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January 2012 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.

Rural Mainstreet Index Reaches Five Year High

Jan 23, 2012

The rural economy continued to move forward this month, reaching its highest level since June of 2007. The farmland price index fell to a still growth positive reading after reaching a record high level in December 2011.

The Rural Mainstreet Index (RMI) advanced to 59.8 from 59.7 to remain growth positive for the fifth straight month and above the 59.3 it posted 12 months prior. The growth is largely due to the areas of the country tied to agriculture and oil.

RMI January 2012

Fred Bauer, president of Farmers Bank in Ault, Colorado, responded to the bankers reporting, “Oil and ag income continue to push our area economy up.”
 
Bankers were asked what the largest economic challenge will be for 2012. Over one fourth, 26%, indicated that a decrease in agriculture commodity prices is the largest threat to the Rural Mainstreet Index.
 
Agriculture
 
The farmland price index fell to 74.3 this month from its record high 84.1 in December. This marks the 24th straight month the index has been above growth neutral. The farm equipment sales index decreased to 72.3 from 73.8 in December.

Farmland Price Index January 2012

Only 9% of bankers expect the ending of the blender's tax credit for corn-based ethanol to have a significant negative impact on the Rural Mainstreet economy. The majority, 51%, thought it would have a modest negative impact.
 
Banking
 
The loan volume index decreased to 45.5 from 50.8 a month prior. The check deposit index decreased to 68.2 from 68.9 in December and the certificate of deposit and savings instruments increased to 47.8 from 37.0 last month.
 
October's job index decreased to 51.5 compared to 54.6 in December. “Year over year job growth for Rural Mainstreet communities is approximately 1 percent compared to 0.8 percent for urban areas of the region,” said Creighton University economist Ernie Goss.
 
The economic confidence declined to 56.1 from December's 61.8 as outside markets continue to affect the economic outlook, “Difficulties in Europe and potential conflicts with Iran combined to push economic confidence lower,” said Goss.
 
Survey
 
This survey represents an early snapshot of the economy of rural, agriculturally and energy-dependent portions of the nation. The RMI is a unique index covering 10 regional states, focusing on approximately 200 rural communities with an average population of 1,300. It gives the most current real-time analysis of the rural economy.
 
- Colvin

For Daily Updates Visit http://farmlandforecast.colvin-co.com 

 

 

WASDE: USDA Starts Year Off With a Surprise

Jan 12, 2012

The USDA caught the grain market by surprise this morning, resulting in corn and wheat prices plummeting. Analysts were expecting the USDA to reduce ending corn stocks by 100 million bushels due to lower than expected yields, but the USDA actually increased corn yields and production, leaving stocks roughly unchanged.

Corn

Unexpected and bearish news from the USDA as U.S. corn production is estimated 48 million bushels higher with a 0.5 bushel increase in yield per acre and a 45,000 acre increase in harvested acreage. U.S. corn exports are projected 50 million bushels higher due to strong sales to date and reduced forecast for Argentina.

2011/12 U.S. ending stocks are projected at 846 million bushels, two million bushels lower than last month. The USDA decreased the forecasted season-average farm price by $0.20 to $5.70 to $6.70 per bushel.

The Quarterly Stocks report indicated that corn stored in all positions on December 1st, 2011 was 9.64 billion bushels, a 4 percent decrease from a year ago. Of those stocks, 6.18 billion bushels are stored on farms, and 3.47 billion bushels stored off-farms.

2011/12 global coarse grain supplies are unchanged this month as increased corn production in the United States, Ukraine, EU-27, and Russia is offset by lower expected corn production in Argentina and the decreased sorghum production estimate for the United States.

We will continue to watch Argentina's corn production as La Niña weather patterns of extreme heat reduce yield prospects. Although corn prices decreased, a historically low stocks to use ratio should support corn prices going forward.

