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November 2010 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.

Rising Farm Income Drives Rural Economy

Nov 22, 2010

For the first time since June, the rural economy expanded due to higher farm income, strong farmland prices, and improving confidence in economic conditions, partially offset by weak employment. In the November survey, bankers reported that farmland price have increased roughly 8% over the last year and farm equipment sales are the highest since May, 2008.

The overall Rural Mainstreet Index (RMI) improved to 53.3 this month from October’s 48.4 and September’s 47.6, according to the survey of bank CEOs in a 10-state region. This is the first time since June the overall index has been above growth neutral 50.0 and is the highest reading since May of this year.

RMI   November 2010 farmland forecast marc schober greyson colvin farmland value

“The Rural Mainstreet economy is behaving like the nation with a lot of zigzags in growth. However, I expect very healthy farm income to begin to have positive but somewhat muted impacts on businesses on Rural Mainstreet. Businesses heavily dependent on the farm economy continue to do quite well though,” said economist Ernie Goss, co-author of the report.

Agriculture

High grain prices and expectations for higher farm income have driven the farmland price index to 68.1 in November from 60.0 in October. This is the tenth straight month the index has been above growth neutral. The RMI survey is consistent with the Chicago Fed’s third-quarter survey which reported farmland values rose 10% in the last year in the Seventh District.

RMI   Farmland Price Index Rural Mainstreet Index november 2010 marc schober greyson colvin farmland forecast colvin   co

“While growth for businesses on Rural Mainstreet has been fragile at best, farm indicators remain very strong, including farmland prices and the sale of agricultural equipment. This month, we asked bankers how much prices for irrigated farmland had expanded in their area over the past year. Approximately 23 percent indicated that prices had grown between 11 percent and 20 percent with average growth of almost 8 percent,” noted Goss.

The farm equipment sales index also improved to 68.7 in November from 61.0 in October, and is at its highest level since May, 2008. Scott Tewksbury, CEO of Heartland State Bank added, “One area farm equipment dealer told me he had record sales for October.”

Banking

Loan volumes declined for the second straight month in November to 35.2 from October’s 48.4. Strong farm income in 2010 has significantly reduced farmer demand for borrowing. The other two banking indicators, checking deposits and certificates of deposits, were above growth neutral for the ninth straight month.

Bankers noted that hiring still remains weak in the rural economy as the November hiring index rose to a still weak 46.8 from 46.0 in October. Goss commented that “Many areas in the Rural Mainstreet area are still losing jobs.”

Bankers were also asked about the federal blenders’ tax credit of 45 cents per gallon of ethanol produced, which is set to expire on Dec. 31. Responses were mixed on what action Congress should take regarding the program. Roughly 1/3 of respondents would support extending the credit for three to five years, 36% supported a one to two year extension, 13% supported a permanent extension, while 18% called for the expiration of the tax credit.

Outlook

The November survey showed that the rural economy is beginning to recover, driven primarily by rising farm income. Bankers are confident about the economy over the next six months, as the confidence index improved to 63.8 in November from October’s 57.3.

Read more about agriculture and farmland at http://farmlandforecast.colvin-co.com.

Farmland Values Rise 10% Says Chicago Fed

Nov 19, 2010

Farmland values rose 10% year-over-year due to strong agriculture prices and rising farm income, according to the Federal Reserve Bank of Chicago’s November AgLetter. The Seventh Federal Reserve District also reported quarter-over-quarter farmland values rose 3%. Farmland values are expected to be up in the fourth quarter again due to high demand for agricultural land among farmers.

Credit conditions also improved in the third quarter due to higher expected farm income and loan repayment rates. Interest rates on agricultural operating and real estate loans declined to the lowest levels recorded in the history of the survey.

Over the past 12 months economic conditions have stabilized and lending has become more available. Higher grain prices have encouraged farmers to reinvest their cash flow back into farmland to expand their operations. This fall will see higher volumes of farmland sales due to the early harvest, high grain prices, and potential change in tax legislation. Landowners will also be making up for the lack of farmland sales last year due to the late harvest.

