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March 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.

Record ending stocks of wheat; why the steady prices?

Mar 29, 2010
The March WASDE Report from the USDA estimated U.S. wheat ending stocks to surpass 1 billion bushels for the first time in 22 years. This causes a concern for some wheat producers since basic economics tell us that when supplies extend higher than demand, prices can decrease. So far, wheat prices have held fairly steady since the March 12th release of the WASDE Report, but will these prices hold, and why is there such a surplus?
 
Why the surplus of wheat?
 
In 2008, commodity prices were at all time highs due to depressed global ending stocks of major commodities. “Farmers will take advantage of high prices whenever they can,” according to Randy Englund, the Executive Director of the South Dakota Wheat Commission. While these record high prices were present, farmers figured they could plant more of these crops to expand their income as much as possible. This excess acreage of planting is still carrying over into 2010 while the price of many commodities does not justify the size of the crop.



In 2007, both the U.S. and world ending stocks of wheat were at extreme lows, which eventually drove prices up in 2008 and lead to such a large crop since. “Farmers responded to high commodity prices, and we were coming off of some of the lowest stocks,” explained Englund. It made sense for some farmers to grow wheat in fields that were typically soybeans or corn in order for them to take advantage of the high prices.
 
Low ending stocks and high prices from a few years ago have lead to record high ending stocks today.



Factors driving future wheat prices
 
Both domestic and global ending stocks will affect wheat prices in the short-run. Although in the U.S., ending stocks are at a 22 year high; in 2007 wheat ending stocks were at 50 year lows, according to USDA. If ending stocks remain at high levels for consecutive years, look for prices to soften and eventually farmers will limit their wheat acres, which has already started to occur in 2010 with the depleted amount of winter wheat currently in the ground. Planted acres of wheat have decreased from 59 million acres in 2009 to 52 million acres in 2010. Record global wheat production could drive global ending stocks to higher volumes, which could have a negative effect on wheat prices as well.



The recent rally of the U.S. dollar could affect grain prices because foreign grains may become more attractive. “The value of the dollar is increasing and competitor’s wheat is looking favorable,” according to Englund. The USDA estimated a 20 million bushel decrease in wheat exports this March, primarily due to cancelled orders because of the strong U.S. dollar.
 
Milling extraction rates are higher than normal, according to Erica Olson, marketing specialist for the North Dakota Wheat Commission. Mills require less wheat to produce the same amount of flour. This increase in efficiency could lead to a slight decrease in demand when paired with an overall decrease in per capita consumption of wheat in the U.S.
 
Wheat prices may increase if livestock producers switch from their traditional feed to wheat based feed, according to Englund. Some countries have made the transition to wheat based feed which could increase demand and wheat prices over time.
 
Finally, the weather will play its usual factor affecting grain prices. If farmers are unable to access their fields this spring because of excess moisture, prices will increase because of the potential decrease in supply. The USDA will be releasing their Prospective Plantings Report on March 31st. This report will give an initial estimate of planned planting acreage for the 2010 crop. As usual, the USDA estimates will be subject to changes in weather.

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

The Bulls and Bears of the Grain Market

Mar 24, 2010
Major grain prices have been fluctuating recently on the Chicago Board of Trade. Prices have been trying to recover since the WASDE Report was released on January 12, 2010 by the USDA. Some analysts feel that food commodities are bound for another increase, while others believe that food commodities are going to remain stable or decrease over time.
 
Between the rising global population and the increase in renewable fuels, food commodity prices, particularly grains, should increase over time. On the other hand, a dollar that is rallying and record ending stocks could keep grain prices in check.
 
Bear outlook
 
The recent rally of the U.S. dollar has started to push grain prices down because foreign buyers of grains can purchase grains in a cheaper currency, like the Brazilian Real. Some feel that grain prices in the U.S. will remain relatively low in the short-term because of the stronger U.S. dollar.
 
