Podcast Episode 52

An Ag Economist Tells All: Critical Topics Impacting the Future of Agriculture

With Guest:
  • Michael Swanson of Wells Fargo, Chief Agricultural Economist

Michael Swanson, Chief Agricultural Economist at Wells Fargo, joins Jamie to explain critical topics affecting agriculture. Listen to learn how current crop prices, the environmental effects of tiling, cash rents, carbon credits & the biodiesel market will impact the future of the ag community.

Episode 52 | 29 min
"I think you're underselling tiling... It's so important to understand the marginal impact of getting the additional yield on the existing spend, instead of getting additional output on additional spending. That has just a huge leveraging effect."

Guest Bio

Michael Swanson’s experience in agriculture and economics make him an expert on topics of commodity pricing, the economic impact of tiling, and understanding and predicting trends in ag. 

Michael is Chief Agricultural Economist and consultant for the largest commercial agricultural lender in the United States, Wells Fargo. Prior to working for Wells Fargo, he supervised a portion of the supply chain for dairy products at Land O’Lakes, including the distribution of more than 400 million pounds of cheese annually. Michael’s experience in the ag industry has led him and Jamie to have many conversations throughout the years about drainage, commodity prices and the economic state of agriculture.


Jamie Duininck (00:02):
This is The Water Table.

Kent Rodelius (00:05):
A chance to hear the agricultural side of these issues.

Jamie Duininck (00:09):
Place for people to go find information and education.

Matt Helmers: (00:13):
Water management is just going to become even more critical into the future.

Jamie Duininck (00:17):
How misunderstood what we do is.

Kent Rodelius (00:22):
I would encourage people to open their minds and listen to this dialogue.

Jamie Duininck: (00:32)
Okay. Welcome back to The Water Table podcast. Today I have a special guest with me, Michael Swanson. Michael is Agricultural Economist and Consultant for Wells Fargo, the largest commercial agricultural lender in the United States. He’s based in Minneapolis. He has responsibilities that include the impacts of energy on agriculture, forecasting, key agricultural commodities, including wheat, soybeans, corn, livestock sectors, such as cattle and dairy and hogs. Prior to working at Wells Fargo, Michael worked for four years at Land O’Lakes. Before working in the dairy processing business, Michael lived in South America for four years, working for Cargill.

His career started in the transportation analysis business for Burlington Northern from 1986 until 1989. Michael received a graduate degree in economics and business administration from University of St. Thomas and St. Paul, and both of his master’s and doctorate degrees in agriculture and applied economics from University of Minnesota. Excited to have Michael with me today. Him and I have talked different times throughout the years about what’s going on in agriculture and just going to talk for a while about agriculture, commodity prices, drainage, water management, all of that stuff. So welcome, Michael.

Michael Swanson: (01:56)
It’s a pleasure to be here today.

Jamie Duininck: (01:57)
Kind of a wild year in wild time right now in agriculture. I know you and I spoke a couple of years ago and my take on that conversation was neither one of us really predicted where we would be today. So tell us a little bit about how you see things right now in the markets and where you think we’re headed in the short term, maybe six months.

Michael Swanson: (02:20)
Well, never bury your lead is the advice you get in the newspaper world. So things won’t stay this good forever. Farmers understand that instinctively. The Ukraine, Russian conflict took some grain out of the world market, put a lot of fear in people’s minds. And so we’re seeing that impact, but it won’t last. But it’s not a bad thing for us to take advantage of the situation, to strengthen our balance sheets, to prepare ourselves for $4,50, $5 corn. But it’s important what we do with our money in the next say 12 to 24 months, whether it’s equipment or land purchases or tiling. Where you going to get your best bang for your buck as you go forward.

Jamie Duininck: (03:06)
Talk a little bit, we’ll just jump around here a little bit, but you mentioned Russia, Ukraine war. We have no idea how long that war will last, but during that war, will there be things that will solidify that make things less volatile or is that unknown? So will we see more stabilization, just given this goes on 12 months, even if the war continues or is that going to be volatile until the end?

Michael Swanson: (03:40)
I think what we’ll see going forward is that people will look for more resiliency in their supplies. You don’t want to be at risk due to a Russia invading somebody else in the EU, if you can avoid it. So there’s going to be more supplies in Brazil, Argentina, Australia, other areas. Even in MENA, Middle East, North Africa, we’re seeing investment in more pivot technology so they can grow crops locally. So what’s good for us right now, might lead to more supply three or four years down the road that might actually be depressing for prices. So people don’t like risk. They don’t like uncertainty. And so they’re going to make more investments to eliminate it on a go forward basis. Because I don’t think Putin’s done being a bad actor.

