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July 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.

Agriculture to Benefit from E15

Jul 29, 2010

The Environmental Protection Agency (EPA) is currently reviewing the proposal to approve the use of 15% ethanol blend gasoline from 10% to help achieve the Renewable Fuel Standards (RFS) goal for year 2022. Proponents of increasing the ethanol blend are concerned about the current constraints on the ethanol market are limiting future innovation and growth.

The increase to E15 will have substantial impact on the agriculture industry as the demand for grains used for ethanol production will increase for the higher ethanol production. However, implementation restrictions and regulations may limit the impact that an approval of E15 as the higher blend may be limited to vehicles 2007 or newer.

Renewable Fuel Standards

In 2007 the United States passed The Energy Independence and Security Act of 2007 (EISA), which will have far reaching impacts on the consumption of ethanol in the United States. The bill requires that the United States use 36 billion gallons of bio-fuels a year by 2022. To accomplish these goals, the EPA is required to set renewable fuel standards each November for the following year based on gasoline and diesel projections from the Energy Information Administration (EIA).




The EPA believes to accomplish this that the current ethanol blend in gasoline will need to be increased from 10% (E10). However, when and how this increase will occur is not set in stone. Currently the EPA is receiving pressure from producers and energy groups to deliver a decision as soon as possible. The motivation behind their urgency is the fear that the ethanol market will hit the blend wall, which is when the supply of ethanol meets the demand for ethanol. Ethanol consumption is currently being constrained by the cap of a 10% blend.

The concern of hitting the wall and continuing forward with ethanol production is that if the supply of ethanol is greater than demand, then margins and net income from ethanol will dwindle causing the growth and innovation within the industry to slow. This not only impacts the producers and blenders of ethanol, but also developments in vehicles and consumer expectations of the use of ethanol.

Impact on Agriculture

The increase from E10 to E15 will have a substantial impact on the demand for grains used in ethanol production, such as corn and soybeans, as more grain will be needed to produce the incremental ethanol. The increase will provide long-term support for grain prices and has the agriculture industry very excited as it will encourage current farmers to produce more grains and for new farmers to begin growing corn and soybeans. The EPA expects the total impact from the increased use of ethanol to increase net farm income by $13 billion in 2022.

EPA’s E15 Decision

Due to the time sensitivity of farmers’ crop decisions for each year and the desire for farmers to maximize their income to meet the potential increase in demand, the agriculture industry is encouraging the EPA to make their decision soon. Unfortunately, the EPA has delayed their decision on whether or not to approve ethanol blends of 15% in gasoline until the fall of 2010. The primary reason for the delay is the Department of Energy (DOE) has not completed vehicle testing.

Obstacles to the Proposal


In 2009, the EPA advised that they believed E15 would be safe for use in vehicles 2001 and newer. However, recent news articles and testing has raised worries that the EPA may only approve E15 for vehicle models 2007 and newer. This would limit the potential new demand for higher ethanol blend gasoline.

“If the agency were to approve E15 for all cars on the road that would mean a ‘potential increase of 6.5 billion gallons of new ethanol demand…,’ the Renewable Fuels Association said. But if the EPA restricts consumption and confuses motorists on who can use E15, it ‘will likely lead to little if any additional ethanol being sold,’" as reported by Wall Street Journal in the article, EPA Delays Decision Until Fall on More Ethanol in Gasoline.

Restrictions on vehicle use create multiple obstacles for the implementation at all stages from the farmer to the consumer. The ethanol industry is concerned that restrictions would limit demand and economic profit from ethanol.

The restrictions would also cause the cost of implementation to be greater than the potential future revenue. For example, the cost for a gas station to update their infrastructure is a fixed cost whether ten customers or 100 customers use the new 15% blend. If demand is limited, then gas stations may find that the infrastructure cost may exceed the potential revenue.

If the EPA announces an E15 approval, but it is restricted to 2007 and newer vehicle years, the implementation obstacles may cause the approval to have little impact on the demand for ethanol. If the demand for ethanol does not increase, there will be little to no impact on the demand for grains used to make ethanol and the ethanol industry may still be facing the blend wall.

Regulation and Tax

Currently, the volumetric ethanol excise tax credit (VEETC) pays 45 cents per gallon to blenders that use ethanol in their fuel. This tax credit is currently due to expire at the end of 2010. The impact of VEETC expiring may be negative or positive depending on other factors influencing the supply and demand of ethanol.

