World equity markets continued the volatility throughout August as the fear of a double dip recession is becoming stronger. In early August, Standard & Poor's downgraded the U.S. government from its AAA debt rating to a AA+ which sent stocks into a downfall as investors moved assets into safer places, like the hard asset gold.
District Federal Reserve Banks released their quarterly farmland values reports in August which revealed a cropland price increase of 17% and 20% across the Chicago and Kansas City Districts, respectively. Nationally, farm real estate, which includes all types of farmland, increased 6.8% over that past 12 months according to the latest USDA estimates. Farmland values should continue to benefit from any global uncertainty.
Corn prices surged 14.14% in August and closed at $7.59 per bushel due to bullish news from both the USDA monthly WASDE Report and weekly Crop Progress Reports. The USDA lowered the estimated national average for corn yields by 3.7%, or 5.3 bushels, to 153.0 bushels per acre, which sent prices on a rally. Crop Progress Reports have also continued to reveal a U.S. corn crop in poor condition in comparison to recent years. As of August 28th, 19% of the U.S. corn crop was in poor or very poor condition compared to 10% in 2010 while only 54% was in good or excellent condition compared to 70% in 2010.
Soybean prices increased 6.94% this month to $14.48 per bushel on the Chicago Board of Trade. USDA estimated U.S. average soybean yields were lower in the August WASDE Report from 43.4 bushels per acre down to 41.4 bushels per acre; a 4.8% decrease. Soybean prices have also been volatile as Brazil is entering its planting season which could dictate global prices through the upcoming winter months.
Wheat prices were driven 10.57% higher during August to $7.43 per bushel due to the increase in corn prices. As corn prices increase, wheat prices will follow because wheat is the direct substitute to corn in major livestock feed. Until corn reaches $8.00 per bushel, expect wheat prices to continue to rise in line with corn.
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-August. WASDE reports in the summer are a barometer of overall world demand, forecasted production, and inventory adjustments. In August, U.S. ending stocks for 2011/12 were revised lower for corn and soybeans, but increased for wheat.
After the surprising June 30th acreage report, the USDA resurveyed producers in Minnesota, Montana, North Dakota and South Dakota and confirmed previous estimates for planted acres but decreased estimates for harvested acres. The USDA reduced harvested acres to 84.4 million acres, a reduction of 0.5 million acres. Reductions were based on flood damage caused in the Mississippi and Missouri River basins.
The national average corn yield was revised to 153.0 bushels per acre, down 5.7 bushels from July’s projection as unusually high temperatures and below average precipitation during July across much of the Corn Belt sharply reduced yield prospects. Harvested acreage and yield reductions resulted in the USDA lowering production estimates for 2011/12 to 12.914 million bushels, a reduction of 556 million bushels, or 4%.
Even though the USDA lowered its 2011/12 ending stock levels for corn and soybeans, we are closely monitoring demand levels for both commodities. Recent escalations in commodity prices have caused some demand softening and end-users will look toward alternatives if margins cannot be sustained. If end-users begin to transition to alternatives or go out of business due to higher commodity costs, the entire demand picture may shift drastically and force stocks to increase resulting in lower prices.
The United States Department of Agriculture released its biannual report for farm real estate, cropland and pasture values on August 4th. Compared to 2010, average values for farm real estate, cropland and pastures across the United States were up 6.8%, 9.4% and 1.9%, respectively.
During the second quarter, the Kansas City Federal Reserve Bank District's farmland values rose further, although the pace of gain slowed. Compared to first quarter gains, the value of non-irrigated and irrigated cropland in the District climbed 2.3% and 3.9%, respectively, to remain 20% above year-ago levels. District ranchland values grew 1% from the first to second quarter and year-over-year values are up 11%.
During the second quarter, farmland values in the seventh Federal Reserve District rose 17% over the last 12 months according to the Federal Reserve Bank of Chicago’s second quarter survey of Farmland Values and Agricultural Credit Conditions Report. Across the District, the value of “good” farmland increased 4% in the second quarter compared to the first quarter of 2011. Among the District states, only Wisconsin had a smaller year-over-year increase in farmland values in the second quarter of 2011 than in the first quarter of 2011. Year-over-year, land values in Indiana and Iowa climbed 21% and 20%, respectively, while values in Wisconsin climbed a modest 8%.
Colvin & Co. in the News
On August 10th, Bloomberg published an article on investing in farmland in the United States that featured top farmland fund managers including Greyson Colvin, founder of Colvin & Co. The article touched on the possible bubble being created in the farmland sector:
Colvin, a former analyst at UBS AG and Credit Suisse Group AG, says U.S. farmers aren’t carrying as much debt as they did during the 1980s crisis, which contributed to the downfall of banks as agriculture loans defaulted. The farm debt-to-asset ratio, which peaked in 1985 at 23%, is expected to fall to 10.7% in 2011, according to Agriculture Department estimates.
August was an eventful month for agriculture with strengthening commodity prices and impressive farmland value reports from multiple Federal Reserve Districts. We feel that the ongoing uncertainty among investors will continue to drive farmland values higher moving into the upcoming harvest season in the Corn Belt.
Late summer is historically a time when elevators and other offtakes are paying a premium for old crop corn. Difficult weather this summer is driving new crop corn prices to historic levels as well. Many farmers will be selling their stored grain in the upcoming weeks to take advantage of high prices as well as contracting out large amounts of their new crop corn for 2012. Farmers with cash on hand will undoubtedly reinvest in land which should help support increasing farmland values moving forward.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.