It would have been nice if government had been as concerned about debts and deficits five, ten, twenty years ago as they are now – but with a new Congress apparently getting at least a little bit serious about deficit reduction it's time to consider just what this all means for the average family farmer.

The Farm Bill in the U.S. is what's called an "omnibus bill" that comes up for consideration every five years.  By "omnibus," it means that it's a piece of legislation that covers a lot of different issues. The Farm Bill, which largely determines agricultural and food policy in this country, deals with community food programs, commodities, trade, farm credit, conservation, research, food safety, general welfare of rural communities, environmental issue, subsidies and more.

It's hardly news by now that President Obama is planning a five-year freeze on "discretionary spending" – which means virtually everything except defense and the military. One thing that farmers are going to see is a dramatic drop in direct payments. Those who participate in the Average Crop Revenue Election (ACRE) Program are going to see those payments drop by as much as 20%. Now, arguably, these payments, meant to function as a safety net when farms experience a bad year, are paid out every year, whether it was good or bad. The argument here is whether or not such payments should be made if they are not necessary, i.e., Farmer Brown had a bumper crop that year and actually made a profit. We could see ACRE being reconfigured to match payments to farmers who actually are having trouble, and not just being a generic farm welfare program, and on balance that would be good for farmers.

Another potentially positive side to the current Farm Bill - an end to a multi-billion dollar giveaway to a small group of wealthy sugar producers. The sugar subsidy was originally part of the 1981 Farm Act, and provides subsidies and price supports to domestic sugar producers. At the time this seemed like a good idea, but in the subsequent years we’ve seen that it creates major hardship for growers in unsubsidized, and usually extremely poor, countries in the Caribbean. American farmers are simply the best in the world; in a fair competition we can grow whatever crops we need to grow. Subsidies make some sense for new-born industries or where our overseas competitors are subsidizing their farmers, but neither of those are the case for sugar production and hopefully this obsolete giveaway can be ended and the funds redirected towards programs that actually strengthen American agriculture.

There is no doubt that family farmers are going to feel some pain here, but the issues are far from simple. I'll be keeping an eye on them as they develop.

Back in the 19^th century when the "infernal combustion engine" was first invented, there were a few far-sighted individuals, even then, who knew that the world's supply of petroleum wasn't going to last forever.

One of those visionaries was a fellow named Rudolf Diesel.

You may have a car or truck equipped with one of his engine designs, though it's been greatly refined and improved since it was invented in 1892. Diesel's engine was originally designed to run on coal dust, not peanut oil – but as it turned out, peanut oil worked quite well.

It still does – but this is only one of the industrial uses of the lowly peanut. The peanut has a potentially huge role to play in agriculture above and beyond that of a direct food source. For example, the tops of a peanut make excellent hay, while the protein cake residue left over from processing the oil itself can be alternatives to commercial animal feed as well as petroleum-based fertilizers.

It goes without saying that low-grade peanut oil is potentially useful as a fuel for a wide range of farm machinery. However, there are a lot of commercial products that the peanut finds its way into that gets used on the farm. The use of peanut oil in paint and varnish is a less-toxic alternative to turpentine. If you raise horses, that oil makes for a fine leather dressing as well.

Out in the field, pest control with peanut oil is starting to catch on. It turns out that ants and other insect pests are repelled by it.

Some of the more unusual ways in which peanuts are used include furniture and various types of glue – and ladies may find this substance in a number of common cosmetics as well. Green-minded builders may be interested to know that peanut products are starting to find uses in construction materials, including wallboard, abrasives, plastic fixtures and other handy items.

In fact, there is little that peanuts can't be used for. As the world's petroleum supplies continue to dwindle – affecting the many, many products containing oil– farmers along America's Sun Belt may be called on to increase their production in order to fill the void.

The peanut is possibly one of the most misunderstood vegetables cultivated.

It's neither a pea nor a nut – but it's a lot closer to being the former. A member of the bean family (which includes peas), the peanut is often disparaged and the butt of many jokes. "Living on peanut butter sandwiches" is often associated with extreme poverty (after all, commercial peanut butter is cheap, though better, organic brands will cost you a buck or two more). But the fact is (at least for those of us who don't suffer from potentially lethal peanut allergies), peanuts represent an amazing source of nutrition – and more.

A popular misconception is that 19th-Century African-American scientist George Washington Carver invented the peanut. He didn't, although he did find many interesting uses for it. Peanuts go back a long way in agricultural history – over 7,600 years, in fact. It was the indigenous peoples of Peru (not the Incas nor even the Moche – this was several millennia before those peoples emerged) who started cultivating the early ancestor of the modern peanut, which apparently is a hybrid of a couple of herbaceous wild beans (which is known as the Faboidae family).  Cultivation of peanuts spread northward into Mexico, where early Spanish conquistadores found them being peddled on the streets of Tenochtitlan (present-day Mexico City).

The rest, as they say, is history...