Soybeans

Domestic soybean production is estimated at 3.056 billion bushels, a 10 million bushel increase based on improved yields. The soybean yield estimate is up 0.2 bushels per acre to 41.5 bushels per acre. U.S. soybean exports are projected 25 million bushels lower than last month to 1.275 billion bushels. 2011/12 ending stocks are projected 45 million bushels higher to 275 million bushels due to increased yields, decrease in soybean crush, and decreased exports. The U.S. season-average price range for 2011/12 was narrowed by 25 cents on both ends of the range to $10.95 to $12.45 per bushel.

The Quarterly Stocks report indicated that soybean stored in all positions on December 1st, 2011 was 2.37 billion bushels, a 4 percent increase from a year ago. Of those stocks, 1.14 billion bushels are stored on farms, and 1.23 billion bushels stored off-farms.

Global soybean production for 2011/12 is projected down 2.2 million tons to 257 million tons due to lower production forecasts for South America.

Wheat

U.S. wheat ending stocks were projected 8 million bushels lower to 870 million bushels due to an increase in seed usage and exports. Feed and residual use is projected 15 million bushels lower due to a decrease in expected disappearance during September through November. The season-average price is projected at $6.95 to $7.45 per bushel, a 10 cent drop on both ends of the range.

The Quarterly Stocks report indicated that wheat stored in all positions on December 1st, 2011 was 1.66 billion bushels, a 14 percent decrease from a year ago. Of those stocks, 405 million bushels are stored on farms, a 26 percent decrease from a year ago. Off-farm stocks are at 1.25 billion bushels, a 10 percent decrease from a year ago.

Global wheat supplies for 2011/12 are projected 2.7 million tons higher due to increased production for Kazakhstan, Brazil, and Russia.

Overview

The USDA is always good for a surprise. The higher than expected grain supplies will result in downward pressure on grain prices in the short-term. Moving forward, the grain markets will be closely watching South America's corn and soybean production and how La Niña weather patterns will affect yields.

For daily articles on farmland and agriculture, visit www.farmlandforecast.com.

2012 Outlook for U.S. Grain Prices

Jan 09, 2012

Grain prices have been volatile throughout 2011 due to wide changes in production and demand estimates, as well as macro issues including the European debt crisis. Corn prices reached near $8.00 per bushel ,pre-harvest, on a poor yield outlook in the U.S.

Moving into 2012, we expect commodity prices to continue to be volatile and trade based on both agricultural and nonagricultural market factors. The primary data point that will drive grain prices in 2012 will be U.S. planted acres of corn. Analysts are expecting the largest global corn crop on record, including 94 million acres of corn in the U.S. in 2012. Many commodity prices will be heavily correlated to any deviation from the 94 million acres.

Long-term factors that will continue to weigh on grain prices in 2012 will be the growing demand for bio-fuels, emerging market demand, global yield trends, and the political outlook.

In the short-term, we will be closely tracking the weather outlook for South America in the upcoming few months. Currently, the La Niña weather pattern is expected to bring severe hot and dry weather to Argentina and Brazil throughout the growing season for corn and soybeans.

Corn

Corn has been recently trading between $5.50 to $6.50, but was as high as $7.50, due to tight supplies both domestically and globally that were not capable of meeting demand. The price of corn began to decrease as wheat became an alternative for feed usage and macro concerns prompted investors to sell off grain positions.

Corn has a more attractive profit margin compared to soybeans at over $1.50 per bushel for the 2012 season, according to Iowa State University. Many farmers have already forward sold portions of their 2012 crop at high prices, forcing the farmers to plant corn to fulfill said contracts.

Bear Outlook

Our bearish outlook is primarily driven by a global recession due to continued European concerns and economic slowdown in China. Large U.S. corn plantings, a bumper crop, increasing South American exports, and political pressure may increase ending stocks to over 1 billion bushels in 2012/13.

• Macro Issues – A global slowdown will result in demand destruction, especially in emerging markets. The long-term outlook for corn usage strongly takes into account the urban growth in China where 40% of every incremental dollar of income is spent on food. If the European debt crisis is not resolved, there will be a continued flight to safety and a stronger U.S. dollar.

