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November 2011 Archive for Farmland Forecast

RSS By: Marc Schober, AgWeb.com

Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.

Rural Economy at Highest Level Since 2007

Nov 18, 2011

The rural economy showed a strong rebound in November and is now at its highest level since 2007. The index has remained above growth neutral for nearly two years, driven by the strong farm economy. Farmland values continue to rise as farmers reinvest their cash flows from a record income harvest in 2011.

The Rural Mainstreet Index (RMI) advanced to 58.4 from 52.9 to remain positive for the third straight month and well above the 53.3 it posted 12 months ago. The economic confidence jumped to 57.5 from October’s neutral 50.0.

RMI November 2011

Creighton University economist Ernie Goss said, "After softening for several months, the Rural Mainstreet economy appears to be once again growing at a very healthy pace. The farm economy is clearly outpacing the nonfarm economy."

Agriculture

The farmland price index rose to 75.4 in November from 66.9 in October and is at its highest level since April 2011. This marks the 22nd straight month the index has been above growth neutral. The farm equipment sales index increased to 68.4 from October's 63.1.

Farmland Price Index November 2011

"After losing a bit of its economic steam, farmers and investors are once again driving up the price of farmland at a rapid pace. Likewise, farmers are continuing to purchase farm equipment at a swift pace,” said Goss.

Bankers were asked to identify the biggest threat the rural economy for 212. Roughly half (49%) of the respondents indicated that low agricultural commodity prices remain the biggest threat. 18% were worried about farmland values and 16% identified changes in federal alternative energy policies.

Banking

The loan volume index decreased to 44.2 from 57.3 a month prior. The check deposit index increased to 81.7 from 71.1 in October and the certificate of deposit and savings instruments dipped to a weak 41.7 from 44.9 last month.

Bankers also noted that the primary factor limiting their lending was the lack of potential demand due to the strong farm economy. Respondents also noted that regulatory concerns continue to limit their lending ability.

October's job index decreased to 53.4 compared to 56.4 in October. “Year over year job growth for Rural Mainstreet communities is almost twice that of metropolitan areas of the region. Even with the recent strength, employment for Rural Mainstreet communities is down approximately 2.8 percent from pre-recession levels,” said Goss.

Survey

This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.

- Colvin

For Daily Updates Visit http://farmlandforecast.colvin-co.com

WASDE Report: Corn and Soybean Production Fall

Nov 09, 2011

The USDA updated the U.S. and world balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report today. The USDA stunned the market today by decreasing U.S. corn yields, although reduced U.S. corn demand helped settle the bullish tone.