Values

In the Seventh District, farmland values rose 10% compared to the third quarter of 2009, with values increasing 13% in Iowa, 11% in Indiana, 10% in Michigan, 8% in Illinois, and only 3% in Wisconsin. Quarter-over-quarter farmland values 3%. Farmland values increased 6% in Iowa, 3% in Illinois and Michigan, 2% in Indiana, and 1% in Wisconsin compared to the second quarter of 2010.

Farmland Forecast   Change in value of farmland 3q2010 IL IN IA WI MI greyson colvin marc schober farmland invest

“The market is tight right now as high corn prices make farmland an attractive investment for farmers. If you believe corn is going to stay above $5.00, farmland is undervalued,” said Greyson Colvin, Managing Partner of Colvin & Co.

Farmland values are also expected to rise during the fourth quarter of 2010 according to survey respondents. 48% of respondents expect farmland values in the Seventh District to rise and 49% expect stable values. 60% of responding bankers also expect strong demand among farmers to purchase farmland this fall and winter. Interest in farmland by outside investors is also expected to grow as 37% of respondents expect higher demand of farmland among nonfarm investors.

Credit

Credit conditions in the Seventh District continued to improve during the third quarter. The loan repayment index jumped in the third quarter to 114 from 85 in the second quarter. Availability of credit expanded as the funds availability index rose to 138 from 122 last quarter, and 121 a year ago.

Collateral requirements were tightened in the third quarter. 22% of respondents required more collateral, while 78% left collateral requirements unchanged. The average loan-to-deposit ratio was 73.2%, slightly below last quarter’s 74.5% and last year’s 75.3%

Interest rates declined to the lowest levels recorded in the history of the survey. The average interest rate of agricultural real estate loans was 5.81%. Iowa had the lowest interest rate of 5.64% and Michigan had the highest at 6.16%.

Farmland Forecast   Quarterly seventh district farm loan interest rates 2010 marc schober greyson colvin

Outlook

A perfect storm of rising grain prices, the Russian wheat crisis, lower U.S. grain production, and grain supplies at decade lows have driven an appetite for agricultural related investments. 2010 net cash farm income is expected to increase to $85.3 billion, a 23% increase over 2009 farm income according to the USDA.

We expect farmland to be in the sights of many investors, including farmers. Grain supplies should stay tight as it will take time for supply to catch up with demand. High grain prices will attract capital to the farm sector, and one of the best ways to capitalize on this momentum is farmland. It is the one input in the farming equation that cannot be substituted.

Read more about agriculture and farmland at http://farmlandforecast.colvin-co.com.

Corn and Soybean Ending Stocks Drop

Nov 10, 2010

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 on Tuesday. Reports have been coming in about lower U.S. corn yields by many farmers across the country due to a wet June and a dry August. This is what led the USDA to make another reduction in the U.S. corn yield to 154.3 bushels per acre from 155.9 bushels per acre last month. Last year the U.S. corn yield was 162.5 bushels per acre. U.S. ending corn stocks were decreased again by the USDA, down to 827 million bushels which is well below the critical 1 billion mark.

Corn

Bullish news as the 2010/11 U.S. corn production was decreased by 124 million bushels to 12,540 million bushels due to lower yields across the country. Feed and residual use was estimated 100 billion bushels lower, which was paired with a 50 million bushel reduction in exports due to higher prices, but ethanol usage was increased by 100 million bushels sending the ending stocks 75 million bushels lower to 827 million bushels.

Ending domestic stocks will be the lowest since 1995/96, and the ending stocks to use ratio will be at a very low 6.2% here in 2010/11. The USDA season-average farm price for corn is estimated at $4.80 to $5.60 per bushel, a midpoint increase of 20 cents and the highest season-average ever.

World corn production was lowered 1.1 million tons to 818.52 million tons due to lower production in the U.S., partially offset by a 2.0 million ton increase in Chinese corn production due to higher 2010/11 area. Global corn ending stocks were estimated 2.3 million tons lower to 129.2 million tons, which would mark the lowest since 2006/07.

