La Niña Causes Grain Rally
Jan 03, 2012
Throughout the month, farmers have been busy working on end of the year accounting, purchasing farmland, expanding operations, and preparing for the spring planting season. The weather across the Corn Belt has been very mild compared to twelve months prior, but cold temperatures are promoting a healthy frost in the ground that will help break up compaction and kill disease and pests.
The current La Niña weather pattern has been causing very hot and dry weather in South America which has lead to a late rally in the grain markets after decreased global demand had been driving commodity prices lower.
Corn prices increased by 7.7% in December and closed at $6.47 per bushel. Prices started the month off bearish, dropping 3.7% on outside market influence and soybean prices decreasing. The December WASDE revealed an estimated 7.3 million ton increase in production from China which increased total world production to 867.5 million tons. Domestically, corn ending stocks were increased by 5 million bushels to 848 million bushels due to a decrease in feed and seed use. The Chinese recently announced that they will consider importing more corn to increase stocks if U.S. corn drops to $5.00 per bushel.
Soybean prices increased 5.9% this month to $11.98 per bushel on the Chicago Board of Trade. The USDA estimated that domestic soybean exports decreased by 25 million bushels to 1.3 billion bushels due to a slow pace of shipments, outstanding sales through November, and strong export competition from South America. Soybean prices had decreased 1.9% to $11.10 after the USDA WASDE report release, but the outlook of the South American crop is deteriorating quickly as reports of the La Niña are causing extreme dry heat for the top yielding corn and soybean land of Argentina, Brazil, and the rest of Latin America.
Wheat prices were sent 9.7% higher during December to $6.53 per bushel due to increased speculative buying and the correlation to soybean and corn prices. Wheat prices slumped 2.7% by midmonth on a bearish demand outlook via the WASDE report. U.S. wheat ending stocks were projected 50 million bushels higher due to reduced prospects for exports of Hard Red Winter, Soft Red Winter, and White Wheat. Global wheat supplies for 2011/12 are projected 9.3 million tons higher with larger beginning stocks in Australia and Argentina, and a 5.7 million ton increase in global production.
The Creighton University farmland price rose to a record high 84.1 in December. This marks the 23rd straight month the index has been above growth neutral. The farm equipment sales index increased to 73.8, its highest level since February of 2008, from November's 68.4. Bankers were asked to provide average cash rents per acre in their area. The average cash rent was $191 and 22% of bankers reported average per acre rents above $250.
Don Reynolds, president of Regional Missouri Bank, said, “Land prices appear to continue to rise. But, we noted that a few small tracts that were desired by multiple cash rich buyers appeared to distort people’s thinking.”
Farmland values are steadily increasing across the Corn Belt as farmers are continuing to purchase farmland during the winter months after a strong harvest of highly priced grain that provided farmers with additional income.
2012 Grain Outlook
Corn stocks should increase as 2012 may see the largest global corn crop in history. Low soybean prices are encouraging farmers to plant as much corn as possible. We expect emerging market and domestic demand to support prices throughout the year though. We expect to see prices rebound in the first half of 2010 as production estimates in South American continue to be lowered due to La Niña weather patterns.
We will watch the stocks-to-use ratio, especially in corn, throughout early 2012 for any dip below 5% which would instantly justify an increase in corn prices and other grains would follow. Any corn stocks-to-use ratio of below the 10-year average of 12.5% should be considered bullish moving forward. Currently the corn stocks-to-use ratio is at 6.8%.
The planted acres report in March, along with monthly USDA WASDE reports, will help grain markets adjust to the potential for 94 million acres of corn to be planted in the U.S. After acreage reports are released in spring of 2012, expect the weather to become the key factor for crop condition reports. In any report from USDA, expect soybean prices to benefit from any estimate higher than 94 million from corn acres.
Farmland values have been continuing to increase due to the large amount of land sales this winter at elevated sale prices primarily driven by farmers and not outside investors. The ratio of farmer to investor buyers of Iowa farmland has been increasing over the past five out of six years according to Iowa State University. Currently 74% of Iowa farmland is purchased by farmers. Properties that are being sold both publically and nonpublically are producing a large number of comparable sales for Midwestern farmland and allowing appraised values to reflect the most accurate fair market values in recent history.
We expect 2012 to have a larger volume of farmland transactions heading into the planting season before weather will eventually dictate crop prices throughout the summer.