Poor weather patterns across much of Europe, Russia, and into China have led to an exceptional rally in the U.S. grain markets during the month of July. There is concern over global shrinking suppliers, which has increased demand for grains from the U.S., the world's largest exporter of grains.
U.S. fields have been a different story, with excellent weather during the all-important growing season. Fields that were planted late, due to excess moisture levels, have made strong improvement during July. The three most valuable crops in the U.S. remain in above average-growing conditions. Across the Midwest, corn has tasselled, soybeans have formed pods, and wheat is being harvested.
Commodity prices soared in July as reports of poor yields across Europe and Asia sent importers searching for new sellers. Corn closed in July at $3.93 per bushel, increasing by 10.8%. Soybeans closed at $10.53 per bushel, increasing 11.0% and marking the first monthly increase since April of this year. Wheat spiked up 42.3% to a 12-month high in July, closing at $6.61 per bushel. Wheat yields in the Black Sea region have been hurt the most by the dry weather, translating to the drastic increase in U.S. wheat prices, along with other domestic grains.
China is entering a “new era” of corn buying. The world’s most populous country may import as much as 15 million tons of corn in 2015, according to the U.S. Grains Council. China has historically been self-sufficient in corn production, but demand is starting to outpace supply as the nation continues to consume more protein.
Chinese imports of corn will grow from 1.7 million tons in 2010 to 5.8 million tons in 2011 and to 15 million tons in 2014-15, according to Hanver Li, chairman of Shanghai JC, in remarks to the U.S. Grains Council. Fifteen million tons of corn translates to the U.S. exporting roughly 600 million bushels of corn, which will have a substantial impact on corn stocks.
We see China’s transition to a net importer of corn as very similar to its transition to becoming a net importer of soybeans. Before 1995, China was a net exporter of soybeans, but it is now the world’s largest soybean importer and is expected to import more than 40 million tons of soybeans this year.
Creighton University publishes a monthly farmland index, which remained above growth-neutral for the sixth consecutive month, although it declined sequentially to 52.5 from June’s 54.7. We think that farmland values should increase over the second half of 2010. One hurdle in valuing farmland has been the lack of comparable sales across the Midwest, but we believe there will be an increased amount of farms starting to appear on the market in the fourth quarter. More land sales will help bridge the gap of comparable land sales for appraisers.
U.S. corn ending stocks for 2010/11 decreased by 200 million bushels to 1.373 billion bushels from the June estimate, but were higher than the average estimate of 1.269 billion bushels. The decrease in ending stocks was due to an increase in usage from 2009/10, decreased harvest area, and a 125-million-bushel decrease in production. Corn stocks-to-use ratio for 2010/11 is now estimated at 10.3%, the lowest level since 2003/04.
Estimated ending stocks of soybeans remained unchanged by the USDA this month as increased exports and crush offset the increase in U.S. production. U.S. production increased by 35 million bushels on an increase in area harvested. An increase in foreign demand was not enough to offset higher production of wheat. The USDA estimated that wheat ending stocks for 2010/11 will increase by 102 million bushels due to increased area, yields, and carry-in.
Due to the time sensitivity of farmers’ crop decisions for each year and the desire for farmers to maximize their income to meet the potential increase in demand, the agriculture industry is encouraging the EPA to make its decision soon on requiring U.S. gasoline to contain 15% ethanol instead of the current 10% blend. Unfortunately, the EPA has delayed its decision on whether or not to approve ethanol blends of 15% in gasoline until the fall of 2010. The primary reason for the delay is that the Department of Energy has not completed vehicle testing.
We believe that the EPA will make the increase to E15, as it is the only realistic solution to meet the Renewable Fuels Standard and reduce the U.S. dependency on foreign hydrocarbons. After the Deepwater Horizon disaster, renewable fuel sources, which are environmentally friendly and add jobs, will continue to become a larger part of the U.S. fuel supply.
The agriculture industry is very excited about E15 and believes there will be substantial impact on the demand for grains used for ethanol production. The impact will not be felt overnight, but will support farmers’ income and the demand for agricultural products.
We expect farmland values to grow at strong rates because of the crop outlook for the rest of 2010. Even if this year is not a bumper crop, elevated grain prices will support healthy farm incomes come harvest. Some farmers had feared soybeans to be below $9.00 per bushel by the end of the year, but currently soybeans are trading over $10.00 per bushel for November delivery. The increase in grain prices will trickle down and benefit the majority of the agriculture sector.
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