Grain prices continued their rally in December, which has kept the demand for farmland high. Corn, soybeans, and wheat all saw double-digit gains while farmland value reports revealed gains as high as 19% in localized areas over the last twelve months, according to Iowa State University Extension’s 2010 Land Value Survey. An extension of the ethanol blender’s tax credit was a major factor in the increase of grain prices this month. Weather conditions have also played a big role in grain prices as La Nina has damaged crops in South America and Australia has experienced heavy rains.
Grain Prices
Grain prices rallied again throughout December, climbing to near two-year highs for corn, soybeans, and wheat. Foreign demand continues to be the driving force behind the current rally. March 2011 contracts for corn, soybeans, and wheat all increased over 12% during December. Investors took some profits at the end of the month bringing prices down a small amount before a weak dollar ended profit taking. Prior to end of the year profit taking, corn had sustained a 10 day rally.
In December, corn prices increased by 15.6% and closed the year at $6.29 per bushel. Year-over-year, corn prices are 40.0% higher. Global demand has been increasing for U.S. corn and supplies are the tightest since 1996. Global corn consumption has outpaced production for the second straight year. Food inflation is a major concern across the world. China has increased their interest rates twice in the last two months to battle inflation. Worries over lower production in South America due to the lingering La Nina have also fueled the current rally in grains.
Soybean prices increased by 12.1% in December, to $14.03 per bushel due tightening supplies. The December WASDE report estimated U.S. soybean ending stocks to decrease by over 10% due to increased exports. Projected planted acres and the health of the South American soybean crop will be key factors for soybean prices throughout the first quarter of 2011.
Wheat prices rose to $7.94 per bushel this month, a 14.6% increase, due to the decreased value of the dollar and increased foreign interest in U.S. wheat. In late December, Egypt, the largest importer of wheat, ordered 600,000 metric tons of U.S. wheat. Poor U.S. winter wheat conditions, due to low moisture, have also supported strong wheat prices. Crop condition reports and the January estimate of planted wheat acres should be the key factors affecting wheat prices, along with soybeans and corn. If planted wheat acres are high, expect bullish outlooks for corn and soybeans.
WASDE
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-December. 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.
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.
Crop Conditions
La Nina continues to affect South American crops and specifically in Argentina. Farmers are having a hard time planting a second soybean crop due to the extremely hot, dry weather. Sub-surface moisture levels are dangerously low for crops. This extreme weather has caused northern portions of Uruguay and Brazil to declare a state of emergency for farmers due to crop damage.
In Argentina, the world’s second largest exporter of corn and third largest of soybeans, corn production was expected to be higher this year because of a 23% increase in planted acres. The hot and dry weather caused by La Nina now could reduce production by 16%, according to Econometrica consultancy in Buenos Ares.
Wheat production in Australia has been estimated below average due to damaging rains and a wet harvest. Currently, wheat harvest is progressing faster than previously expected in Australia but yields are still anticipated to be lower.
Farmland
Farmland continues to be the “hot” topic in December. The Creighton University farmland price index was above growth neutral 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.
Iowa State University Extension released their 2010 Land Value Survey in December. The survey found Iowa farmland values 15.9% higher from 2009. The average value of Iowa farmland was pegged at $5,065 per acre by ISU. High commodity prices, healthy lending conditions, and a limited supply of land are the biggest factors for the recent increase in Iowa farmland values.
Outlook
Great looking, top quality farms are selling for a big premium this season. Surveys and reports on farmland values across the Midwest increasing by 10% to 20% are all paralleling actual land sales in the region. Since the U.S. harvest finished early this year, land sales have been plentiful. Early sales brought strong prices due to two key factors:
• Increased farmer income – Farmers make up the overwhelming majority of farmland buyers. This season is no different. Farmer income is much higher this year because of the elevated commodity prices.
• Limited 2009 sales – Since the 2009 harvest was delayed into early 2010 in some areas, land owners did not sell very much land. As the majority of buyers, farmers could not justify many land acquisitions because their income was late coming in.
The early sales that brought strong prices have continued to be encouraging to other land owners to sell this season since prices are high.
We agree that prices are high, but the outlook for farmland is very fundamentally strong. Even at $5 corn prices, $5,000/acre land is still justifiable. Farmland values are dependent on long-term grain prices. A small shift in corn prices will not have a very meaningful affect on land values. Ending grain stocks are very low while demand is ever rising. The basic supply and demand is in place for farmland to continue its bullish trends in the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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