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.
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.
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.
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.
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.
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.
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