Jamie Duininck:(04:28)
That’s interesting. And I think some of the certainty and like when you say strengthening balance sheets and where we’re at today, some of that certainty just comes in our crop insurance programs the way they are now. And when prices are high in the winter, there’s some certainty for the rest of that calendar year, for sure, that things are going to be okay. And so that probably drives some of our spending. Talk a little bit about that.

Michael Swanson:  (04:56)
Well, we’ll be sitting a cash rents here in October, November. That should be some pretty interesting conversation with landlords. We’ll be looking backwards saying how much money farmers made and asking for a bigger piece of it. Farmers are going to be looking forward at the December contract for 2023 saying, “Hey, it’s only at $5,25 its not $7 corn. Let’s not set our cash rents based on $7. There might be some pretty tough conversations between all of those things going on in there. So that’s part of it. And so crop insurance is a very important piece, but you got to do something about it. If you’re going to buy the fertilizer, you’re going to pay the cash rent, you better do some forward selling to make sure it works for you. But that’s going to be tough. Farmers don’t like selling ahead when they don’t have the crop in the ground, even if they’re going to put the crop insurances against it.

But it’s interesting. Probably the biggest thing right now is land sales. I know you hear a lot about that in your household. So think about it. We’ve seen land just jump up 4, $5,000 an acre in some parts from Minnesota since 2019, 2020. And is that good spending? Is $4,000 more for an acre ground that you wouldn’t buy in 2019. That’s going to be a tough decision. If you’re just adding a little bit, maybe it works for you, but I think the land piece is probably the biggest decision making farmers are facing right now. If we can expand, should they expanded at these prices? And if not, what can they do to get more crops? And you certainly want. You make money by selling corn and soybean beans, and it’s easy to tie the land to the sales, but what about the yield that you could be getting if you did something else?

Jamie Duininck: (06:41)
Yeah. And you said a lot in that little time though. Let’s break that down a little bit and just back up around the cash rents and how that correlates to land prices is really changed, because the land has jumped up so much and cash rents. Yeah, they’re higher than probably they’ve ever been, but they haven’t necessarily kept pace with what an acre of land is. It used to be if I’m an investor and I can get 4% in cash rent of value, then that’s a good deal. And now we’re seeing that drop way down maybe 2%. And to me, this doesn’t make sense. It doesn’t make sense why people are willing to pay the kind of dollars they are per acre of farm ground.

You’re hearing things in Northwest Iowa above $20,000 an acre, you’re hearing things here in Kandiyohi County, $13,850 is the highest I know of sold in the county, which still is $20,000, there’s $7,000, $6,000 there. But it doesn’t matter. It’s still for the area is extreme. And so how do you make anything of that as an economist and where you go from there? We’re going to get into the tiling part, but just purely on why are they purchasing that at those prices and how are they making sense of it?

Michael Swanson: (08:11)
It’s interesting because nothing makes sense. We have a 1.8% yield on tenure treasuries, and we have 10% inflation rate. Who in their right mind is about hold onto a 1.8% yield on government debt when you have 10% inflation. Now we have short term rates jumping up. So we might see CD rates at some of these banks go up with it even higher than the 10 year treasury. You might be able to buy a two year CD or five year CD and might get two and a half, three, 4% for it, depending on how hungry they are for your funds. And that’s going to put pressure on the land market, because if I have more liquidity and less risk in a CD, then why would I buy that ground and have to deal with the headache?

But for the last four or five years, you couldn’t get any money for your interest on anything that you were holding. So people were like, “Okay, I guess 2% makes sense if I get zero on a CD”. So they were willing to take that. But with the change in the interest rates, will they take it, will they think it’s a good deal going forward? I think they might start to reevaluate that, especially if these interest rates stay up for a couple years and they say, “Hey, there’s a better payout there somewhere for my million dollars that I have in my pocket”.

Jamie Duininck: (09:24)
When they couldn’t get anything they were out and you can get 2% in the land market, there is also looking at, “Well, the land’s going to over time, it’s going to increase in value. So my 2% is more than 2%. I don’t know exactly what it is. I’m guaranteed two, but the land’s going to go up in value too, where the CD is just what it is”. If it’s a half a percent or whatever, but now when the land is at all time highs, is it going to continue to increase in value too over 10 years? That has to come into question.