Support to renew the tax credit includes the need for stable incentives to assure proper infrastructure is built and consumer awareness is achieved. The ethanol industry also argues that not renewing the tax credit may lead to job losses due to a reduction in operating costs. These arguments indicate that not renewing the tax credit will have a negative impact on the ethanol market and create obstacles to achieving the positive impact on demand that would help the United States reach their bio-fuel goal.

Conversely, others believe renewing the tax credit is an unnecessary incentive. Support against renewing the tax credit includes: the belief that a larger market will allow the ethanol market to compete on its own with petroleum, the new standards to meet the Renewable Fuels Standards is already a requirement and adding a tax credit is a double incentive, and the idea that instead of a tax credit to help build the infrastructure, the government should directly supply the new pumps and pipelines


Conclusion


We believe that the EPA will make the increase to E15 as it is the only realistic solution to meet the RFS and reduced the United States dependency on foreign hydro carbons. After the Deepwater Horizon disaster, renewable fuel sources, that are environmentally friendly and add jobs, will continue to become a larger part of the United States fuel supply.

The agriculture industry is very excited for E15 and believes there will be substantial impact on the demand for grains used for ethanol production. The impact will not be felt over night, but will support farmer’s income and the demand for agricultural products.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.

Crop Progress: Corn and Soybeans Maturing Quickly

Jul 27, 2010

Yesterday afternoon, the USDA released its weekly crop progress report. The corn and soybean crop conditions were virtually unchanged from last week’s report, while both crops continue to mature at an accelerated pace. The USDA estimated 72% of the corn crop is in good or excellent condition, while 9% is in poor or very poor condition, which was unchanged from last week. During this week in 2009, 70% of the crop was in good or excellent condition and 8% was in poor or very poor condition. This week, 84% of the corn crop is silking, according to USDA estimates; while 48% was last week and 52% this week in 2009. The 5-year historical average is that only 70% of the crop silking by the third week of July.

 

Of the 18 primary soybean producing states, 10% of the soybean crop is in poor or very poor condition while 67% is in good or excellent condition. Last week only 9% was in poor or very poor condition and 67% of the crop was in good or excellent condition. The USDA estimated soybean blooming this week at 75% of the crop, while the estimate last week was 60% and for this week in 2009 was 60%. The 5-year historical average is 72% of the soybean crop blooming by the third week in July. The USDA estimated that 35% of the soybean crop is setting pods already, while only 18% were last week and the 5-year historical average is 31%.

 

The winter wheat harvest is progressing well with 79% of the crop already harvested. Last week 71% was harvested while the 5-year historical average is 82% by this week in July.

 

Corn prices decreased 8.45% over the past week ending at $3.64 per bushel, soybeans were also down 2.13% to $9.98 per bushel, and wheat ended the week up 0.4%, closing at $5.89 per bushel. Crop prices have been volatile due to weather conditions across the Corn Belt. Recently, favorable weather conditions have hurt prices. Year-over-year corn prices are up 15.1%, soybeans are down 2.3%, and wheat is up 14.2%.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.

Rural Economy Slows in July

Jul 19, 2010

The rural economy noted a slight slowdown in July as the Rural Mainstreet Index (RMI) dipped below growth neutral 50.0, despite positive growth for the prior two months. Farmland prices and farm equipments sales continue to advance, although rural bankers continue to be concerned about financial reform and unemployment.

The RMI declined to 49.3 in July from June’s 52.6 and May’s 54.3. The index has significantly improved on an annual basis as the index was at only 34.0 in July, 2009.

“Much like other economic indicators from across the nation, our survey is signaling slowing in economic progress. However, surveys over the past several months show an economy that has improved significantly from last year at this time,” said Ernie Goss, economist at Creighton University.


Farmland


The farmland-price index remained above growth neutral for the sixth consecutive month, although declined sequentially to 52.5 from June’s 54.7. “The farm economy has clearly improved from last year and we are seeing that reflected in farmland prices. However, the strengthening of the U.S. dollar, which has dented farm commodity prices, has slowed the growth in farmland prices,” said Goss.



The farm equipment-sales index remained growth positive, although declined slightly in July to 51.8 from 53.1 in June. “The outlook for farm income for 2010, while still healthy, has softened a bit lately. This has cut into the growth in farm equipment sales,” noted Goss.

Lending

Banking conditions continue to improve as all bank indicators were above growth netural, although bankers continue to be concerned about financial reform.

In July, respondents were asked to assess the financial reform bill just passed by Congress. Only 29% expect reform to have a positive influence on community banks, while 66% anticipate a negative impact.
Dan Coup, CEO of the First National Bank, noted concern, “The sad part about the whole package is that the consumer will again be the biggest loser.”

