Welcome to Corn Country

Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks. So each part of your farming machinery, we want to be able to sell no matter what brand of equipment you have. We can upgrade it with new technology to give you new capability, and our target is always 1 to 2 year payback for the farmer. Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard, that's Eric Hansotia. He's the CEO of a company called AGCO. They make planters and sprayers and combine harvesters. And as you just heard, they make retrofit products that you can use to teach old farm machines new tricks. That's important now because farmers are suddenly flourishing. This might be the biggest technology wave for agriculture since the rise of mechanization. In a moment, we'll hear more from Eric and a Wall Street analyst and a real estate executive, but mostly we'll hear from farmers. It's time for a visit to Osage, Iowa. Listening in is our audio producer Jackson. Hi, Jackson. Hey, Jack. Two weeks ago on this podcast, I said I was in Minneapolis working on a story for Barron's, and some listeners have tried to guess, was I visiting this or that company that's based in Minnesota? No, I wasn't. I was on my way to talk with some farmers in Iowa. People of Minnesota, you have a lovely state. And I did visit that Mall of America for my first time. You said you haven't been to Minnesota, right? No, never been to Minnesota. Well, they have the Mall of America. It's about, I'm going to say, 300 floors. That might be— I'm estimating— going to be taller than the Empire State Building. 300. I got lost a couple of times, and there might have been one or two stores that repeated throughout the mall. But I did have a lovely steak and a beer, as I said I would, at a restaurant, Twin Cities something or other. Can't quite remember the name. Anyhow, if you were there in the mall on Valentine's Day with your loved one eating at the steakhouse and you weren't able to get a table and you had to sit at a bar, and then some weirdo came by himself and sat by himself eating a steak at the bar, it was a pleasure spending Valentine's Day with both of you. Have you been to Iowa? Tell me no, because I have, and I'm going to begin lording it over you immediately. I have been to Iowa. How dare you? Tell me about it. Well, I think I've driven across the state 3 times, twice with my family and once alone. And I stopped in Sioux City and Waterloo, but haven't been to the rest of the state. So I'm missing a lot of important cities here. Okay. Impressions? Lots of sort of Cute downtowns. Waterloo has a river running through it with some bridges. You're making Iowa blush. I know. I was surprised. Sioux City actually has a lot of murals downtown that were impressive. So I remember taking pictures of murals. But other than that, lots of corn and soy. And it was about like a 7-hour drive every time. So windmills. A lot of Iowa. Did you see windmills? Wind turbines? I don't know if those are new. I don't remember seeing a single wind turbine. I drove across in 2019. It was the last time I went to North Iowa. And in the late winter there, one of the first things you notice are these towering blades of the wind turbines. There's no state that generates more electricity from wind per acre than Iowa. And the wind blows hardest there in March. But you didn't know that, Mr. Iowa Smarty Pants. I did not. Iowa is, as you say, corn country, but planting in the north can't start until around mid-April at the earliest, depending on the soil temperature. Speaking of which, let me take listeners to J.R. Peterson, who was driving me in his Ford pickup down this dead straight road between two fields. And he was trying to fill in some of the gaps in my farming knowledge, which is no easy task because as it turns out, it's almost all gaps and not nearly enough knowledge. You go farther north, it's harder to do no-till because your winter's longer and you got to be able to get in. And when you till the ground, that ground has got a white haze to it that hasn't been tilled. That soybean stubble, that will not suck in as much sunlight in the spring. It will not warm up as fast, whereas that ground or this ground here that's been tilled, it's got a dark hue to it. That'll suck more sunlight early and it'll warm up faster, which means you can plant faster. J.R. mentioned no-till farming. By not turning the ground over, less soil blows away. Soil quality improves over time, but as J.R. says, unturned soil can take longer to warm up in spring. It can also require some special planting equipment. There are lots of tradeoffs like that in farming. Corn and soybeans are often planted in a rotation. Right now, corn is more profitable, so it might be tempting to grow more corn. But corn needs a lot of nitrogen, which requires fertilizer, and the price for that has shot up. Soybeans put