I also think there’s this phenomenon of, and we did a podcast on this just a few weeks ago, but if high net worth individuals buying land, and I think that’s driving some other people. Well, if Bill Gates is buying land, for instance, he’s a smart guy. I got a lot of money too. Maybe I should be having at least some of my portfolio in land, which makes some sense. But I think that’s also driving all of this market and the pricing to the point where something seems like it’s going to have to change.

Michael Swanson: (10:31)
And it’s interesting timing. You should buy something once out of favor, if you really believe in it. So you should have been buying farm ground aggressively in 2018 and 2019 when everybody was down in the dumps about it. Maybe the joke is if you want to double your money is to fold it over and put it back in your pocket. So let’s just say that if you’re looking for a good investment, it’s not now. I’m never going to argue against farm ground as an asset class. It’s great. It has productivity. You could make money with it, but timing is important. So not now, so maybe four years from now, when we’re back to $4,75 corn, $4,50 corn, and people are down in the dumps about farming, you should be looking more aggressive at buying farm ground, but today’s not the day in my mind.

Jamie Duininck: (11:19)
Right. Right. And that comes back to again, when we started this little segment here on farm ground and pricing, but let’s just use the example of a farmer that owns 2000 acres of farm ground and wants to grow, have some kids looking at buying land. But if you decided to manage the water on that, by tiling all that 2000 acres, you’re going to see a yield increase. And it depends on, but let’s just say that there’s no water management happening on that ground. There’s no random tiling. There’s nothing, you’re going to see 25, 20 to 30, let’s say, percent yield increase on ground like that. And think of it that way. You’re going to do that for a thousand roughly, let’s say $800 to $1,500 an acre, depending on topography, things like that.

But talking, let’s just take the high end $1,500 bucks an acre to do 2,000 acres, you’re going to be able to increase your yield on by 25% on 2,000 acres, rather than buying another quarter, so to speak. And I just don’t think that that many people think that way. There are farmers that absolutely are saying, “I’m going to make sure that my farm ground is managed to the utmost potential before I buy another acre”. But that isn’t the norm.

Michael Swanson: (12:51)
And I’m going to say something odd. I think you’re underselling tiling here.

Jamie Duininck: (12:54)
Well, thank you.

Michael Swanson: (12:56)
Because the same 2,000 acres you’d have the same equipment, same seed rate, typically same NPK prescription over it, same crop chemical. And then you get that 20% more yield, because it performs. Instead of buying another quarter, like you said, where you have to expand your seed spending, your equipment spending, your NPK spending to get those average yields. And so it’s so important to understand the marginal impact of getting the additional yield on the existing spend instead of getting additional output on additional spending and that has just a huge leveraging effect. So I think you’re underselling tiling on there, Jamie, which is strange.

Jamie Duininck:(13:45)
I’m glad that you explained that better. Absolutely. I wanted to share it that way and get your response, but that really does lead into another point and that is around just the environmental side of this. And if you’re getting more yield on the same acres, that’s less chemical. It’s the same amount, but you’re growing more yields instead of buying more ground and doing it. It’s less carbon footprint, less fuel being used in those tractors, all of that. And I think our industry on the water management side has to continue to tell that story in a good way, because we’re growing more with less. But talk a little bit about what you’re seeing and what you know about the carbon markets, where that’s headed. Is there going to be an opportunity? Is there any opportunity for farmers when it comes to the carbon sequestration?

Michael Swanson: (14:47)
There could be an opportunity, but I think the market outside of farming just doesn’t know numbers. They don’t appreciate it. They say, “Oh, maybe we’ll give them $10 an acre for carbon credit, but a $5 corn. That’s two bushels”. So why would I fool around for two bushels? I can lose two bushels from a miss adjusted combine head, and I need to say, you got to give me a real incentive to want to do something about this, whether it is no-till or limited till or whatever it is. So they have to come to that understanding that if they want a farmer who has a thousand dollars an acre revenue to change behavior, they’ve got to start talking a hundred dollars an acre of carbon credit before they’re really going to start listening and changing practices. They just don’t know the dollars yet. And over 180 million acres of corn and soybeans, they don’t want to write those types of checks.

Jamie Duininck: (15:35)
Yep. Yeah. And yet they don’t want to write them, but yet it still is probably some of the cheaper ways we can actually attack this problem than when you start talking about some of the urban issues in some of the industrial issues, still the agriculture and rural America areas are going to be expensive, but not as expensive as a challenge of some of the other industrial pollution.