Peanut cultivation is normally associated with the American South, where it has been called the "goober" among other unflattering names. However, the U.S. produces only a small fraction of the world's peanuts. The largest producer by far is (ready for this?) China, where the peanut harvest runs over 14 million metric tons a year. India is a distant second, at just over 6 million tons, while the USA comes in third at around 2.3 million tons.

Here's something else I'll bet not many people know: there are a half-dozen types of peanut grown around the world, and dozens more cultivars within these groupings. Most of the peanuts grown in the US today are of the Spanish type. These seeds tend to be smaller, but have a higher oil content. Over the past seventy years however, more farmers in the South have been turning to the "Runners," which taste and roast up better. Virginia peanuts are also growing in popularity because of the large seed.

When it comes to food, peanut butter and candies like peanut brittle are only the beginning. Peanuts are a popular ingredient in Chinese and South Asian cuisine; they're the main ingredient in the popular dish known as pad thai (if you've never tried this concoction, you've missed on one of Thailand's major contribution to the world). Another unique savory dish is known as "African peanut soup," a hearty stew made with peanut butter, chicken, onions, tomatoes and various spices.

Mainly however, peanuts are a nutritional powerhouse, providing more "bang for the buck" than many other foods. Chock-full of vitamin E various minerals and healthy unsaturated fats, they are also 25% protein – the highest of any member of the bean family.

Next week, I'll tell you about some of the industrial and manufacturing uses for this little gem.

I’ve been talking about farmland bubbles and whether the current rise in farm and ranchland valuations (almost a 60% increase over the last ten years) represents a speculative bubble or a genuine increase in value. “Bubbles” are periods of irrational growth in asset prices, where investors and speculators bid up the price of economically productive assets beyond what the returns on those assets would justify.

Here’s the thing. One man’s bubble is another man’s intelligent investment. Some bankers think that we’re in a bubble because land values have increased at a rate higher than the rate of appreciation of other types of assets; other bankers think the valuations are rational because they are supported by the incomes that can be earned from the farm properties. On balance, I think the more optimistic bankers are correct. We aren’t seeing the typical signs of asset overvaluation that are normal for bubbles – exaggerated debt levels, marginal deals by nonfarm players, prices being paid at absurd multiples of expected income.

But in a very real sense, this is missing the trees for the forest. Farmers don’t farm a market, they farm a particular piece of land. Investors in equity index funds might be buying into the success or failure of an entire sector or the market as a whole; farm investors are buying into the success or failure of a discrete farm or ranch operation. If you buy a farm for $10 million, and derive a net income of $1 million a year from that farm, then your farm is profitable and successful – even if land prices change and your farm’s paper valuation drops to $5 million in the first year after you bought it.

To some types of investors, that scenario represents an enormous loss: the investor paid $10 million for something that now could only sell for $5 million. Farmers, however, do not buy farms in order to flip them at a profit; they buy farms in order to use the land, to grow and sell crops. A crash in the land value might make the farm illiquid, it might reduce the farmer’s ability to take out a loan – but it doesn’t make the farm unprofitable. A farm that produces a return of 10% annually on an initial investment is a great farm – never mind what the current asset price is.

We have a tendency to fall prey to the idea that prices have some absolute meaning – that something with a price tag of $5 million is worth $5 million, objectively and forever. But prices in a market economy are not objective values, they are simply a consolidation of a large number of opinions. Your farm is worth $X because the people who might be interested in buying or selling it today or in the near future think “it would bring” or they could get $X. That opinion might be very important, if you’re trying to sell the land. Especially if you are trying to sell it fast. 

But if you aren’t trying to sell the land, or get someone to loan you money against the value of the land, then those opinions are completely irrelevant. Does it matter what neighboring farmers think of your tillage practices, or of how you lay out your orchard, or what color you paint your barn? Nope. All that matters is your soil quality, the yield compared to expectation, and whether YOU like the color. In the case of land valuation, what matters is whether you can make a profit from farming the property, and whether that income is sufficient to pay off any debt you incurred in buying it.

If a farm is viable and makes money, then that farm was a good investment to the farmer regardless of what the outside world thinks of it. Land values may rise and land values may fall, but the smart farmer will understand that what matters is whether or not the farm can operate and make money going forward. If it can, then the asset was appropriately priced; if it can’t, then you paid too much. Farmers are in a better position than investors to understand this because farmers are in it for the long haul, not for a quick buck on a turnover or land flip. You don’t need to worry about whether land values are overinflated or not; all you need to worry about is whether the purchase you may or not be making will make sense for your farming operations.

Previous writing on this topic in 2010:

Dec 6, 2010

http://blog.alextiller.com/_blog/Alex_Tiller%27s_Blog_on_Agriculture_and_Farming/post/2010_Farmland_Values/             

Dec 2, 2010

http://blog.alextiller.com/_blog/Alex_Tiller%27s_Blog_on_Agriculture_and_Farming/post/Farming_on_the_Bubble_%E2%80%93_Have_Farmers_and_Investors_Fallen_Down_the_Rabbit_Hole/