Corn
Slightly bearish news from the USDA as corn production declined by 123 million bushels due to the national average yield forecast at 1.4 bushels per acre below last month’s estimate. Yields are at 146.7 bushels per acre, the lowest since 2003/04, due to extreme heat and humidity during pollination. Despite the reduced production estimate, this year's crop is still on pace to be the third largest on record because of elevated planted acres.
Due to the smaller crop and decrease in broiler production, feed and residual use was lowered by 100 million bushels. Ending corn stocks for 2011/12 were reduced by 23 million bushels due to a decrease in production and exports remaining unchanged. The USDA forecasted the season-average farm price remained unchanged at $6.20 to $7.20 per bushel.  
We were expecting a reduction in exports this month due to greater competition from the seaborne market, but believe that China's import of 900,000 tons in October of U.S. corn could have offset a potential decrease in U.S. exports.
Global supplies for 2011/12 are projected lower due to the reduced U.S. corn production. Global corn production is lowered for a number of countries and the biggest reduction coming from Mexico with a decrease of 3.5 million metric tons. Mexico's decrease in corn production is a result of a late start to the summer rainy season and an early September freeze in parts of the southern plateau corn belt. Increased corn production in China and EU-27 have partly offset reductions in Mexico. China's estimated corn production was increased by 2.5 mmt due to increases in area planted and yield. Production in the EU-27 has been raised by 1.9 mmt generally reflecting increased output from France, Romania, and Austria.
Soybeans
The USDA decreased U.S. soybean production by 14 million bushels to 3.046 billion bushels based on decreased yields. Yield estimates declined by 0.2 bushels per acre to 41.3 bushels per acre.
Domestic exports decreased by 50 million bushels to 1.325 billion bushels due to a slow export sales pace through October. The slow sales pace has resulted in an increase in ending stocks by 35 million bushels to 195 million bushels. The U.S. season-average price range for 2011/12 is projected at $11.60 to $13.60 per bushel, a $0.55 decrease on both ends of the range.
Global oilseed production was increased by 1.3 mmt to 454.8 mmt. A quarter of this increase is due to global soybean production with increases in Brazil, Paraguay, and Mexico. Brazil's increase was due to improved yields related to rapid planting progress and strong early season moisture throughout the country.
Wheat
U.S wheat supplies were lowered by 9 million bushels due to updated production estimates from the September 30th Small Grains Report. Significant acreage remained unharvested in early September, lowering production estimates for hard red spring wheat and durum. Domestic use is unchanged for all wheat. Wheat ending stocks were in line with production, a decrease of 9 million bushels. The season-average price is projected at $7.05 to $7.75 per bushel compared with $7.10 to $7.90 last month.
Global supplies are projected at an increase of 2.6 mmt. This is due to higher production in Kazakhstan and EU-27.
Russian wheat exports have dominated the global market due to undercutting other sellers with low prices. Although Russia has not banned exports as they did last year, they are planning on limiting exports due to nervousness of the U.S. government crop report. If Russia limits their exports, expect increased U.S. wheat exports along with prices.
Overview
The harvest is coming to a close in the U.S. and as of November 7th, 87% of the corn crop has been harvested. Disappointing yields in 2011 due to difficult weather in the growing season have now put the stocks-to-use ratio at 6.7%, which is the lowest since 1995/96.
The grain markets will be closely watching Chinese imports over the next few months and prices will hang on their every move. China’s rapidly deteriorating inventories may increase 2011 imports to levels above 5 million metric tons.
- Colvin

For Daily Updates Visit http://farmlandforecast.colvin-co.com 

Understanding the Relationship Between Ethanol and DDGS

Nov 08, 2011

The debate about the use of grain for food vs. fuel continues, but should there even be a debate? Critics of ethanol argue that the large amount of corn used in ethanol production is a poor use of the food supply. Congress recently pointed to ethanol as the major contributor to increased prices of feed and food.

The topic of ethanol is not as cut and dry as one would imagine and many critics are forgetting about an important bi-product of ethanol production. When corn is processed at an ethanol plant, ethanol is not the only product; 1/3 of all corn gets recycled into a rich and nutritious feed for livestock, which is called DDGS (Dried Distillers Grains with Solubles).

Ethanol at its basic form is an alcohol, the same type found in beverages. It is also used in pharmaceuticals, paints, lacquers, food, personal care products, and cleaning products. To produce ethanol, only the starch is used from corn and grain sorghum. The remaining nutrients of protein, fiber, and oil are by-products called DDGS and are used as livestock feed. Ethanol plants make up 98% of DDGS production in North America and the other 2% comes from the alcoholic beverage industry.

According the University of Minnesota, "Historically, three types of residual co-products were produced: distiller's dried grains, distiller's dried solubles, and distiller's dried grains with solubles. Once the fermented mash was distilled, the soluble portion of the remaining residue was condensed by evaporation to produce condensed distiller's solubles. The course material remaining in the fermentation residues was the Distiller's Grains fraction. Both of these fractions were subsequently dried to produce either distiller's dried solubles (DDS) or distiller's dried grains (DDG)."

Ethanol plants dry and blend these two residues to produce DDGS to be used in the feed industry. Approximately 1/3 of grains that are used in ethanol refining come out as DDGS. A bushel of grain makes 2.7 gallons of ethanol, 18 pounds of DDGS, and 18 pounds of carbon dioxide. 80% of DDGS are used for ruminant diets (cattle and sheep). The remainder is fed to poultry and swine due to the excellent nutritional value of proteins, energy, minerals, and vitamins.

Due to its high nutritional value, one metric ton of DDGS can replace 1.22 metric tons of feed consisting of corn and soybean meal. In one bushel of corn used for ethanol production, 32% of it comes out as DDGS, but that amount equates to a 39% nutrient output due to the DDGS high concentration.