Michael Swanson: (16:05)
It brings up an interesting concept. You got to deal with the pretty sacred cows at the same time. They don’t want you to touch groundwater. They don’t want you to manage water, but they want you to reduce carbon footprint and crop performance is all about having the right amount of water at the right time. Tile is great for getting rid of excess when you don’t need it. But irrigation is excellent for putting it on when you need it. But so many people in the urban area don’t want you ever pump water for irrigation, which is also a huge yield enhancer because they say groundwater is sacred. I’m like, “Why is it sacred? Why can’t we use groundwater that’s going to get regenerated, recharged over the next year from other things”? But they don’t see it that way.

Jamie Duininck: (16:49)
Yeah. So it’s interesting, you mentioned that around some of the water issues and we in our industry have some challenging issues with nitrates. Nitrates are there, but pipe is the conduit to get them to the rivers and streams and eventually the Golf of Mexico. But this plays right in this question about what you’re talking about. But there’s some conversation happening in the State of Minnesota around having a certain percentage, I’ve heard as high as 70% of our farm ground being no-tilled by 2030.

And what the part of the conversation that hasn’t happened yet, is if you want a no-till you’re in upper Midwest like this, you better be managing your water. Because if you go into a fall that’s wet on the weather side and you don’t till that ground, now that ground isn’t black and you get a late spring, like we’re having almost every year now, I don’t know if that’s something to do with climate change or not, but the springs are coming later. The falls are staying longer and you’re not going to have ground that’s suited to plant if you don’t have that ground black, which means you have to have the proper water management system in place. Then you could leave it no-tilled.

But I don’t think that when you talk about the people that don’t understand water, they also, they want to have no-till. They want to have this carbon sequestration, but they don’t always understand everything that goes with that, which you’re probably going to need to have your ground managed from a water perspective and have most of it tiled in order to make that work.

Michael Swanson: (18:40)
So we would need to have our industry representatives facing the legislature and telling them a consistent story because they hate inconsistency. But if you say, if this is what you want, this is what it costs and do you want it at this price? Or do you want something else off the menu? And they’ll deal with that. They have money, we all pay taxes. But everybody wants the money, but industry representatives from agriculture have to be united. They have to say it, “Here’s the menus that you can choose”, and have to be reasonable and honest about it. And we’ll get progress incrementally if we have this dialogue. The old saying is if you’re not at the table, you’re on the menu and let’s not be on the menu next time the legislature feeds.

Jamie Duininck: (19:25)
Yep. That’s a good point. That’s a good point, because we have so much to offer, but it needs to be understood. So it needs to be understood. You know, Michael, some of the times in the past, when I’ve heard you speak, you’re more of a cautionary tone. Let’s just say at times, but give me where you think things are headed, not just in the next six months, but we talked a little bit about that, but on a longer term from where I sit, just being part of this industry, not an economist of any type, but just looking at this and thinking about it. We had a disruption with the China US relationship and Trump supporting where we didn’t see that coming on soybeans. Then we have other things happen, other dynamics in 2020, COVID, that kind of thing.

Then we have now the Russian Ukraine war. So this thing’s been prolonged by three things that we would’ve never seen coming in 2018, 2017, whenever that started with China. So because of my fear as just a consumer and working in this industry, because of these three things that we didn’t see coming all happen simultaneously, which has all helped keep the commodity markets up. What happens on the backside of that? And I don’t know when is the backside? I don’t know if you have any crystal ball, but then what doesn’t necessarily matter when it is, but what happens when it happens?

Michael Swanson:  (21:02)
Well, let’s talk a couple secular trends that are going on. Domestically, when we’re the most important market for ourselves, most consumers’ highest money, our population growth that continues to slow. I mean, we’re at 0.5, 0.4 right now, depending how you’re reading it and that’s well below yield gain. So why would you expect premium pricing when you have more yield gain in your population growth? So we have a long term secular challenge for pricing around population and yield productivity. And then the other one is the world’s richest jerk is Elon Musk, but he’s bringing our technological revolution. There’s going to be more battery technology. And it doesn’t matter that you don’t want to drive a battery powered tech car in Traverse County, Minnesota. In Hennepin County, 95% of the people could drive a battery powered vehicle all day long and never have a problem. So we’re going to see far lose market share via the ethanol, which is a third world market going forward.

So we have a couple of very big secular trends pushing against the value of crops in general and corn in particular. Now we hear about renewable biodiesel, aviation fuel. There might be some growth in there somewhere, but it’s not here yet. So we’d have to be realistic. We had $3,50 corn from 2014 to 2019. Maybe we get $4,50 corn as a new average, but it’s not $7. So don’t set up your living standards and your balance sheet to deal with $7 corn on ongoing basis. If you can’t make money at $4,50 and $5 with good management, you really have to consider where you want to go in the farming side.