nitrogen into the soil, so rotating crops can save on fertilizer.. It can also help fend off disease cycles. And if you're thinking, I don't consume much corn or soy, you might be surprised. Both are used to feed livestock, including egg-laying hens. They're used in ingredients—sweeteners, starches, proteins, oils. They're used for biofuel, including ethanol. There's a lively debate over ethanol mandates and their effect on food prices, which we'll come to. Iowa ranks number 1 in corn production, followed by Illinois and Nebraska. It's number 2 in soybeans behind Illinois. But hang on, why is a guy who writes for an investment magazine talking about all of this now? Agriculture has Wall Street's full attention. For one thing, farmland has been beating the stock market. Farmland prices in Iowa rose 17% last year and 29% the year before. The average acre recently went for more than $11,400, which is triple the national average. And that includes grazing lands. If we're just talking about choice cropland, parcels in Iowa have been selling for more than $20,000 an acre. One last November went for $30,000 an acre. Maybe that one was an outlier. But what's clear is that farmer net worth is up and outside investors have loaded up on farmland in recent years and are making excellent money. That includes pension funds, but also Bill Gates and Jeff Bezos. There's a real estate investment fund called Farmland Partners, ticker FPI. Its returns, 93% cumulatively over the past 3 years. That's more than twice as much as the S&P 500 index. Crop prices are off last year's highs, but the Department of Agriculture expects them to remain well above historical averages. The same is true for cash incomes for farmers adjusted for inflation. Those are expected to hit healthy levels for a third consecutive year after a decade-long slump. If farmers are making good money, that means they're spending not just on regular inputs like seed and fertilizer, but on new machines from the likes of Deere and AGCO. Those stocks have been outperforming too. You might say it's another boom cycle. The downturn can't be far behind. It's possible, but machinery makers haven't been able to keep up with demand, so plenty of farmers are still buying. Also, data analytics and artificial intelligence are fueling rapid changes in farm technology. We'll come to that too. Back to JR. He was explaining how a Montanan came to farm in Osage. There's an organization called FFA. It used to be known as Future Farmers of America, and I kind of married the the queen of Iowa. She was the state FFA president and then she ended up being national FFA president. And we ran at the same time. So I met her in Kansas City, Missouri, 23, 24 years ago. J.R. and Lisa raised 3 kids and with help from Lisa's 81-year-old dad, run a mid-sized farm, smaller than the 700 or so acres typically needed to be a full-time farmer. If you don't have livestock. J.R. works for a seed and pesticide giant called Syngenta. Lisa works for a startup called Pivot Bio, which uses soil microbes to reduce the need for nitrogen fertilizer. J.R. says, our kids will wear shoes every year no matter what the price of corn is. That's Midwest understatement. The Petersons are doing well. They bought land just before the recent spike in both prices and financing rates. Many farmers do it for the lifestyle, and a few do it for profit. The Petersons are somewhere in the middle. Their son Ethan is 15. He flies a drone during summer to monitor crop conditions. For much of the past 4 years, Lisa was the only woman in Osage to drive big rig trucks to the grain elevator during harvest time. Now there are 2. If something sounds vaguely familiar here to longtime listeners, it's because Ethan once emailed me an investing question. The family listens to the podcast. I asked his parents for permission to play the question. JR and Lisa were so pleased afterward that they issued an open invitation for me to come and learn about corn and soybean farming. I took them up on it. Next, I stopped in on Chris Edgington. He's the chairman of the National Corn Growers Association. That's one of his titles. The other is farmer. He farms about 4,000 acres split among 5 families. People like low-cost food. Governments like low-cost food. Around the world, governments like low cost. They'll even subsidize to get low-cost food. There's a lot of people then that perceive that that means that farmers should get low-cost income. That's not accurate. And that's not fair to the guy that just put his entire life at risk every spring when he started planting. And so the recognition that it's okay for farmers to make profits is something that is still being worked on. Chris has Mexico on his mind. The government there is pushing to ban imports of genetically modified food for human consumption, which would violate the trade agreement that