Grain Prices Rally in September as Harvest Begins
Oct 04, 2010
September rewarded nearly all asset classes as investors became more confident about the economy and that the Federal Reserve will support the markets. The Dow gained 7.7%, the strongest September since 1939. Grain markets also continued their rally due to decreased yield estimates and increased demand outlooks. Farmland has also been gaining investor interest as famed investors such as, Michael Burry, Nassim Taleb, and Barton Biggs, have recently recommended arable farmland as an investment.
The grain market performed exceptionally well throughout September due to weather related supply losses and concern over global supplies. December corn prices increased by 16.8% and closed the month at $4.95 per bushel. The rally in corn this month was driven by the USDA decrease in average yields per acre estimate in the WASDE report and strong demand from non-commercial buyers.
Soybean prices increased by 10.16% in September to $11.06 per bushel due to concerns over South American production this upcoming year, unrealized global demand potential, and the possibility of lower production next year if farmers plant more corn due to higher corn prices.
Wheat prices continued their momentum to $6.74 per bushel, a 3.3% increase in September due to concerns of global wheat supplies. Delays to Russian winter wheat plantings will continue the bullish momentum for wheat in the near term.
A strong weather system dumped upwards of ten inches of rain across areas of South Dakota, Minnesota, Iowa and Wisconsin last week delaying harvest in isolated regions. Besides the recent precipitation, harvest has been progressing well across the nation. Soybean harvest is 17% complete as of the fourth week in September, while the 5-year historical average is 13%. Corn harvest is also moving along faster than in recent history. 27% of the corn crop has been harvested in the 18 primary producing states. The 5-year historical average is that only 15% of the crop has been harvested by the fourth week in September.
Many farmers were weeks ahead of schedule when planting this spring, which has lead to favorable maturity and moisture levels for the harvested crops. Farmer’s shouldn’t have much dockage for low test weights or high moisture when selling this new crop at the local elevators.
Agriculture continues to be the bright spot in the economy as the Creighton University Farmland Price Index rocketed to 57.7 in September from 55.3 August. This is the eighth straight month the index has been above growth neutral. Economist Ernie Goss, co-author of the report noted, “Farm indicators remain very strong, including farmland prices.”
The farmland price index rose in all 10 states surveyed, with strong gains in Iowa, Minnesota, Nebraska, and the Dakotas.
“The general economy is still struggling, but the crop and livestock producers are looking at an exceptional year. Growing conditions are the best in decades, yields are up and prices are good,” commented Kathy Thuman, President of Farmers State Bank. Thuman also noted she is concerned thought about rising farm input costs.
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-September. Hot and dry weather across much of the U.S. caused a reduction in corn yields, especially in the Midwest. Estimates of U.S. corn yields were decreased to 162.5 bushels per acre, below last year’s record of 164.7 bushels per acre.
The USDA increased its estimate of U.S. soybean production by 50 million bushels to 3.483 billion bushels due to an increase in yields to a record 44.7 bushels per acre. 2010/11 exports were increased by 50 million bushels to 1.485 billion bushels on strong early season sales and an anticipated increase in global import demand lead by China.
Agriculture has done extremely well throughout the first three quarters of 2010, while the final quarter looks very strong as well. Grain prices should continue to appreciate over the long-term as global demand is continues to increase and global supplies wither.
Farmland, as an asset, should also continue to appreciate as the upcoming months should provide an elevated amount of land sales to use as comparables when valuing land. The sale prices that have occurred in the last three months have reported gains of 4-8% across the Corn Belt.
The typical selling season for farmland is after harvest because farmers, who make up the majority of farmland buyers, have cash on hand after their crop is in and sold to a certain extent. The end of 2010 should have above average land sales compared to recent years as the harvest is ahead of schedule. Also, many land owners that have been looking for a time to sell may be pressured into selling prior to December 31 due to the potential expiration of the Bush tax cuts. A lot of parcels of land have been held for decades, and for a seller to take advantage of a lower capital gains tax could save them thousands of dollars.
Read more about agriculture and farmland at http://farmlandforecast.colvin-co.com.