Jamie Duininck:(22:56)
Yep. Good point. And I noticed you didn’t give me your crystal ball on when this all happens, which is fine. I don’t have it either, but how you explain that, I think we can all feel it, but you explain it in a way that this just can’t continue with these metrics the way it is. And do you have any insight on, because as you’re talking about ethanol and that makes complete sense to me with electric cars and I don’t have a lot of experience with them, but I happened to be in Phoenix at a meeting in May and had a college friend come pick me up and he had a Tesla and first time I’d ridden in one, maybe not first time, but close to it.

But if I lived in a city I don’t have much desire to own a electric vehicle where I currently live, but if I lived in a city, makes complete sense to me where you would just pretty much plug it in at home, never go to a gas station or a electrical station, just do it at home. So that makes a lot of sense. But what I’m curious about more is this biodiesel market and how that could positively affect our soybean pricing long term?

Michael Swanson: (24:11)
Well, definitely it’s a good demand point for us in agriculture, but it has a couple of wrinkles in that we should consider. First off, when you crush a soybean it’s 20% oil, 80% meal. So if you’re crushing it just for the oil, what do you do with the meal? What does it do with the meal pricing because the crusher has to sell both pieces to make the money. And we’re struggling with that right now because we took the cart which was oil and put it in front of the cause which was the meal. So we’re trying to figure out how this whole thing is going to work. And secondly, do we want to grow 120 million, 125 million acres of soybean every year and only 75 million acres of corn? Is that going to work for us with rotation, with other issues? So it’s great to talk about renewable biodiesel as a next demand point, but you better have some answers for the crush and the rotation.

Jamie Duininck: (25:08)
Yeah. I’m not familiar with that, but what are some good places for that meal? Is that a good feed product or is it have to be in smaller percentages or-

Michael Swanson: (25:21)
Oh, absolutely is a great feed product. I mean high protein soybean meal is been the rocket fuel of poultry, pork for years. And we have the big export market. We can take a lot of high grade, [inaudible 00:25:35] meal out to the market and we have a great demand for it, but there is a limit to what they want right now. They certainly want more over time. But if you come at them right now with 20% more, they have to discount her to get rid of it.

Jamie Duininck:(25:49)
Sure. Makes sense. Well, good. I think we talked about a lot of stuff here in a half hour and went around all of the issues around the globe a little bit. Anything else you want to share with us you think that our listeners need to know what’s going on right now and some perspective?

Michael Swanson:  (26:10)
I’ll just say one thing about getting big. There’s a myth out there that you have to farm 10,000 acres to be competitive. When we look at the data from the University of Minnesota, we see that people can make it work on almost any size acreage. Now they might need to do off farm income, which is not bad. I mean, what’s wrong with benefits in the paycheck. But you could basically make any size farming operation work if you want to be flexible. So if you’re younger and you’re starting, it works that way. If you’ve got a skill set that’s in demand somewhere else, it can make it work that way. So just don’t believe the myth that you have to get to 5,000 acres to be competitive. You better off picking your battle that you want to fight. So I’m very optimistic about the future of agriculture as people find their niche and the technology that works for them.

Jamie Duininck: (27:01)
Yeah. I’m glad you brought that up because you do hear that so much and there’s so much competition and some of the smaller guys are just, they don’t have that next generation coming home because of their perception, not because of the reality of that. And so I think I sit in the same place where I’m concerned about when this thing changes because of these disruptions that have happened. But I also, from a long term perspective, am super bullish about where we go in this rural American economy and with agriculture and what we do here at Prinsco and in the industry as being a big part of that to continue to provide better yields through managing water and doing it in a way that can do a lot of good for the environmental markets too, environmental concerns. So excited to continue conversations with you. We’ve been doing this different conversations for probably 10 years now, and I really appreciate your perspective and what you have to offer to the industry. So thank you for joining The Water Table today, Michael.

Michael Swanson: (28:15)
It was a pleasure. Let us hope everyone finish up the year with perfect weather and great yields.

Jamie Duininck: (28:19)
Yep. And some and safety to go along with it out on the farm. So thanks for joining us and we’ll see you another time on The Water Table.

Michael Swanson: (28:28)
Sounds great.

Jamie Duininck:(28:34)
Thanks for joining us today on The Water Table. You can find us at www.watertable.ag, find us on Facebook, you can find us on Twitter and you can also find the podcast on any of your favorite podcast platforms.