Harvest is almost finished in the U.S. Corn Belt due to favorable fall weather, with a majority of farmers reporting higher than anticipated yields. 2013 U.S. farmer income is expected to increase 15.1% to a record $131 billion, due to strong corn and soybean yields, according to the USDA. The total corn yield was estimated at a record 13.989 billion bushels and the soybean crop was estimated at the third largest on record at 3.258 billion bushels. Farmers are remaining cautious going into 2014 with current corn futures in the $4.25 to $4.55 range.
The big news in November was the Environmental Protection Agency (EPA) made drastic cuts to the Renewable Fuel Standards (RFS) blending requirements. Mandated blends were cut by a total of 2.94 billion gallons to 15.21 billion gallons of renewable fuels. The corn based ethanol mandate was retracted to the lowest level since 2011 to between 12.7 billion gallons and 13.2 billion gallons. The EPA's proposal is open to 60 days of public comment before being finalized in spring of 2014. Renewable Identification Numbers (RIN) prices declined significantly following the EPA's announcement as refiners expect these goals are achievable based on expected gasoline consumption in 2014.
December corn prices decreased in November by 3.1% to close at $4.15 per bushel. Following the EPA's announcement, corn prices tested 38-month lows. Weather throughout harvest was very favorable, which also allowed new crop corn to enter the market without delay. U.S. corn production was estimated 146 million bushels higher this month to 13.989 billion bushels in the November WASDE Report. The average U.S. corn yield was also increased by 5.1 bushels per acre to 160.4 bushels per acre, more than offsetting a 1.9 million acre reduction in harvested acres.
January soybean prices increased by 5.5% this month, closing at $13.36 per bushel. The USDA estimated the U.S. average soybean yield 1.8 bushels per acre higher in November to 44.8 bushels per acre. Total production was in turn increased 109 million bushels to 3.258 billion bushels, which more than offset a 0.7 million acre decrease in harvested acres. Ending soybean stocks were estimated 20 million bushels higher this month, but are still extremely low at 170 million bushels. The very tight U.S. supply of soybeans has led to an even faster pace of sales to foreign buyers, including China this month. If any issues arise in the South American crop, expect soybean prices to quickly advance.
December wheat prices declined 1.8% in November, closing at $6.55 per bushel. The increased value of the U.S. Dollar has put downward pressure on U.S. wheat prices throughout the month. U.S. wheat production was increased 14 million bushels on late, unaccounted for, harvest data in North Dakota and Montana. The average U.S. wheat yield was increased by 1.0 bushel per acre in this month's WASDE Report to 47.2 bushels per acre.
Weather throughout November was very favorable for harvest as 95% of U.S. corn had been harvested as of November 24th, compared to the average of 91%. North Dakota, Wisconsin, and Michigan are the only lagging states with 14% to 18% of corn yet to be harvested.
The condition of U.S. winter wheat is significantly better than one year prior. 62% of winter wheat was estimated in good or excellent condition by the USDA and only 8% in poor or very poor condition. In 2012, only 33% was in good or excellent condition and 26% was poor or very poor as of November 24th.
The South American corn and soybean crops are currently being planted without much delay or weather issues thus far. 78% of the Brazilian soybean crop has been planted and 44% of the Argentine soybean crop, according to Safras. The Argentine corn crop is about one to two weeks behind average planting dates, although there aren't major yield concerns over the slight delay. An interesting statistic emerging from the South American planting data is the soybean to corn acreage ratio of 3.1. On average, the ratio is near 2.3 and farmers look to be favoring soybean planting over corn this upcoming year.
In late November, the Commodity Weather Group (CWG) reported cautiously warm ocean temperatures which could be an early sign of drier weather in Argentina and southern Brazil. Excess moisture in both regions will welcome drier weather, but CWG forecasts the drier than normal weather may persist through February causing yield concern. The South American crop season is in its infancy, but an El Niño weather pattern would be cause for yield risk.
The Chicago Federal Reserve Bank reported that farmland values increased 14% year over year in the Seventh District encompassing Iowa, Wisconsin, Illinois, Indiana, and Michigan. Indiana and Michigan led all state value increases with 18% and 17% year over year, respectively. Throughout the third quarter of 2013, farmland values increased by 1% in the Seventh District.
In the Tenth Federal Reserve District, non-irrigated farmland values increased 18.7% over the past 12 months, irrigated farmland values increased 21.5%, and ranchland values increased 14.6%. The Kansas City Fed cited limited farmland sales and continued strong demand for the supported increase in farmland values throughout 2013. The Tenth District includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, a portion of New Mexico, and Missouri.
The Creighton University farmland price index increased by 3.4 points in this month's survey and has been above growth neutral for an astonishing 46 months. The farmland price index increased for only the second time in the last 12 months to 54.3 from 50.9 in October. Professor Ernie Goss noted, "Despite the expansion in the index for the month, I expect farmland prices to grow at significantly slower rates for the first six months of 2014 than they did for the same period in 2013.."
The weaker grain prices have led to an opportune time for investors to enter into the farmland asset class. Our long-term outlook on corn and soybean prices remains very strong due to increasing global demand over the next decade. The recent decline in corn prices has led to many great opportunities to buy farmland across the Corn Belt. Investors who missed the excellent opportunity to buy farmland in 2009 should strongly consider today's rare opportunity.
Although the EPA's proposed cuts to the RFS mandate pushed corn prices to record lows, it is important to understand the mandates are the minimum amount of renewable fuels required to be produced. Refiners are able to produce well above the mandates, which we expect in 2014 as foreign ethanol demand remains very strong.
In each year since the inception of the RFS, U.S. renewable fuel blenders have exceeded the RFS mandate, putting more renewable fuel into the domestic market and also exporting U.S. blended renewable fuels to other areas of the world, including Brazil and Europe. The emergence of E15 gasoline and the major delay of cellulosic ethanol infrastructure being built should continue to support corn based ethanol production in 2014.
Moving into December, we will be monitoring the South American weather, watching for any abnormalities which could send U.S. commodity prices higher overnight. Even a minor delay in estimated harvest times could send spring U.S. futures prices higher due to the risk of a lapse in the global commodity supply chain.
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