Countries such as China, Mexico, and Canada have an increasing demand for DDGS due to the high nutrient content. U.S. exports of DDGS stand year-to-date at 5.25 million metric tons, and is on pace to ship almost 8 million metric tons by the end of 2011, according to Ethanol Producer Magazine.

Forgetting About DDGS

There has been damaging misconceptions of the relationship between corn supply and ethanol production, as DDGS were not taken into consideration. So damaging, the USDA altered the World Agricultural Supply and Demand Estimates (WASDE) report to include DDGS.

"For the first time, the April 8th monthly report on U.S. corn supply and use specified that corn used to produce ethanol also produces by-products such as DDGS, corn gluten feed, corn gluten meal and/or corn oil. In addition, the category that was previously labeled 'ethanol for fuel' now says 'ethanol & by-products,” noted Ethanol Producer Magazine.

Previously, the report only took into account the gross usage of corn for ethanol, implying that all corn going to ethanol production resulted in ethanol fuel. Geoff Cooper, vice president of the Renewable Fuels Association said, "This has led to the inflated claim that the ethanol industry is using nearly 40% of the corn supply when in fact, if coproducts are taken into account, only 23% of the 2010-11 U.S. corn supply and 3% of the global grain supply will be used for ethanol production.”

The DDGS taken from ethanol plants make a positive impact on the feed industry. According to the Renewable Fuels Association, the ethanol industry will produce more than 39 million metric tons of animal feed in 2010-11. To put this in perspective, that is enough to produce 50 billion quarter-pound hamburgers or seven patties for every human on this planet.

Growth Energy recently sent a letter to the House Agriculture Committee noting, “More than one-third of all grain used in the production of ethanol is returned as a nutritious distillers grain, which is 25% cheaper than corn and can displace a greater amount of corn in feed rations, ultimately saving livestock producers’ input costs."

A July 2011 report from Informa Economics found that ethanol is only one factor behind rising corn prices and that speculation, monetary policy, and global demand has driven prices higher. The report concluded that “Statistical evidence does not support a conclusion that the growth in the ethanol industry is the driving force behind higher consumer food prices.”

The Future of Ethanol

Incremental production of ethanol will most likely not take root in America’s corn fields, but with cellulosic ethanol from sources such as switch grass, straw, pulp, and algae. "If this country is going to go big into ethanol, we need to tap into cellulosic ethanol," says UCS Research Director of Clean Vehicles David Friedman, "because it's cleaner and requires less fossil fuels than corn (to produce)."

Global demand for grain and diminishing supplies will continue to make the food versus fuel debate a hot topic, but critics need to make sure they analyze all the data. Ethanol production provides two valuable bi-products to the marketplace and both need to be factored into future decisions.

- Colvin

For Daily Updates Visit http://farmlandforecast.colvin-co.com 

 

Crop Progress: Corn and Soybean Harvest Nearing Completion

Nov 07, 2011

This afternoon, the USDA released its weekly crop progress report. The corn harvest is 87% complete, which is well ahead of the 73% 5-year historical average, but behind last year's 95% harvested for the first week of November.

 Of the 18 primary soybean producing states, 92% of soybeans were harvested by the first week of November. Last year at this time 98% of soybeans had been harvested and the 5-year historical average is 88% harvested.
 
The winter wheat planting progress is at 94%, which is slightly ahead of the 5-year average of 92% and slightly behind last year's progress of 95%. Winter wheat emergence is at 76%, down from the 5-year average of 79% emerged. Winter wheat in poor or very poor condition is at 15%, a 2% decrease from last year at this time. Winter wheat in good or excellent condition is at 49%, a 4% decrease from last year at this time.
 
Corn prices increased by 0.93% over the past week ending at $6.53 per bushel, soybeans were down 1.24% to $11.92 per bushel, and wheat ended the week up 1.59% closing at $6.38 per bushel. Year-over-year corn prices are up 11.62%, soybeans are down 5.70%, and wheat is down 13.32%.
 
This is our last crop progress report for the 2011 year. We are looking forward to a productive winter and have an optimistic outlook for 2012.
 