Soybeans

Soybeans continued the bullish theme, as the USDA reduced its estimate of U.S. soybean production by 33 million bushels to 3.375 billion bushels due to a large reduction in U.S. yields. The USDA estimated average U.S. soybean yields of 43.9 bushels per acre, a drop of 0.5 bushels per acre from last month.

2010/11 exports were again increased by 50 million bushels to 1.570 billion bushels on strong export sales, especially from China who accounts for 70% of all U.S. soybean exports through October. The elevated exports reduced ending soybean stocks to 185 million bushels, a decrease of 80 million bushels. The USDA season-average farm price for soybeans is estimated at $10.70 to $12.20, up 70 cents from last month.

Global soybean production was estimated at 257.4 million tons, up 2.1 million tons, primarily due to a 2.0 million ton increase in Argentina as farmers responded to higher soybean prices. Production was also increased in Brazil, India, and South Korea which helped offset the reduction in U.S. production.

Wheat

U.S. 2010/11 wheat ending stocks were decreased to 848 million bushels because of the slightly lower average yield estimate of 46.4 bushels per acre from 46.7 bushels per acre last month. Exports and domestic usage remained unchanged in the report. The USDA season-average farm price for wheat is estimated at $5.25 to $5.85, up 5 cents from last month’s estimate.

Total world wheat production was estimated at 642.89 million tons, up from last month’s estimate of 641.44 million tons due to increased production in Argentina, Australia, EU-27 and Paraguay. Global ending wheat stocks were decreased by 2.15 million tons to 172.51 million tons primarily due to the increased consumption. Global consumption of wheat was raised 2.5 million tons for 2010/11 with higher expected feed use for China.

Overview

Grain supplies are becoming extremely low. The 1 billion bushel ending stocks mark for the U.S. is a critical point, but now ending corn stocks are over 17% below 1 billion bushels.

Another factor to keep an eye on will be La Nina’s affect on South American crop production this spring. If La Nina produces more dry weather before the March harvest in South America, expect production to decrease. Brazil and Argentina produce 50% of the world’s soybean supply alone.

In 2008 La Nina hurt Argentinean soybean production, but the U.S. was able to offset it. Today the U.S. wouldn’t be able to offset such a reduction in Argentinean soybean production due to such low domestic stocks. This could eventually lead to an increase in corn prices here in the U.S. if more acres are going to be allocated to soybeans.

Click on the link for the full WASDE report: http://www.usda.gov/oce/commodity/wasde.

Read more about agriculture and farmland at http://farmlandforecast.colvin-co.com.

Harvest Wraps Up While Grain Prices Rally in October

Nov 01, 2010

A near perfect harvest is now coming to a close across the Midwest. Farmers have been lucky enough to harvest their corn and soybeans at optimal moisture levels without the need to dry them. The continuation of the rally in the grain market, paired with excellent harvest conditions, have led to happy farmers in the U.S. Besides a slight drop in average yields, there’s not much to complain about here in the Corn Belt, as the corn crop is estimated to be the third largest in history.

Commodity Prices

Grains again performed well throughout October, primarily due to the decrease in estimated corn yields by the USDA in October’s WASDE Report, and increased global demand. December corn prices increased by 17.6% and closed the month at $5.82 per bushel. The remarkable rally has pushed corn prices to their highest levels since the summer of 2008. Since the end of June, corn prices have increased by 79.1%.

Soybean prices increased by 10.8% in October to $12.26 per bushel due to concerns over the estimated amount of planted soybean acres for the 2011 crop due to farmer’s incentive to plant more corn acres due to the high corn prices. Chinese demand for soybeans has also put pressure on supplies as Chinese soybean imports are expected to be 65% more than last year. South America production also faces weather risk due to La Nina and will keep prices strong through the Spring of 2011.