replaced NAFTA. Chris says biotechnology is what has accelerated the rise of no-till farming and other environmentally friendly practices. In other words, he says it's good for the planet. He's optimistic about future demand for corn because developing countries around the world want to add protein to their diets, and corn helps feed animals. He sees corn-based fuel for aviation as a growth opportunity and ethanol for cars as something that can offset oil demand until electric vehicles take over. There's some debate on that last point. Critics of corn ethanol say it's a mature industry that doesn't need government mandates and that it contributed to food inflation when the war in Ukraine interrupted grain supplies. Chris says food as a percentage of disposable income in the U.S. is still well below what it is in Europe, and that farmers who have broken even for years are entitled to good years. He says finding labor is a challenge. Some Iowa farmers have turned to what might seem like an unlikely source: South Africa. There are skilled tractor operators there who speak English, and rising violence has some of them seeking work abroad. Our conversation turned to machinery and what Chris is buying, and he showed me a little box. This is the latest technology. Looks like an iPad. Yeah, for my planter. Okay, I've had— this is the third version of what I've had, and, um, this will basically control the planter. And the planter is where it all starts. I mean, you've got seed selection and you got fertility and you got this or that, but you need to put the seed in the furrow, boom, boom, boom, in at the right depth with the right all the other parameters that come into this and be able to control that. Planting technology, and there's a lot of it out there, almost always improves somebody's bottom line. The device Chris was holding is called 20/20, as in 20/20 vision, and it's made by a company called Precision Planting. That was part of Monsanto. Deere tried to buy it in 2015, but regulators objected, so AGCO bought Precision in 2017. Chris says he was previously using a 2008 Deere planter that he bought in 2014. The new system will be faster and it'll keep his seed spacing more even. Instead of at 4.5 miles an hour, I'll plant at 8.5 or 9. Some people go up to 10, and the seeds will still all be— if I want them 6 inches apart, they will be 6 inches apart. In my old planter, they'd be 6, 4, 2, 4, 6, 6, 6, 6, 2, 4. You didn't get perfect placement. They'll be perfect with a high-speed planter because it's a different delivery system. Accurate placement matters because it can increase crop yields, which drives higher profits. Modern planting equipment can also read how hard the soil is to adjust the downforce leave seeds at the right depth. It can read the organic content of soil in real time and judge how much fertilizer should be added with the seed. Chris's precision planting device is a data and monitoring system that'll work with a new planter on the way from a company called Case IH. But AGCO also sells modules that can attach to older machines and pair with its software and control systems. Here's the CEO of AGCO Eric Hanzotia explaining it. He was traveling in Brazil and we spoke recently via video conference. So you're taking something off that's an old approach, mechanical or hydraulic, and you're putting something different on, a module that usually is electronic, electronically controlled, and has more capability, more precision. The— all of the modules that we sell work in a family, so you can add one this year, and then two years later, add another one, and it fits into that same family. They all fit together like a set of Lego blocks, as an example. They all work through a common user interface, so meaning that a display in the cab. This seems like a strategy that's right for the moment. Deere sells all manner of farm machines and has its own data platform. Both it and AGCO are constrained on manufacturing. A deer dealer in Wanamingo, Minnesota told me it was like someone flipped a switch in November 2020 and that the past 2 years have been among the best he's seen. But he doesn't have as many sprayers as he'd like, or planters. Anyway, only 5 to 7% of farmers buy a new piece of equipment in a given year on average. That leaves a lot of older machines of various makes that could use smartening up, which is what AGCO gives them. Eric says that on retrofit products, it aims for a payback period of 1 to 2 years. Deere and AGCO both showed off new products in January. Deere created buzz with its autonomous tractor at the Consumer Electronics Show. Robocars are something we've been talking about for years, but city streets filled with them are still a distant vision. On farms, however, where there's no traffic to worry about, Planters, sprayers, and combine harvesters are expected to drive themselves in