Grains Stabilize, Farmland Values Soar
Dec 01, 2010
Grain prices stabilized during the month of November, primarily due to concerns over China’s attempt to curb inflation and food prices and renewed sovereign debt issues in Europe. Although most grain prices decreased for the month, farmland values have been on a sharp upturn. The Midwest Fed Districts released their farmland value reports this month for the third quarter of 2010 and the overall trend was increasing values driven by increased demand and rising farm income. Concerns have also been raised about the poor condition of the U.S. winter wheat crop after little precipitation since emergence.
The rally in grains has finally stabilized since the spark of the Russian wheat crisis in mid-summer. Grain prices ended their upward trend on news that the Chinese are concerned about inflation and may increase interest rates to slow their economic growth, which could translate into less grain demand. Concerns over European financial problems and political debate over U.S. monetary expansion has also weighed on the grain markets.
In November, corn prices declined by 8.9% and closed the month at $5.30 per bushel, although year-over-year, corn prices are 31.6% higher. Global concerns have weighed on corn prices, however tight fundamentals remain in place and the 2010 ending-stocks-to-use ratio is at a very low 6.2%. The corn market is closely watching the ethanol market due to the potential expiration of the U.S. ethanol tax credit and the expansion of E15 in vehicles manufactured in 2001 to 2006.
Soybean prices increased by 1.4% in November, to $12.43 per bushel due to tight supplies which was partially offset by global economic concerns. Soybean prices are going to be subject to planted acreage for 2011 over the next few months as farmers will be weighing their options of planting corn or soybeans depending on prices. Current corn prices should encourage farmers to plant more corn in 2011 at the expense of soybeans. The potential decline in soybean acreage should support soybean prices over the next year. The weather in South America will also be a key driver of soybean prices as La Nina may stress growing conditions in the strong soybean growing areas of Argentina and Brazil.
Wheat prices declined to $6.50 per bushel this month, a 9.1% decrease, primarily due to a potential increase in planted wheat acres. The early harvest this fall allowed farmers to increase winter wheat plantings in order to capitalize on higher wheat prices. The key drivers of wheat prices will be the uncertain growing conditions for the 2011/12 Russian wheat crop and the below average crop conditions for the U.S. winter wheat crop. Wheat prices will also trend in the direction of corn and soybeans; if those two remain elevated, expect wheat prices to be as well.
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-November. 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 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 one billion mark.
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 million 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.
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.
The crop condition of the U.S. winter wheat is well below the historical average. Only 47% of the winter wheat planted in 2010 is in good or excellent condition, according to the USDA Crop Progress Report. At this time, 17% is in poor or very poor condition. At this time last year, 63% of the crop was in good or excellent condition, and only 6% was in poor or very poor condition. The poor crop condition is due to the lack of post emergence precipitation this fall.
Concerns are slowly growing over the condition of the upcoming year’s wheat crop across the globe as well. It is unknown how the Russian wheat crop will be able to recover from last year’s catastrophic droughts.
La Nina is also a leading cause for worries in soybean production this year. The weather in South America will play a large role in the prices of soybeans this spring. If China’s insatiable demand for soybeans continues to increase, along with lower production in Argentina and Brazil, expect soybean prices to increase.
Farmland values have performed well over the last year due to strong agriculture prices, rising farm income, and an expansion of lending. Higher grain prices have encouraged farmers to reinvest their cash flow back into farmland to expand their operations. The last six months have seen higher volume 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.
The Chicago Fed reported that farmland values rose 10% year-over-year and 3% quarter-over-quarter in the Seventh Federal Reserve District. Farmland values are expected to be up in the fourth quarter again due to high demand for agricultural land among farmers. Farmland values rose 13% in Iowa, 11% in Indiana, 10% in Michigan, 8% in Illinois, and only 3% in Wisconsin.
This was also consistent with the Minneapolis and Kansas City Federal Reserve’s, which reported a 9% and 9.6% increase, respectively. Creighton University’s farmland price index also rose to 68.1 in November from 60.0 in October. This is the tenth straight month the index has been above growth neutral.
Outlook We had been looking forward to November as it is the typical farmland selling season because the crops are out of the ground and farmer income is ready to be reinvested. Interest in farmland has grown from outside investors as well, which has translated to increased farmland values. The Fed’s reports of increased farmland values parallel our theory that farmland values will continue to rise given the growing demand for the grains produced on Midwest farmland. At corn prices above $5.00, we believe farmland is still undervalued and an attractive long-term investment.
Grain prices have stabilized, but we believe farmland values will continue to appreciate. Farmland is a long-term investment and looking five to ten years down the road, farmland values could easily double their current values. Farm income in 2011 should increase substantially due to strong grain prices and this should translate into increased cash rents across the Midwest. Higher farm income will be reinvested by farmers in their operation by increasing acreage through leasing or buying, or updating equipment. We expect that grain supplies will remain tight over the next decade and will support long-term grain and farmland prices.
Read more about farmland and agriculture at http://farmlandforecast.colvin-co.com/.