• Planted Acres – The key estimate in 2012 is corn acreage in the U.S. of 94 million. If planted acres exceed this estimate, the corn markets will take on a bearish mood until crop condition reports regain the spotlight throughout the growing season. Approximately 1.6 million acres are coming out of the Conservation Reserve Program that will be eligible to be planted in 2012. The amount of potential corn acres will also increase due to the high amount of prevent planted acres in 2011 that will now be eligible for planting in 2012, which was 2.7 million acres higher than average according to NASS.

• Bumper Crop – The past two years have resulted in disappointing crops and there will be a reversion to the mean at some point in the future. In each of the past two years, U.S. corn yields have been unable to surpass the 165 plus bushels per acre that the USDA trend line forecasts. If U.S. corn yields are over 165 bushels per acre in 2012 and acreage is above 94 million acres, ending stocks could be well above 1 billion bushels.

• Global Production – 2012 is expected to be the largest global corn crop on record, due to increased acreage in Brazil, Argentina, and Ukraine. Favorable weather and a weak La Niña could result in large exports from South America.

• Federal Deficit – The U.S. government is searching for budget cuts and agriculture can expect to see a decrease in spending. The direct payments, which are paid per acre farmed, are likely to be lost during 2012. Federal crop insurance premiums are roughly 50% subsidized by the government and these subsidies are also at risk under budget cuts. Farmer income would decrease significantly if crop insurance was to be covered entirely by farmers.

• Ethanol – The expiration of the blender’s tax credit will not decrease ethanol production, but will decrease refiner’s margins. Economic issues may constrain energy consumption and consumers may reject the use of 15% ethanol blended gasoline.

Bull Outlook

Our bullish scenario does not expect prices to reach record levels, but rather that corn supplies remain tight and global economic issues are somewhat resolved or contained. Although there are economic incentives to corn, 94 million planted acres will be hard to achieve. Difficult growing conditions in South America will keep global supplies tight.

• Reduced Acres – Corn planted acres could be below 94 million acres, which is probably likely, as there is probably not enough corn seed for 94 million plus acres. Dry soil conditions in the Corn Belt and flooding in Missouri River Valley will likely result in another difficult planting season this spring.

• Yields – A return to 160 plus bushel per acre is unlikely and a yield estimate of 154 to 155 bushels per acre is more likely, based on historical trends. Marginal land brought into production will also have below average yields. The weather is the single most important factor for producing corn and we expect there will be some bumps in the road.

• La Niña – Hot and dry weather patterns from La Niña are already pressuring South America and are likely to constrain yields and reduce South American exports. Corn prices will closely track the South American crop in the first half of 2012 and will have consequences on global supplies. Any significant yield decrease in other crops used for feed would also be bullish news for the corn markets.

• Ethanol Demand – We expect corn used for ethanol to remain above 5 billion bushels as refiners continue to operate with positive margins despite the loss of the blender’s tax credit. Political support of an increase in E15 infrastructure would strengthen the long-term outlook on bio-fuel demand and help support corn prices even in the short-term.

• Chinese Imports – China continues to be structurally short of corn and will rely on the import market to make up the deficit. China will have to restock government supplies at some point and will use the current low prices as a buying opportunity.

• Economic Stabilization – Global economic growth could pick up if the European debt crisis is resolved and growth stabilizes in emerging markets. A weaker U.S. dollar will make U.S. exports more competitive and could reach record levels in 2012.

Soybeans

Soybeans have been recently trading between $11.00 to $12.00 as strong competition from Brazil has decreased U.S. export demand. Prices will closely track the La Niña weather pattern in South America throughout the next few months as critical growth stages are occurring for the 2012 soybean crop.

Bear Outlook

A bearish outlook for soybeans would stem from a global recession or a bumper crop from outside of the U.S. Demand for feed usage would decrease in less favorable economic conditions on a global scale due to the slowed increase of food demand by emerging and emerged markets.

• Yields – High yields from Brazil and Argentina would increase global supplies to a level where global demand would not be able to keep pace and thus dampen soybean prices. The current La Niña weather pattern does not favor a scenario of record yields in South America.

• Price Correlation – Soybean prices will remain correlated to long-term corn prices and thus if a bearish corn outlook occurs, expect soybeans to follow due to the feed usage connection and crop rotation needs of the U.S. farmer.

