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December 2010 Archive for Farmland Forecast

RSS By: Marc Schober,

Marc Schober is the editor of Farmland Forecast an educational blog devoted to investments in agriculture and farmland.

Rural Economy Improves to Almost Three Year High

Dec 20, 2010

The rural economy continued to improve in December, driven by rising farm income and high grain prices. The USDA estimates that 2010 farm income increased 31% from 2009, which has led farmers to reinvest cash flows into farmland and farm equipment. The healthy rural economy has also led to improving employment numbers and lending conditions.

The overall Rural Mainstreet Index (RMI) continued to increase this month to 55.4 from 53.3 in November, according to the survey of bank CEOs in a 10-state region. This marks the second straight month the index is above growth neutral 50.0, and the fourth straight month the index has increased.

Farmland Forecast   RMI december 2010 greyson colvin marc schober farmland fund values

“Very healthy farm income is rippling across the Rural Mainstreet economy. Businesses heavily dependent on the farm economy continue to experience very strong economic conditions,” said Creighton University economist Ernie Goss, co-author of the report.


Farmland prices have been increasing very quickly over the past few months. The farmland price index was above 50.0 for the 11th straight month at 76.9 in December. This is the highest the index has been since March of 2008. Rising farm income has allowed farmers to reinvest their cash flows back into farmland to expand their operations.

Farmland Forecast   Farmland Price Index December 2010 Marc Schober Greyson Colvin RMI

“This month bankers were asked to name the biggest threat to the Rural Mainstreet economy for 2011. Over one-third or 35 percent indicated that a bursting of the farmland price bubble was the number one threat to the economy for next year. More than one in four or 27 percent of the bankers named low agricultural commodity prices as the number one risk for the Rural Mainstreet economy,” said Goss

Farmers have also been expanding their operations by investing in new farm equipment. In December, the farm equipment sales index expanded to a record high 77.8 from November’s 68.7.


Loan volumes sky rocketed this month to 52.3 from last month’s 35.3 as land and equipment buying has increased the demand for ag lending. The other two banking indicators, checking deposits and certificates of deposits, were above growth neutral for the tenth straight month.
Survey respondents expect the Fed could increase interest rates sooner, rather than later. Bankers were asked this month when they thought the Federal Reserve would increase interest rates and 62% thought that is would occur in 2011 and 38% thought in 2012.

The rural economy finally began to add jobs in December as the hiring index increased to 50.1 this month marking the fifth straight month of improvement. Goss noted that “While many metropolitan areas continue to shed jobs, agriculturally dependent small towns have begun to see improving job prospects.”

Bankers confidence in the economy six months out dipped slightly as the index declined to 62.2 from 63.8 in November, although is well above last December’s reading of 53.7.


This month, bankers responded that the bursting of a farmland price bubble posed the biggest threat to the rural economy, but we are skeptical, due to the nature of the surveyed question. Bankers had to decide whether a change in federal alternative energy policy, low farm commodity prices, or the bursting of a farmland price bubble would be the biggest threat. We would have responded with the same choice, although of potential risks in 2011, this is near the bottom of our list.

We are very excited about the improving prospect of the rural economy. Agricultural fundamentals are the best in decades, due to low supplies, increasing exports, and sustained demand for biofuels. The improving economy is reflected in the expansion of the RMI, demand for farmland, and increased purchases of farming equipment. Farmer balance sheets are at the most conservative levels in over 40 years, which helps us feel comfortable that even if the unexpected happens, farm economy is well positioned to capitalize on the increasing demand.

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Organic Trends Benefit Farmland

Dec 15, 2010

Organic farming entails tasks like planting and harvesting, but organic farmers have additional work that differs greatly from conventional farmers. Organic production is very specific to comply with certifications and requirements mandated by the National Organic Program (NOP), which was created through the Organic Foods Production Act of 1990 (OFPA). The NOP develops, implements, and administers national production, handling and labeling USDA standards.