Hiring

Bankers are also worried unemployment and expect it to be the biggest economic challenge for the rural economy over the next 12 months. The hiring index, after moving above growth neutral for two consecutive months, fell to 45.4 in July from June’s 50.9 and May’s healthier 56.1.

Overall

The decline in July’s survey is consistent with the remainder of the U.S. economy as economists continue to be concerned about unemployment, long-term growth prospects, and sovereign debt concerns. The farmland, equipment, and banking indicators were all growth positive, which we see as a sign that agriculture is continuing to outperform. The recent rebound in grain prices over the last month will also improve the farm economy for 2010.

The Rural Mainstreet Indexes are compiled from a survey of small community bank CEOs from Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota and Wyoming.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.

WASDE: Corn Supplies Decrease on Lower Production

Jul 09, 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 today. This morning’s report was slightly bearish as the USDA numbers mostly came in above the average estimates.

Grain prices have been on a rally of late after last week’s surprising Acreage Report, concerns over 2010 production estimates, and increased foreign demand.

Corn

U.S. corn ending stocks for 2010/11 were decreased by 200 million bushels to 1.373 billion bushels from the June estimate, but higher than the average estimate of 1.269 billion bushels. The decrease in ending stocks was due to an increase in usage from 2009/10, decreased harvest area, and a 125 million bushel decrease in production. Corn stocks-to-use ratio for 2010/11 is now estimated at 10.3%, the lowest level since 2003/04.

 

“The reduction in the corn carryover has drastically changed the supply dynamics,” said Roy Huckabay of the Linn Group. “Too much rain in the Midwest and hot, dry weather in the southern and eastern U.S. are causing crops to walk backwards.”

 

2010/11 estimated corn exports were decreased by 50 million bushels as tighter domestic supplies, higher ethanol production, and rising prices will reduce the export competitiveness of the U.S. corn crop. Corn use for ethanol is lowered 50 million bushels reflecting the latest ethanol production data from the Energy Information Administration (EIA). The USDA season-average farm price for corn is estimated at $3.45 to $4.05 per bushel, up 15 cents from the June estimate.

 

Projected world corn supplies were decreased by 14.9 million tons in which over half of the decrease can be attributed to lower U.S. carryin and production.

 

Soybeans

 

Estimated ending stocks of soybeans remained unchanged by the USDA this month as increased exports and crush offset the increase in U.S. production. U.S. production increased by 35 million bushels on an increase in area harvested. The record yield estimate of 42.9 bushels per acre for 2010/11 was left unchanged despite planting delays and excessive precipitation.

 

“Demand continues to improve,” said Bill Nelson economist at Doane Advisory Services Co. “Soybeans supplies left from last year’s crop will be tight before this year’s harvest.”

 

U.S. exports were projected at a record 1.46 billion bushels on recent purchases from the Chinese. The USDA season-average farm price for soybeans is estimated at $8.10 to $9.60, up 10 cents from last month.

 

Estimated global soybean production was marked at a record 251.3 million tons, up 1.4 million tons due to increased production in the U.S.

 

Wheat

 

An increase in foreign demand was not enough to offset higher production of wheat. The USDA estimated wheat ending stocks for 2010/11 to increase by 102 million bushels due to increased area, yields, and carryin. The ending stocks of U.S. wheat remain at 23 year highs.

 

U.S. wheat yields were increased by 2.0 bushels per acre to a record 45.9 bushels per acre, which directly increased production by 14.9 million bushels. The USDA season-average farm price for wheat is estimated at $4.20 to $5.00, up 20 cents from last month’s WASDE.

 

World wheat supplies estimates decreased by 7.5 million tons on lower global production despite the increase in U.S. production.

 

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

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.

Weekly USDA Crop Progress: Corn and Soybeans Well Ahead of Schedule, Despite Worsening Conditions

Jul 07, 2010

Yesterday afternoon, the USDA released its weekly Crop Progress report. The corn and soybean crops continued their worsening condition, but remained maturing well ahead of schedule. The USDA estimated 71% of the corn crop is in good or excellent condition, while 10% is in poor or very poor condition. Last week, 73% was in good or excellent condition while only 8% was in poor or very poor condition. During this week in 2009, 71% of the crop was in good or excellent condition and 8% was in poor or very poor condition. This week, 19% of the corn crop is silking, according to USDA estimates, while only 7% was last week and 8% this week in 2009. The five-year historical average is 12% of the crop silking in the first week of July.

