Wheat and corn lead the grain markets higher in January due to difficult global weather conditions early in the month and increased foreign demand throughout the month. Subsequently, farmland values have steadily been increasing with record sale prices across much of the Midwest driven by high commodity prices and the EPA’s approval of E15 gasoline. The USDA Prospective Plantings report is due out in late March, but analysts and traders will be making plenty of their own predictions in the upcoming weeks which will have an affect grain prices.
Corn prices increased by 4.8% this month and closed at $6.59 per bushel. The rally in corn was fueled by the USDA estimating ending corn stocks for 2010/11 to be the lowest since 1995/96 at 745 million bushels which leaves the ending stocks to use ratio at 5.5%. U.S. ending stocks were decreased because of a 100 million bushel increase in both ethanol and industrial use. The EPA also ruled that vehicles 2001 and newer are safe to use gasoline blended with 15% ethanol. The current blend is mandated at 10%. This additional ethanol use was very bullish news for the corn markets.
Soybean prices increased slightly by 0.7% in January, to $14.13 per bushel due tightening global supplies. News that the Chinese demand may be decreasing due to negative crush margins may curb soybean demand to a certain extent. In addition, Brazil is ready to export a record amount of soybeans this year; 31 million tons.
Wheat prices continued their rally this month to $8.40 per bushel this month, a 5.9% increase, due increased global demand. Countries such as Egypt, Morocco, and Yemen have been facing protests on food and unemployment. If any country starts to stockpile grains as a safety net, it will create false demand which could increase prices even further. Wheat prices have the potential for stockpiling since wheat is essential for flour and can be a substitute to other animal feed grains.
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 mid-month. January’s report is typically one of the most anticipated and it was not a letdown.
U.S. grain supplies were substantially reduced for the 2010/11 marketing year due to lower grain production estimates and higher use. A late harvest in the U.S. led the USDA to reduce U.S corn yield estimates to152.8 bushels per acres from 154.3 bushels. Grain supplies are now critically tight and discussions may turn to rationing.
Grain stocks continue to become tighter as every day passes. There is currently less than a three week supply of corn available. Corn prices above $6.00 will pressure food prices and supply rationing.
The regions on Argentina that so desperately needed rains in early January got the precipitation, but it may have been too late. Strong storms systems dropped heavy rains in South America throughout the middle on the month, but this after many farmers had already given up on planting their second soybean crop. For those who got the soybeans planted, the rain may have saved the entire crop. Corn conditions continue to look weak across much of Argentina.
Areas across the Midwest have received elevated amounts of snow which have come earlier than in recent years. More snow historically leads to a wetter spring for farmers which could delay planting and hurt overall yield potential. The difference this year is the timing of the first heavy snow amounts.
The frost depth in southern Minnesota is currently 55”, according to the Minnesota DOT. The average maximum frost depth for the region is 65” to 70”. If our weather doesn’t significantly change, 2011’s frost depth should follow the 2010 trend of a maximum frost depth reached in early February. If the frost depth is below average, then it will allow soils to thaw out earlier in spring and drain excess snow faster than normal. We are keeping an eye on the maximum frost depth for the rest of winter and how it could affect spring planting.
Farmland prices continue to be robust as the Creighton University farmland price index remained above growth neutral for the 12th straight month at 75.4, but down a tick from December’s 76.9. Respondents noted they expect the strong farm economy to drive cash rental rates for farmland in 2011.
“More than three-fourths of the CEOs anticipate cash rents to rise by more than 5 percent in 2011, and approximately one-fifth expect these rents to grow by more than 10 percent,” said Ernie Goss.
Land values have sharply increased over the past couple months due to a high volume of comparable sales throughout this selling season. When a farm sells for $6,500/acre, the neighbor next door will imagine the possibilities now in place.
"I would say in some areas of Iowa and Minnesota land values may have jumped as much as $1,000 an acre in the last 60 days, with prices at $6,200 per acre in Minnesota," said Sam Kain, area sales manager for Farmers National Company.
The typical farmland selling season is in full swing and we believe there may be an extension to this year’s selling season. Grain prices are high and many landowners have seen the recent sales in their county giving more reason for some of these hesitant sellers to list their farms. Although prices have been very high, we still think farms are going for a discount in many cases. If the cash price of corn remains above $5/bushel, farmland sale prices can still be justified at over $6,500/acre on Iowa ground.
The commodity markets are certainly volatile, and that is one reason why we prefer cash rent contracts to share cropping. The markets are going to key in on two major factors moving forward in 2011; the weather and the planted acres.
Global weather patterns have caused huge rallies in commodities over the past 12 months and this could certainly continue, but the long-term weather cannot be predicted to a certain extent. The amount of acres allocated to corn, soybeans, or wheat this year will have large roles in each of their market prices. If wheat stays at its elevated price due to the 2010 drought in Russia and floods in Australia, expect farmers to cut into corn and soybeans acres to plant more spring wheat in the western Corn Belt.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.