The most recent WASDE Report from March, which included a resurvey of crop production, revealed a record amount of ending stocks for wheat, according to the USDA. For the first time in 22 years, wheat’s ending stocks will be over 1 billion bushels. Large ending stocks are a sign of oversupply, which will likely prevent prices from increasing until supply decreases or demand increases.
 
Corn and soybean planted acres could be larger than expected because of a 6 million acre decrease in winter wheat planting and 3 million acres exiting the Conservation Reserve Program. These 9 million acres of U.S. cropland will certainly increase the amount of planted acres in 2010.
 
One of the largest factors bears of the grain market emphasize is the ongoing advancement in seed technology. Seed technology, including Genetically Modified Organisms (GMO) seed, may increase corn output by 26% over the next three years, according to Cheryl Beebe of Corn Products International Inc. In addition, 85% of the total 2009 U.S. corn crop was grown with GMO seeds, according to the USDA. Seed technology will continue to increase grain output, especially in foreign countries. This increase in production should increase supplies which will negatively affect grain prices.



Bull outlook

 

The global demand for grains has never been higher. Bulls of the grain market think that demand for grains will increase faster than the increases in production of grain. The global population is targeted to increase from roughly 6 billion today to over 9 billion by 2050. Crop production will need to increase by 86% by 2050 to meet the demand of 3 billion more people, according to the Global Harvest Initiative.

 

Although 2009/10 ending stocks were at a record amount for certain food commodities, global reserves as a percent of consumption are forecasted to decrease to 17.4% in 2010, according to Goldman Sachs. The 30 year average for reserves as a percentage of consumption is 27.7%, which includes the 2009 bumper crop. If consumption is increasing faster than production, prices will tend to increase.

 

The demand for food commodities for renewable fuels is also increasing. The EPA is currently considering an increase of the maximum amount of ethanol allowed in U.S. gasoline. The current maximum is 10% and the proposal being researched by the EPA is 15%. The EPA should make a decision on the increase by June 2010. An increase in the amount of ethanol in gasoline will demand more corn to be used for ethanol production and decrease the supply of corn available for other uses.



Currently an ounce of gold has more grain purchasing power than ever, according to Dale Durchholz of Agrivisor LLC. An ounce of gold will buy over 300 bushels of corn or 119 bushels of soybeans today. When grain prices peaked in the summer of 2008, an ounce of gold could only buy 116 bushels of corn. “A lot of people investing in commodities are going to start looking at how much grain prices are undervalued relative to gold and other precious metals,” Durchholz has explained.

 
Economist Dr. Marc Faber has recently agreed that food commodities are extremely undervalued. “Food commodities are at 200 year lows in real time dollars,” Faber said. Since food commodities are at such a discounted price, it will be difficult for them to decreasing any further.
 
Farmland values
 
The equation for determining farmland values is complex, and no one knows what it all exactly involves, although commodity prices are certainly one of the major aspects of determining farmland values. Commodity prices should increase in the short and long-term because of the increased demand that will consistently outpace production. Although 2009 ending stocks were at record amounts according to the USDA, consumption of these commodities is also at extremely high levels.
 
Since late in 2009, farmland values have started to increase from their stall during late 2008 and into 2009. Farmland values should continually increase because of rising commodity prices, decreasing supply of farmland, a growing population, increased biofuel demands, and farmland’s ability to act as an inflation hedge. Land values are starting to increase again, and its proving that the opportunity is slowly closing on investing in farmland at these discounted prices.

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

Area Economic Index at its highest since April 2008

Mar 22, 2010
The overall Rural Mainstreet Index (RMI) continued its climb to a nearly two year high this month,  according to Creighton University’s March survey of bank CEOs in an 11-state region. The RMI rose to 47.4, which is still below the growth neutral 50.0. The farm equipment index fell while the farmland price index continued its rally. The confidence index, which estimates the economy six months out, continued to remain growth positive for the sixth consecutive month at 54.3. The loan volume index increased above growth neutral to 55.2 for the first time since last June.