Bull Outlook

As soon as USDA releases the early estimates of planned planted corn acres on March 1, we expect soybean prices to react. Any acreage larger than 94 million acres for corn will favor soybean prices as additional corn acres will come at the expense of soybean acres.

• Yields – Low yield estimates in the U.S. would be very bullish for soybeans, especially if paired with low acres and a poor South American crop. Domestic weather can be very volatile and can leave room for a large amount of risk in soybeans. Farmers will be allotting more acres to corn in 2012, thus taking not just average soybean acres out of production, but soybean acres that yield 1.5 times the national average. A low amount of soybean acres in Iowa and Illinois will be bullish for soybean prices.

Stagnant Yields – The USDA soybean trend line yield curve is increasing at a slow rate for soybeans. While working with farmers on a daily basis across the entire Midwest, soybean yields have remained quite stagnant for the past few years.

• La Niña - La Niña is currently the largest factor driving soybeans. The weather in South America is already extremely hot and dry which is putting stress on crops. Current subsurface soil moisture levels are already very low in South America due to the severe La Niña of 2010/11, thus any additional shortfall of rain will increasingly damage crop conditions, especially for the typically hearty South America soybeans.

Wheat

Wheat has been recently trading near $6.50 per bushel after reaching $9.50 per bushel due to the Russian drought of 2010. Since the FSU has been cleared for open market wheat exporting, global wheat supplies have loosened, partially offset by the alternative to corn as a feed. The 2011 growing season is expected to be the second largest wheat crop on record.

The recent dissolution of the Canadian Wheat Board will now allow farmers to sell at market rates instead of government controlled pricing.

Bear Outlook

Our bearish outlook is driven by abundant global supplies, driven by improving crop conditions and increased exports. Weak corn prices will also weight on wheat.

• Price Correlation – Wheat prices will track corn and soybean fundamentals. Weak corn prices will no longer make wheat an attractive alternative for feed use.

• Global Production – Global production is the largest risk for wheat prices in 2012. Currently, the U.S. is at a very high level of stocks-to-use for wheat at 38, which is well off the lows of 20% in 2007.

• Yields – Improving growing conditions and the end of the southwest drought could result in a bumper crop of wheat in the U.S. The U.S. is preparing for a bright outlook on the 2012 wheat crop as adequate snow fall is covering winter wheat varieties and residual fertilizer could push 2012 yields higher in the southern plains after the poor yielding 2011 season.

Bull Outlook

The upside for wheat is minimal in 2012, but the potential for disappointing yields and a weaker dollar could push wheat prices higher.

• Yields - Decreased global yields could occur if drastic drought or flooding were to strike again in the FSU, Australia, Canada, Europe, or the U.S which could constrain the global export market for wheat.

• U.S. Currency – A weak dollar in the U.S. would be bullish for wheat prices and allow the U.S. to gain market share in the export market.

• Corn Fundamentals – Improving fundamentals in the corn market will support the grain market and force demand rationing.

2012 Overall Outlook

We expect 2012 to be a volatile year as prices adjust to planting estimates and weather patterns. We will also be keeping a close eye on the world politics. Presidential candidates could play a role in the grain markets during 2012 as well. Any sort of major political change to trade restrictions could also be a major factor for grain prices. In the 1980s, an embargo by Russia on U.S. trade lead to the crash of the U.S. grain markets as well as the entire agriculture sector.

Fundamentally, the long-term outlook for agriculture continues to remain positive. Growing food demand in emerging markets and increased bio-fuel production will continue to provide a long-term bull market for grains over the next decade.

For daily articles on agriculture and farmland, please visit www.farmlandforecast.com.

La Niña Causes Grain Rally

Jan 03, 2012

Throughout the month, farmers have been busy working on end of the year accounting, purchasing farmland, expanding operations, and preparing for the spring planting season. The weather across the Corn Belt has been very mild compared to twelve months prior, but cold temperatures are promoting a healthy frost in the ground that will help break up compaction and kill disease and pests.

The current La Niña weather pattern has been causing very hot and dry weather in South America which has lead to a late rally in the grain markets after decreased global demand had been driving commodity prices lower.
 