large numbers by the end of this decade. Precision held its yearly winter conference in January and launched a different product altogether, a new data platform called Panorama, which works across platforms from other manufacturers, including Deere. BMO Capital called the event eye-opening for its, quote, rock concert attendance and for how much ground the company has gained on the competition. Larry DiMaria, who covers both Deere and AGCO for investment bank William Blair, is bullish on both and on distributor Titan Machinery. Deere recently traded at 14 times earnings and AGCO and Titan closer to 10 times. DiMaria says equipment makers are in the best strategic position since the rise of mechanization. These companies have distribution. They are in the field touching the data, capturing the data, touching the ground, and as a result, they're able to charge more for their services over time. So in a decade from now, as this has all come to a solution, we're going to see potentially the model shifting to farming as a service, much more level 4, close to level 5 autonomy, probably on the farm. All connected and, you know, more or less managed from, from your farmhouse. Let's take a quick break here. I'll meet you back at the Cedar Valley Seminary. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks. Model portfolios are no longer one-size-fits-all. In fact, 85% of investors want financial advisors to deliver models customized to their individual goals, investment preferences, and tax circumstances. Discover some of the top themes driving the shift and seizing the next model moment by BlackRock. Welcome back, Jackson. You there? I'm still here. Pop quiz. Why do they call a combine harvester a combine? Oh, Mr. I've been to Iowa more times than you. All right, go ahead. Takes a whole NFL Draft combine. Class to push it down the field. Yes, that exactly right. Also, it combines the processes of reaping, threshing, gathering, and winnowing to a single process. But not sowing. You need a planter to sow. Have you been trying to plant with a combine? Because that's really going to affect your yields. Yeah, spent $20,000 on this acre and now I'm just farming dirt. Okay, so Osage is a town of about 3,600, and it hasn't grown really in population since the 1950s. It's a handsome town, and it feels livelier than some of its neighbors. JR was talking about one of those nearby towns, and he helped explain it. He said of that other town, they don't have a school left anymore. Which kind of starts to rip the heart out of the town. I stopped in the middle of Osage to meet with a farmer about seed technology. There's a building there called the Cedar Valley Seminary, and it was built in 1869 by Baptist settlers, and it has dodged the wrecking ball twice, one of them in dramatic fashion. The first time in 1966, The townspeople saved it by voting to turn it into a museum. The second time, in 2016, the space was needed to expand the nearby elementary school, which it was agreed was a worthy cause. The seminary would have to go. But then a group from the town arranged to put it, all 633 tons of it, on a massive raft of dollies and move it 900 feet. And the seminary was saved again. And today it holds a coffee shop and plenty of meeting space upstairs, which is where I spoke with Barry Christianson, who's a farmer and a seed salesman for a company called Pioneer, which is part of a publicly traded company called Corteva. Barry says starting conditions for planting this year are good. What'll matter most is getting the right amount of rain from late June through July. I asked him what's new in seeds, and he talked about genetics. As I look over the last even 13, 15 years that I've been back farming on our family farm, you think about advances. You know, we talked about moisture, having not enough moisture. Well, hybrids are more resistant to drought or can handle that drought better. So in a year where maybe we typically would say we really need X amount of rain in July, well, if we only got half of that, is it a disaster? Well, 15 years ago it might have been, and now not so much. They've just made the plants through traditional breeding, made them more tolerant of high heat, drought, and able to still produce. Pioneer can use high-speed computers to predict the performance of genetic traits and then test the most promising one in labs followed by fields. One result is crops that can resist pests and so don't need as much pesticide. The thought of biotechnology in food makes some consumers uncomfortable. Farmers in Iowa say what matters most is choice. Lower-income families can't afford to pay $9 a gallon for organic milk, they say. Predicting the next turn of the farm economy is easy. Getting it right is the hard part. I met with Brent Warrington. He's the chief information officer at a large farming operation called Saratoga