When dealing with food production, the term, “organic” is not interchangeable with natural, free-range, or hormone-free. Organic grains, primarily corn and soybeans, can be very profitable for farmers as organic grains can sell for large premiums from farmers who are certified. The growing consumption of organic foods is also helping increase the value of U.S. farmland because more land is required to produce organic food since yields are typically lower than conventional farming.

What is Organic?

Organic foods and grains are produced without using pesticides, non-organic fertilizers, antibiotics, and hormones. Farmers that use organic production methods, and that have been certified organic by the NOP’s 55 domestic or 42 foreign accredited certifying agents, can sell their grains to organic handlers and producers. For a farmer to be certified, they must present an application to an accredited certifying agent with four items included:

• The type of operation to be certified
• A history of substances applied to land for the previous 3 years
• The organic products being grown
• The organic system plan describing practices and substances used in production

Before farmers are able to be certified, their fields must remain organic (free of certain fertilizers and chemicals) for three years. During those three years, farmers are practicing organic farming without the ability to sell their crop at the higher organic prices. After being approved, farmers must maintain accurate records in order to continue their organic certifications.

Here is a short overview of organic farming from the Agriculture Marketing Service at USDA:

Organic food is produced by farmers who emphasize the use of renewable resources and the conservation of soil and water to enhance environmental quality for future generations. Organic meat, poultry, eggs, and dairy products come from animals that are given no antibiotics or growth hormones. Organic food is produced without using most conventional pesticides; fertilizers made with synthetic ingredients or sewage sludge; or ionizing radiation. Before a product can be labeled "organic," a Government-approved certifier inspects the farm where the food is grown to make sure the farmer is following all the rules necessary to meet USDA organic standards. Companies that handle or process organic food before it gets to your local supermarket or restaurant must be certified, too.

Conventional vs. Organic

Although organic grains typically sell for a premium versus conventional grains, the USDA has no claims that organic is safer or more nutritious. The demand for organic foods has grown substantially as health conscious consumers demand a healthier diet.

The key differences between conventional and organic farming include variations in soil composition, weed control, yields, and prices. For organic farmers to be profitable, the organic price premium must cover their yield loss and higher input costs. Fertilizer is cheaper since synthetic fertilizers are prohibited, but cultivation and other weed control methods consume diesel and time in comparison.

Any plant material grown on a farm field will promote organic material in the soil. Since organic farm fields have a lot more growing in them than just the targeted crop, organic material in the soil is being built at a faster rate than most conventional farm fields. Increased levels of organic material in soil will translate into higher yields over time for farmers.

Weed control is the most noticeable difference between organic and conventional farm fields. Organic farmers will mow and cultivate weeds when they are small, with the intention to kill the weed before the weed’s seeds are able to spread. Many organic farmers will also add another crop to their rotation, like rye to follow corn, to make nitrogen, phosphorus and potassium more accessible for the next crop. Rye and other filler crops discourage weeds as well.

Yields are the most important statistic a farmer follows. For organic farmers, typically their yields will be lower than conventional farmer yields. Yields of organic crops are tied to the crop rotation practiced by the farmer.

Research from Iowa State University shows that organic corn yields are very different depending on the crops corn is rotated with. In a corn-oats/annual alfalfa rotation, organic corn yields were 146.4 bushels per acre from 2000-05. Yields were 163.7 bushels per acre if organic corn was in a corn-soybean-oats-alfalfa rotation. During these same years, conventional corn yields were 177.6 bushels per acre while in a corn-soybean rotation and 156.0 in a corn-corn rotation.

Organic Grains   Organic corn yields vs conventional corn yields farmland forecast marc schober greyson colvin

Organic corn yields were proven to be significantly higher when in a four crop rotation, but farmers are only able to capitalize on organic corn prices every four year in a four crop rotation.

Organic farmers may have lower yields, but at times the price of organic grains can more than offset their lower yields. Organic grain prices follow some of the same trends as conventional grains, but the two are not completely correlated. Organic prices depend heavily on consumer demand and discretionary spending. During recessions, organic prices suffer due to lower demand.