Grain Prices
 
Corn prices increased by 7.7% in December and closed at $6.47 per bushel. Prices started the month off bearish, dropping 3.7% on outside market influence and soybean prices decreasing. The December WASDE revealed an estimated 7.3 million ton increase in production from China which increased total world production to 867.5 million tons. Domestically, corn ending stocks were increased by 5 million bushels to 848 million bushels due to a decrease in feed and seed use. The Chinese recently announced that they will consider importing more corn to increase stocks if U.S. corn drops to $5.00 per bushel.
 
Soybean prices increased 5.9% this month to $11.98 per bushel on the Chicago Board of Trade. The USDA estimated that domestic soybean exports decreased by 25 million bushels to 1.3 billion bushels due to a slow pace of shipments, outstanding sales through November, and strong export competition from South America. Soybean prices had decreased 1.9% to $11.10 after the USDA WASDE report release, but the outlook of the South American crop is deteriorating quickly as reports of the La Niña are causing extreme dry heat for the top yielding corn and soybean land of Argentina, Brazil, and the rest of Latin America.
 
Wheat prices were sent 9.7% higher during December to $6.53 per bushel due to increased speculative buying and the correlation to soybean and corn prices. Wheat prices slumped 2.7% by midmonth on a bearish demand outlook via the WASDE report. U.S. wheat ending stocks were projected 50 million bushels higher due to reduced prospects for exports of Hard Red Winter, Soft Red Winter, and White Wheat. Global wheat supplies for 2011/12 are projected 9.3 million tons higher with larger beginning stocks in Australia and Argentina, and a 5.7 million ton increase in global production.
 
Farmland Values
 
The Creighton University farmland price rose to a record high 84.1 in December. This marks the 23rd straight month the index has been above growth neutral. The farm equipment sales index increased to 73.8, its highest level since February of 2008, from November's 68.4. Bankers were asked to provide average cash rents per acre in their area. The average cash rent was $191 and 22% of bankers reported average per acre rents above $250.
 
Don Reynolds, president of Regional Missouri Bank, said, “Land prices appear to continue to rise. But, we noted that a few small tracts that were desired by multiple cash rich buyers appeared to distort people’s thinking.”
 
Farmland values are steadily increasing across the Corn Belt as farmers are continuing to purchase farmland during the winter months after a strong harvest of highly priced grain that provided farmers with  additional income.
 
2012 Grain Outlook
 
Corn stocks should increase as 2012 may see the largest global corn crop in history. Low soybean prices are encouraging farmers to plant as much corn as possible. We expect emerging market and domestic demand to support prices throughout the year though. We expect to see prices rebound in the first half of 2010 as production estimates in South American continue to be lowered due to La Niña weather patterns.
 
We will watch the stocks-to-use ratio, especially in corn, throughout early 2012 for any dip below 5% which would instantly justify an increase in corn prices and other grains would follow. Any corn stocks-to-use ratio of below the 10-year average of 12.5% should be considered bullish moving forward. Currently the corn stocks-to-use ratio is at 6.8%.
 
The planted acres report in March, along with monthly USDA WASDE reports, will help grain markets adjust to the potential for 94 million acres of corn to be planted in the U.S. After acreage reports are released in spring of 2012, expect the weather to become the key factor for crop condition reports. In any report from USDA, expect soybean prices to benefit from any estimate higher than 94 million from corn acres.

Outlook 
 
Farmland values have been continuing to increase due to the large amount of land sales this winter at elevated sale prices primarily driven by farmers and not outside investors. The ratio of farmer to investor buyers of Iowa farmland has been increasing over the past five out of six years according to Iowa State University. Currently 74% of Iowa farmland is purchased by farmers. Properties that are being sold both publically and nonpublically are producing a large number of comparable sales for Midwestern farmland and allowing appraised values to reflect the most accurate fair market values in recent history.
 
We expect 2012 to have a larger volume of farmland transactions heading into the planting season before weather will eventually dictate crop prices throughout the summer.
 
- Colvin
 
For Daily Updates Visit http://farmlandforecast.colvin-co.com 
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