasingly flowing into new software programs, drone technologies, big data, IOT, mobility, and life sciences. As farmers attempt to deal with falling prices, the rise of analytics has been central to the maximization of yields. From sensors and improved irrigation management, to application equipment, farmers have boosted their ability to plan and improve the health of their crop.
The investor community continues to keep an eye on new data technologies used to help boost agricultural production and improve yields. As noted in a recent profile of University of California-Davis’ Sustainable AgTech Innovation Center (SATIC), the collaboration of academics, engineers, and investment professionals is providing a boost to new technologies and generating excitement about the industry’s abilities to address steep challenges in water conservation, production, spoilage, among others.
In fact, the school’s AgTech Innovation Fund is poised to raise $50 million in capital for technology startups.
But it’s not just California getting in on the action. For example, The Yield Lab, a new St. Louis-based ag-tech accelerator program, offered five $100,000 equity-investments to five startups in January. More than 100 companies applied for grants, signaling that entrepreneurs around the United States are focusing on the industry’s challenges.
2. Curbing the Dairy Herd
After last year’s boom, dairy prices are on the decline as U.S. exports are crashing. Simply put, there is too much supply on the market right now. Investors can expect lower prices over the next six months until the glut is reduced. That isn’t a good sign for dairy farms, which will attempt to keep their heads above water.
According to Family First Dairy Cooperative in Madison, Wisc., milk prices are expected to fall to $13.50 per hundredweight in March. That’s a huge decline from peak 2014 levels of $25. Not only is there a lot of milk on the market, there is also a huge number of cows. The number of dairy cows in 23 major dairy states hit 8.59 million at the end of 2014. That is 93,000 more cows than in November 2013. Dairy producers may slaughter some stock like they did in 2009 to reduce feed costs.
Milk exports surged as farmers attempted to keep up with global demand. Now, the U.S. is awash in powdered milk thanks to China’s decision to stockpile supplies and Russian trade sanctions against the West.
3. Heavy Manufacturing Concerns
The heavy manufacturing sector is undergoing a significant number of changes. But producers of tractors and other machinery are dealing with a significant inventory of used vehicles on the markets. Large producers are concerned about farmer purchases in 2015, with a significant focus on mid- to large-scale operations.
However, growing popularity of leasing remains a concern for companies particularly at the regulatory level. With changes to the section 179 tax deduction of the tax code, decisions to purchase or lease are likely to weigh on farming operations. While Congress restored the expense deduction to $500,000 and the Accelerated First Year Depreciation (AFYD) to 50%, whether farming operations will revert to purchasing over the increasingly popular leasing alternative will be an important question in 2015.
4. How Low Can Corn Go?
It’s not just the dairy sector that is struggling in the wake of falling prices. Corn prices soared above $8 per bushel in 2012. Today, prices have fallen below $4.
Farmers have been hit especially hard by falling grain prices. In fact, farmland prices in the Corn Belt fell for the first time in 28 years, according to the Federal Reserve. Over 2014, corn prices slipped 14% thanks to a surge in production. Last year, American producers delivered 14.2 billion bushels.
But 2015 is going to be just as difficult for the sector. With prices below breakeven, farmers must wonder how they plan to sell corn at a profit when much of last year’s crop remains unsold. With a huge amount of stored corn on the market, farmers are likely wondering how they will be able to finance the 2016 crop.
With financial challenges on the horizon, some farms may not survive this ongoing price correction
5. Worries in the Cattle Sector
Low prices in corn are positive for the beef industry, as feed prices are set for a decline.
In 2014, the U.S. cattle herd hit a 63-year low, fueling higher prices. However, high beef prices have a number of financial professionals concerned about who will be left holding the bag should a correction hit the market.
For some in the agricultural finance industry, it’s not a question of “if” but “when” prices will decline and affect lenders. Falling feed prices have a historical influence on rising herds. Agri-lenders anticipate a similar herd expansion from historic lows, which could affect their financing.
In early February, Purdue University agricultural economist Chris Hurt said that the combination of abundant feed and higher prices have led to the U.S. herd’s expansion for the first time in 2007. Prices may remain heightened in 2015, but a correction appears to be on the horizon and on the minds of the financial sector.