The farmland price index increased to 58.2, continuing a four-month rally to a 17-month high, but it marks just the second consecutive month above 50.0. 24% of bankers that were surveyed expect farm and ranch land prices to decline over the next six months while 14% expect prices to increase. All of the surveyed states had farmland price indexes above 50.0 while Nebraska and South Dakota had indexes in the 60’s. 



The farm equipment sales index slipped for the second straight month to 41.4 from January’s 15-month high of 47.2. “I expect farm equipment sales to pick up as the farm and ranch economies improve in the months ahead,” said economist Ernie Goss of Creighton University. Goss and Bill McQuillan, CEO of CNB Community Bank of Greeley, Nebraska created the monthly economic survey back in 2005.

Lending has started to pick up on Rural Mainstreet according to the loan volume index. The index increased to a 9-month high of 55.2 and it is the first time the index is above 50.0 since June 2009. The checking-deposit index increased to 56.2 and the certificates of deposit index rose to 54.4 in March. 

Outlook
 
The RMI revealed some important information this month. Every index increased besides a 1.0 decrease in farm equipment sales, which Professor Goss expects to increase soon. The Rural Mainstreet economy looks like it has been making a strong recovery lately with so many indexes reflecting positive growth.
 
Although 24% of bankers expect a decline in farmland prices, the majority of bank CEOs (62%) expect stable farmland prices over the next six months. 14% still feel that prices will continue to increase. Farmland prices have shown how they can overcome hard economic times by stabilizing when many other asset classes decreased in value. If farmland prices remain steady or decrease, expect more investor interest because it would be such a rare occurrence. Farmland is a tangible asset with a very limited supply which makes it such a unique investment.

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

WASDE: Corn yields decreased as expected

Mar 11, 2010
The USDA updated the U.S. and World 2008/09 and 2009/10 balance sheet estimates for major agricultural commodities in the World Agricultural Supply and Demand Estimates (WASDE) report on Wednesday. Typically the March report receives little attention, but all eyes were focused on this month's report due to the resurvey of last fall's harvest. The resurvey included Illinois, Michigan, Minnesota, and Wisconsin. North and South Dakota will be resurveyed at a future date. 
 
Forecasted U.S. corn production estimates were decreased by 20 million bushels to a revised 13.1 billion bushels. The USDA decreased the 09/10 yield forecast for corn to 164.9 bushels per acre from the record 165.2 bushels per acre. Wheat ending stocks were increased by 20 million bushels, while soybean ending stocks were decreased by 20 million bushels, according to the report.
 
Estimated U.S. corn ending stocks were increased by 80 million bushels by the USDA on a decrease of exports by 100 million bushels due to an increase in foreign supplies. The average U.S. corn yield was adjusted to 164.9 bushels per acre from 165.2 bushels per acre. The decreased yield still makes for a record year. The USDA reduced its 2009/10 farm price for corn by 20 cents to $3.45 to $3.75 per bushel.
 
World corn production was increased by 5.9 million tons because of a 3.8 million ton increase from Argentina and a 2 million ton increase from South Africa. Both countries experienced limited amounts of damaging heat during the growing season. The increase was partially offset by India’s small reduction in corn production.
 
U.S. wheat ending stocks were increased by 20 million bushels on a decrease of food use. The increase in ending stocks pushed total ending stocks to over 1 billion bushels. "This would be the first time the wheat carryover has exceeded 1 billion bushels in over 20 years," GrainAnalyst.com market watcher Vic Lepinasse expressed on the increase of ending stocks. Wheat’s 09/10 marketing year estimated price was increased by 5 cents by the USDA to $4.80 to $5.00.
 
World wheat supplies estimates were increased by 2.1 million tons on a 2.1 million ton increase of Russia’s beginning stocks.
 
The estimated 2009/10 U.S. soybean ending stocks were decrease by 20 million bushels to 190 million bushels because of increased soybean exports. Exports were increased by 20 million bushels to a record 1.42 billion bushels. In addition, Brazil’s soybean production was increased by 1 million tons to a record 67 million tons on higher than expected yields. The farm price for the 2009/10 soybean crop was narrowed to $8.95 to $9.95 per bushel.
 