 

Of the 18 primary soybean producing states, 97% of the soybeans have emerged. The five-year historical average is also 97%. By this week last year, 95% of the soybean crop had emerged. This week, soybeans again worsened slightly in condition. Ten percent of the soybean crop is in poor or very poor condition while 66% is in good or excellent condition. Last week, only 9% was in poor or very poor condition and 67% of the crop was in good or excellent condition. The USDA estimated soybean blooming this week at 23% of the crop, while the estimate last week was 9% and for this week in 2009 was 13%. The five-year historical average is 20% of the soybean crop blooming by the first week in July.

 

The winter and spring wheat crops are still in good condition, compared to last year’s crop. In the six primary producing states of spring wheat, 83% of the crop is in good or excellent condition this year compared to only 72% last year. This year, 2% of the spring wheat crop is in poor or very poor condition while 8% was last year. Harvest has been continuing for winter wheat in the 18 primary producing states. The USDA estimates that 54% of the crop has been harvested, while only 38% had been last week. In 2009, 50% of the winter wheat crop had been harvested by the first week in July, while the five-year historical average is 53%.

 

Corn prices increased 5.8% over the past week, ending at $3.64 per bushel. Soybeans were up 0.5% to $9.62 per bushel, and wheat ended the week up 7.0%, closing at $4.88 per bushel. Crop prices increased because of the bullish USDA Acreage report that was released last week. Year-over-year corn prices are up 5.2%, soybeans are down 29.2% and wheat is off 2.5%. Next week, we look forward to reporting on the USDA’s Crop Progress report, which will include soybean setting pod percentages.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.

Fundamentals Bullish for Corn as Acreage and Stocks Lower

Jul 01, 2010
A bullish surprise for the corn market Wednesday morning as estimated acreage planted and quarterly stocks were significantly lower than expected. The USDA released two important reports on Wednesday, the Prospective Plantings and Quarterly Stocks of Grains.

Surprising the market, the USDA lowered the estimated corn acres planted to 87.9 million, down from the March estimate of 88.1 million acres. The consensus estimate was that corn planted acres increased to 89.3 million acres. Most weather and pricing models had also estimated an increase in planted acres.

“Planting got off to a rapid start in 2010 due to favorable conditions” in April, the USDA said in its report. “However, below-average temperatures and wet weather dominated much of the Midwest and portions of the Plains during the middle part of May, hampering the planting of the remaining acreage.”

The largest losses were in Iowa, down 200,000 acres; Nebraska, down 400,000 acres; South Dakota, down 350,000 acres; and Ohio, down 100,000 acres. The significant acreage loss in some of the highest-yielding areas leaves us concerned about 2010 production estimates.

Soybean planted acreage for 2010 is estimated at a record-high 78.9 million acres, as farmers who couldn’t get corn in the ground switched to soybeans. Planted acreage was up by 300,000 acres or more from last year in Iowa, Kansas, Minnesota and Nebraska, while the largest declines were in Arkansas and North Carolina. The increased acres could add further pressure on already bearish new-crop fundamentals.

All wheat acreage is estimated at 54.3 million acres, up from the March estimate of 53.8 million acres but below the 59.1 million acres planted last year.

Quarterly Stocks

Keeping the bullish momentum for corn going, the USDA released its estimate of quarterly stocks of 4.3 billion bushels, significantly below the consensus estimate of 4.6 billion bushels. Quarterly demand for corn equals 22.8% of total supplies, the largest since the 2005/06 marketing year. We believe the lower test weights from the 2009/10 crop could be part of the reason for the lower than expected stocks.

Soybean stocks were also below expectations, as the actual estimate was 571 million bushels versus the consensus estimate of 587 million bushels. The low stocks will likely generate speculation about how the tighter stocks may affect the supply going forward.

Quarterly stocks of 973 million bushels for wheat were 33 million above the consensus estimate and 316 million above last year at the same time. This means wheat ending stocks for 2010/11 could climb above 1 billion bushels, the highest level since 1987/88.

Biotech

The USDA also provided its annual update on the adoption of biotechnology seed use. The USDA estimated that 86% of corn acres planted in 2010 were planted with a biotechnology variety seed, compared to 85% last year and up from roughly 25% in 2000.

Outlook

Based on Wednesday’s report, we believe that corn has seen a seasonal bottom and the risk is certainly to the upside. Given the lower stocks and acreage planted, the market will start to contemplate the possibility of ending corn stocks falling below the critical 1 billion bushel level.

Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.
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