Organic Grains   Organic vs conventional corn prices since 2007 farmland forecast marc schober greyson colvin

Consumption Trends

Consumption trends show that the U.S. demand for organic foods is growing. Currently, 3.7% of total food sales in the U.S. are organic, according to the 2010 Organic Industry Survey. In the most concentrated organic food sector, fruits and vegetables, sales increased by 11.4% from 2008 to 2009, up to 38% of total sales.

Consumers are continuing to turn to organic foods, even in the recession. A recent study from Mambo Sprouts Marketing found that 88% of consumers have been taking additional steps to promote family health and wellness. Of the 88%, 59% were buying more organic foods and 53% were increasing organic food consumption. The trends show that the organic demand is not letting up anytime soon. If demand for organic food continues to grow, the entire food supply will continue to shrink.

Organic Demand Affecting Farmland Values

The U.S. economy is slowly coming out of its recession, which means organic food demands should increase as the economic conditions improve. As organic food demand increases, it will require more farmland for production since yields are not as high on organic farms. It takes over 20% more land to grow the same amount of organic corn as it does conventional corn, according to comparisons of Iowa State University yield tests. Luther Tweeten of Ohio State thinks it can take nearly twice as many acres to produce organic crop yields equivalent to conventional crop yields. The growth of organic grain production will increase the demand for farmland, as well as farmland values.

Organic farming is becoming more efficient due to improving technology, but will increased production be able to meet the increased demand of organic food? The current U.S. supply of corn is at less than 30 days, according to the November USDA WASDE Report. Farmland will undoubtedly benefit from the increased amount of organic production due to limited supply of farmland and tight grain supplies.

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Uneventful December WASDE

Dec 13, 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 Friday. The USDA made few changes in the December WASDE, which is to be expected.

U.S. soybean ending stocks were tightened by 20 million bushels from November’s estimate and global soybean ending stocks were decreased by 2% due to strong demand. Small changes were made to U.S. ending corn and wheat stocks, which increased 5 million bushels and 10 million bushels, respectively.


The only change made in the December WASDE to corn estimates was a 5 million bushel increase to corn imports from Canada, which had a larger crop than expected this year. Ending U.S. corn stocks increased to 832 million bushels from November’s estimate of 827 million bushels. Despite increasing reports of higher ethanol production, ethanol usage was left unchanged at 4.8 billion bushels.

World corn ending stocks was raised to 130 million metric tons, up from 129.16 million metric tons in the November report due to higher production estimates in Canada, Europe, and the Former Soviet Union.


Soybeans continued the bullish theme as U.S. ending stocks were reduced by 20 million bushels to 165 million bushels. Production estimates were unchanged with an average yield estimate of 43.9 bushels per acre, but exports were raised by 20 million bushels to 1.59 billion bushels. The reduction in ending stocks was within analyst’s estimates, so the report should have little response in the market.

Global soybean production was also reduced to 60.12 million metric tons from November’s estimate of 61.41 million metric tons. Production numbers in major producers Argentina and Brazil were left unchanged, but strong demand from China reduced ending stocks.


U.S. 2010/11 wheat ending stocks were increased to 858 million bushels in December due to a 10 million bushel decline in wheat usage for food. The USDA narrowed it estimate of price range for wheat to $5.30 to $5.70 from November’s estimate of $5.25 to $5.85.

World wheat ending stocks were raised by 4 million metric tons to 176.72 million metric tons in December. Australian and Canadian production was increased by 2.5 million metric tons combined, partially offset by a decrease in Russian production by 500,000 metric tons.


December’s WASDE was very uneventful, but this is to be expected at the end of the year. We believe the market will quickly look past this month’s WASDE and focus on weather and export demand.

Click on the link for the full WASDE report:

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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.

Grain Prices

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.

Crop Conditions

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.

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