The USDA decreased corn yields and production like we forecasted, but the adjustments were not as large as some had hoped for. Grain markets were responding modestly to the report on Wednesday. We will pay attention to flood reports until plating season arrives, which could affect the planted acreage of crops.
 
Remember to visit Farmland Forecast (farmlandforecast.colvin-co.com) for your daily update on news and research about agriculture and farmland.
Click on the link for the full WASDE report: http://www.usda.gov/oce/commodity/wasde.

Wet harvest can lead to wet planting - The risk of farmland flooding

Mar 08, 2010
The planting season is right around the corner and that means that flood season is coming even quicker. After an extremely wet harvest across the nation, fields that have not had their fall tillage completed may be at a disadvantage when spring comes. Fields that still have crops standing in them will even further delay the planting season. Two to four times the normal precipitation level was seen in the Midwest this past fall, according to the National Weather Service.
 
As snow melts and the ground is exposed to the sun once again, the ground needs to heat up and dry out as quickly as possible so farmers can access the fields to plant their crop. Flooding becomes an issue in spring when fields cannot drain their moisture quick enough.
 
The snow pack of the upper Midwest was impressive this year. December brought 150% to 400% the normal amount of precipitation to areas in North Dakota, South Dakota, and Minnesota. Although snow did not come until mid December in many parts, sub-zero temperatures created an extremely thick frost layer in the ground, according to the 2010 National Hydrologic Assessment by the National Weather Service. This thick frost layer does an excellent job of killing pests and fungus that destroy crops during the growing season, but it will cause for an extended thaw period and increased amount of water runoff.
 
Conditions to prevent flooding
 
Even though there is an abnormal amount of moisture in and on top of many farm fields, there is still hope for a successful thaw. Temperatures mildly above freezing help melt the snow and encourage the frost to thaw which will promote drainage. Temperatures have lately been in the 40’s in many of the flood prone areas.
 
The best case scenario for the spring thaw would be a slow snowmelt that allows the frost to come out of the ground before any rain enters the forecast, according to the United States Geological Survey (USGS). When the ground thaws, moisture is able to start draining instead of running off. If the frost is extremely thick in the ground, a slow and steady runoff should not overpower river and stream levels until the frost eventually thaws.
 
The X-factor
 
The worst case scenario would involve rain. Rain is the biggest cause for flood concern during the spring thaw. If the snowmelt occurs very quickly, and more precipitation comes before the ground is able to thaw, then the risk for flooding increases dramatically.



On March 5th, the National Weather Service released an updated flood report. It stated that conditions have been favorable for a healthy snowmelt. Rivers have been at elevated levels during winter and the snow pack has been above normal as well. These conditions increase the risk of flooding, although the National Weather Service noted that if precipitation stays at minimal levels and the snowmelt continues at a steady pace, flood risks may decrease. The 90 day precipitation outlook for the nation is favorable for the Midwest.



Currently rivers and streams are well below flood stage, but 150% to 200% above historical averages for this time of year, according to the USGS. It will be a few more weeks before rivers start to feel the effects of the warmer temperatures across the U.S. and we can predict an increase or decrease in flood risk.
 
How to decrease the already minimal risks of owning farmland
 
Farmland has proven that it is a very safe and nonvolatile asset class over the past century (read “Why Invest in Farmland?” http://farmlandforecast.colvin-co.com/2009/02/12/why-invest-in-farmland.aspx), but as with any investment, there are some risks involved. Natural disaster is one of these risks of owning farmland. Flooding and drought can affect the quality of crops grown on farmland, and in even some cases, ruin the land for years.
 
Central Wisconsin is home to a fair amount of cropland, but the land has been scarred since the flood of 2008. Productive land still sits underwater along I-94 because of the flood. When a field is underwater it not only looses significant value, it will not yield any intermittent income from a cash rent contract.
 
To hedge the risk of owning farmland, investors should diversify their holdings of land. Farmland around the area of the Red River Basin has great value, but flooding occurs almost annually in many parts. It is best to spread out the risk by holding land in different areas across the Midwest.

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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