-Colvin
 

 

Bins filling up Quickly this October

Nov 01, 2011

The end of October marks a major milestone for the world, as the global population is now at 7 billion people. Farmers jobs get harder and harder every day as the world’s population continues to rapidly grow. The United Nations estimates that by 2050, the global population will reach 9.3 billion and require twice as much food production.

Commodity prices recovered in October from a dismal September on a more stable economic outlook in Europe and reduced production estimates across the U.S. for corn, soybeans, and wheat. Strong grain demand from China and La Nina weather concerns in South America may keep the rally going for grains.

The corn harvest is 78% complete across the U.S. as of October 30. Harvest has been progressing faster than historical averages, but crop condition is still significantly lacking.

Grain Prices

Corn prices increased by 9.3% in October and closed at $6.47 per bushel due to increased global demand and improving global economics. The Chinese purchased 900,000 tons of U.S. corn mid-month which set the hypothetical price floor for U.S. corn at near $6.00. The USDA WASDE report revealed an estimated decrease of 64 million bushels of production this season due to a decrease of 450,000 acres of harvested area.

Soybean prices increased 2.6% this month to $12.07 per bushel on the Chicago Board of Trade. The USDA estimated that U.S. production would decrease by 25 million bushels due to lower yields and harvested acres. U.S. soybean yields were decreased by nearly 1% to 41.5 bushels per acre according to the latest WASDE report. We will continue to carefully monitor the newly formed La Niña weather pattern that could have a negative effect on the South American soybean production this winter.

Wheat prices were driven 3.1% higher during September to $6.28 per bushel due to a reduction in production in the U.S. by 69 million bushels according to the USDA. Russia has continued to have a strong presence in the global wheat export market, but a government imposed limit on Russian wheat exports could increase U.S. wheat exports and prices throughout the rest of the year. We also expect wheat prices to continue to move along side corn prices as wheat is still a logical feed alternative to corn at current prices.

Chinese Imports

China, a historically self-sufficient corn producer, is harvesting a record-large crop of 166.6 million tons for the 2011/12 season. Despite the record crop, China will still be structurally short of corn for the seventh out of eighth year as use is estimated at 170.1 million tons. The U.S. Grains Council projects China to need to import 5-10 million tons of corn for the 2011/12 season, a significant increase from the USDA's estimate of 2.0 million tons.

As China's demand for protein increases over the next decade, corn needed for livestock feed will be substantial and result in a shortfall of over 20 million tons. The increase in demand will not be met by domestic production forcing China to look elsewhere for corn supply. Importing record amounts of corn will leave global supplies depleted. Strong Chinese demand may result in corn prices well above the record $8 a bushel set in June and drive profits for the largest global exporters of corn.

Farmland in a Bubble?

The Creighton University Farmland Price Index remained unchanged at 66.9 in October. This marks the 21st straight month the index has been above growth neutral. The farm equipment sales index decreased to a still strong 63.1 from September's 65.4.

Recent sales of Midwestern farmland have been reaching prices of $10,000, $12,000, and even $16,000 an acre. The media and well-known market pundits have been highlighting these high dollar sales and making an argument that farmland is in a bubble.

Rising grain prices and strong farm income over the last few years have driven strong interest in agriculture and the farmland market. Farmers and investors have allocated capital to farmland and prices in the Midwest have increased 17% in the last twelve months and 12% in 2010 according to the Federal Reserve Bank of Chicago.

Is farmland in a bubble? No. We think it is unfair and inaccurate to take a few data points and assign these assumptions to the whole market. Yes there have been some irrational sales that may take years to realize their value, but the market average is rationally priced and represents its fair market value based on near-term commodity expectations.

See our report on Farmland Forecast from October 31st for more information:
http://farmlandforecast.colvin-co.com/2011/10/31/is-farmland-in-a-bubble.aspx.  

Outlook

Corn harvest is coming to an end for many farmers across the Midwest and farmer attention is now turning to acquiring more land. We have been seeing a very strong number of farmland sales throughout the past few weeks and believe the selling season will continue to pick up speed through the end of 2011.

- Colvin

For Daily Updates Visit http://farmlandforecast.colvin-co.com 

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