Extreme weather patterns across much of the U.S. have lead to increasing grain prices throughout July. Farmers have been busy scouting for aphids in their soybean fields and timing the spraying of herbicides and fungicides in their crops in July, but a very severe heat wave left many crops in the Midwest damaged in mid-July.
Temperatures in the Midwest were very high with dangerously high humidity levels. Champaign, Illinois had a seven-day span of temperatures in excess of 90°, while nine of 10 days were over 90° in Waterloo, Iowa. Mitchell, South Dakota experienced a four-day span of temperatures over 99° with a high of 103° on July 19.
Corn prices increased by 5.79% this month and closed at $6.65 per bushel during a month of a general upswing in prices. September corn was trading as high as $7.23 by July 19th due to the latest WASDE (World Agricultural Supply and Demand Estimates) Report which revealed an increase in demand which will continue to trump increased production estimates. Chinese import estimates for 2011/12 were increased by four times to 2.0 million tonnes, compared to June, which sent corn prices immediately higher.
The corn crop condition is also continuing to deteriorate with each passing weekly USDA Crop Progress Report as extreme heat and humidity spanned across the entire Midwest in late mid-July. 14% of the U.S. corn crop was classified as in poor or very poor condition as of the last week in July compared to 2010's 9% during the same week.
Soybean prices increased by 3.69% in July to $13.54 per bushel due to harsh growing conditions throughout the month. Prices have also paralleled rising corn prices during July. The July WASDE estimated lower export expectations from Argentina and Brazil which should help competition for U.S. soybeans in the global market.
Wheat prices increased this month to $6.72 per bushel, a 15.14% increase due to the poor conditions of the wheat crop in top producing states, Texas and Oklahoma. The southern plains experienced prolonged drought conditions throughout the growing season leading to the poor yields. The month's WASDE drastically lowered Canadian wheat production to 21.5 million tonnes. World production of high quality wheat was estimated to decrease 15% year-over-year.
The USDA updated the U.S. and World balance sheet estimates for major agricultural commodities in the WASDE report in mid-July. WASDE reports in the summer are a barometer of overall world demand, forecasted production, and inventory adjustments. In July, U.S. ending stocks for 2011/12 were revised higher for corn, but decreased for soybeans and wheat.
Mixed news for the U.S. corn market continues after the surprise USDA June 30th Acreage and Grain Stocks report, as the 2011/12 U.S. projections for beginning stocks, production, usage, and ending stocks were all increased from their June estimates.
The USDA raised beginning stocks 150 million bushels reflecting changes made to the 2010/11 usage projections. After the surprising June 30th Acreage report, an additional 1.7 million harvested acres were added in the July estimates. Yield estimates remained flat from June, causing the 2011/12 production estimate to be increased by 270 million bushels to 13,470 million bushels.
We will pay attention to crop conditions during pollination and grain fill, end-user demand, and weather patterns as the summer progresses. As grain prices could regain a tailwind and continue their historical climb higher.
Farmland prices remained above growth neutral for the 18th straight month, but the farmland index continued to slip to 59.4 from June’s 62.0, according to the Creighton University Rural Main Street Survey. “Even though this is the 18th straight month the index was above growth neutral, we are tracking consistent slippage in farmland price growth as the index has declined for three straight months. Consistent with the decline in farmland price growth, the farm equipment sales index sank for the fourth consecutive month to 53.7 from 63.1 in June,” said Professor Ernie Goss.
Roughly 68% of bankers supported the removal of blenders’ tax credit for ethanol as a part of the U.S. debt reduction and 35% supported phasing out agriculture support payments over five years. Dan Coup, of First National noted though, “If the government wants to continue with a cheap food policy, payment support needs to remain. Subsidy on crop insurance premiums is a must.”
The macro outlook of agriculture has been continuing to build strength throughout this summer and the headlines of China importing four times the amount of corn than previously estimated for the 2011/12 season should support elevated grain prices moving forward. A recent report from Macquarie estimates the Chinese to import 3.5mt compared to the latest USDA estimate of 2.0 million tonnes in 2011/12. Since the mid-1990s, when China transitioned to being a net importer of soybeans, soybean imports have grown at a torrid pace. We have been foreseeing the same adjustments in corn, which has started to take shape this month. We estimate that the global demand for U.S. grain will continue to increase and thus continue to support increasing farmland values. Read more about agriculture and farmland here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.