Wheat prices maintained their momentum to $7.17 per bushel, a 6.4% increase in October. Global concerns over short-term wheat supplies are helping support the elevated prices. In particular, Russia’s recent announcement to keep their wheat export ban in place until July of 2011. Concerns are starting to rise on dry weather in the largest winter wheat producing states, Colorado and Nebraska, according to Bloomberg. Additionally, all commodity prices have been receiving a boost due to the recent decrease in the U.S. Dollar.

WASDE

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 in mid-October. Wet weather in June and July, followed by a hot, dry August has led to a substantial reduction in U.S. corn yields to 155.9 bushels per acre from 162.5 bushels per acre last year. The USDA also now estimates domestic corn supplies for 2010 to be 902 million bushels, below the critical 1 billion mark.

2010/11 U.S. corn production was decreased by 496 million bushels to 12,664 million bushels due to lower yields, partially offset by a slight increase of 0.3 million acres planted. The USDA reduced yield estimates in all major corn producing states including Illinois (-14 bushels per acres), Indiana (-10), Iowa (-10), and Nebraska (-9). Despite the drop in estimated production, the 2010/11 corn crop is still expected to be the third largest on record.

Ending domestic stocks were reduced by 214 million bushels to 902 million, well below the critical 1 billion mark and the lowest since 2003/04. This now puts the stocks to use ratio at 6.7%, a 15-year low.

Harvest

Unseasonably dry weather has led to the fast and successful harvest so far. Some areas of the Midwest had gone over three weeks without measurable precipitation. Harvest has been steadily progressing well ahead of the 5-year historical average, according to the most recent USDA Crop Progress Report.

Soybean harvest is 91% complete, compared to the historical average of 72% by the end of October. 83% of the corn harvest is complete, compared to the historical average of only 49%. Once farmers are done with harvest, it will be on to fall tillage and applying fall chemicals.

Farmland

Agriculture continues its positive momentum as Creighton University’s Rural Mainstreet Farmland Price Index rocketed to 60.0 in October from 57.7 in September and 55.3 in August. This is the ninth straight month the index has been above growth neutral. Economist Ernie Goss noted, “Farm indicators remain very strong, including farmland prices and the sale of agriculture equipment.”

Confirming strong farmland prices, Terry Engelken, CEO of Federation Bank in Washington, Iowa, said, “We have had several farm land auctions recently and several parcels brought over $9,000 per acre.” The farmland price index rose in all 10 states surveyed, with strong gains in Colorado, Illinois, Kansas, Minnesota, and Wyoming.
China’s Lack of Farmland

As the Chinese growth engine continues to propel forward, the government is faced with the dilemma: How do we feed our growing and developing population? China’s middle class is expected to double over the next 10 years and will demand a higher protein diet. China has roughly 20% of the world’s population although only 7% of the world’s arable land.

In order to be self-sufficient in grain production, the Chinese government estimates they need to maintain 120 million hectares for crop production until 2020. Government figures estimate that the current amount of arable land is roughly 122 million hectares, which has been unchanged since 2005.

The Chinese government is doing all it can to protect farmland resources, but it may be too late. Bank of America estimates that China’s arable land has already fallen below the 120 million hectare threshold and could decrease to 117 million hectares by 2015. Urban sprawl, desertification, and illegal commercial conversion are the primary culprits of the reduction in farmland according to Bank of America.

Outlook

Once again, the entire agriculture sector had a great month. Grain prices have continued their rally, which has in turn supported farmland prices. Wheat could continue to be the lead story until spring after recent USDA field surveys revealed a below historical average quality winter wheat crop here in the U.S. If wheat prices maintain their current levels, or increase, expect other grains to keep pace.

Farmland has been increasing in value across the entire Midwest, and we don’t see this letting up. Land owners that have been thinking about selling their farm will certainly consider selling during 2010 while capital gains taxes are at their current, attractive levels. Although farmland values are continuing to increase, we feel that the rest of the fourth quarter will provide an opportunity for buyers to purchase farmland at a near discount. It’s extremely rare to buy farmland when it is not at a record high, unlike any other asset class.

Be sure to visit farmlandforecast.colvin-co.com for daily articles on farmland and agriculture.

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