Partnership. It started as a family farm bought in 1958 by a couple that lived 220 miles away. They drove a tractor with 3 kids and 2 box wagons at a top speed of about 10 miles an hour. Saratoga still has the tractor. Today it farms on behalf of farmland owners looking for income without the work. It tends to lease its planters and combines and buy its trucks and tillage equipment. Leasing costs more, but it keeps the equipment newer, and the idea is to avoid a breakdown during crucial planting and harvesting days. Brent says that Saratoga is always optimistic on farming, but that the last couple of years have been extraordinary. So I'd say that the outlook is very positive. I think, you know, this next year could start to turn, you know, the the side to where, you know, breakevens are going to be a little bit more difficult. So I think, you know, '23 still will be a pretty decent, pretty adequate year is what we expect. '24, I could see, you know, there being a lot more risk. And I think there's, you know, natural upturns and natural downturns. But what makes this downturn a little bit different than some of the others is, you know, of course, interest is going up again, and that's a sizable factor. So again, you know, the more leveraged the more interest plays. But I think the other big thing is because of the amount of inflation we've seen, inflation in, you know, whether it's the inputs, which, you know, seed and fertilizer, they'll come up and they'll come back down a little bit. But really equipment, they've gone up drastically and I do not foresee them to come down in price. We've never seen equipment and parts come down in price. What Brent says about rising rates is similar to something I heard on a recent call with Paul Schadegg. Senior Vice President of Real Estate Operations at Farmers National Company. Purchases in the last couple years have been primarily cash. So when interest rates started to creep up, that had very little effect on the farmland market. Because there was not— there were not as many people taking out loans anyway. Now, as we move forward, at some point, it's going to make a difference. And that'll be an equation of the interest rates just just went up, or it's going to be the commodity markets maybe had a hiccup and went down. And so guys are going to have to start borrowing a little money. And then that'll, that'll equate back to where land values will take a little bit of a hit on that. I ended my Iowa visit back with the Petersons. Lisa was saying that she never thought she and JR would end up back at the farm. We also recognized when we came here, it would be somewhat stepping off the corporate ladder for him, right? You're not going to make a move every 3 to 5 years to continue to climb the corporate ladder. You're going to be able to do some things from here, but not everything. And that was a choice that we made for the quality of life for our kids. Our— when we moved here, our oldest was starting kindergarten, so it was perfect timing. And have grandparents 6 miles away is also perfect, that my kids have gotten to be able to have the benefits of family near, as well as figure out how to live on a farm and work. It's a pretty easy way to teach work ethic when there's a lot of stuff to be done. I asked JR if he thinks this is a golden age for farming, and he mentioned Lisa's dad. He started with horses, and when he farmed, it was open cab tractors, and he swore he'd never come back to the farm. And now all of a sudden, he gets into the tractor to go plant, and once he gets it set, he takes his hands off the wheel and the thing drives itself down the field. So you think about that progression, he looks at it and goes, and the golden age of agriculture is tomorrow. It always will be tomorrow. The innovation that continues to come into this industry to be more efficient, to be more sustainable, all the different components of how do we take this unbelievable resource that this country has of our soil and turn it into, again, the greatest solar factory that we have in the world of agriculture. To produce an output that feeds people and powers people and fuels people. It's pretty cool. I want to say thank you to— Jackson, I've got a list of names here. It reads like an Oscar speech. I want to thank Barry, Corey, Chris, Brent, Paul, Eric, Larry, and especially JR and Lisa and the whole Peterson family. And thank all of you for listening. Jackson Cantrell is our producer. His motto is, as you reap, so shall you not apparently have sown in the first place because you've been using a combine the whole time. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, write us a review. If you want to find out about new stories, new podcast episodes, you can follow me on Twitter. That's @JackHough. H-O-U-G-H. See you next week. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks.