Commodity Prices Recover In October

Includes: AGCO, CROP, JJA, JJG
by: T. Marc Schober

The end of October marks a major milestone for the world, as the global population is now at 7 billion people. Farmers jobs get harder and harder every day as the world’s population continues to rapidly grow. The United Nations estimates that by 2050, the global population will reach 9.3 billion and require twice as much food production.

Commodity prices recovered in October from a dismal September on a more stable economic outlook in Europe and reduced production estimates across the U.S. for corn, soybeans, and wheat. Strong grain demand from China and La Nina weather concerns in South America may keep the rally going for grains.

The corn harvest is 78% complete across the U.S. as of October 30. Harvest has been progressing faster than historical averages, but crop condition is still significantly lacking.

Grain Prices

Corn prices increased by 9.3% in October and closed at $6.47 per bushel due to increased global demand and improving global economics. The Chinese purchased 900,000 tons of U.S. corn mid-month which set the hypothetical price floor for U.S. corn at near $6.00. The USDA WASDE report revealed an estimated decrease of 64 million bushels of production this season due to a decrease of 450,000 acres of harvested area.

Soybean prices increased 2.6% this month to $12.07 per bushel on the Chicago Board of Trade. The USDA estimated that U.S. production would decrease by 25 million bushels due to lower yields and harvested acres. U.S. soybean yields were decreased by nearly 1% to 41.5 bushels per acre according to the latest WASDE report. We will continue to carefully monitor the newly formed La Niña weather pattern that could have a negative effect on the South American soybean production this winter.

Wheat prices were driven 3.1% higher during September to $6.28 per bushel due to a reduction in production in the U.S. by 69 million bushels according to the USDA. Russia has continued to have a strong presence in the global wheat export market, but a government imposed limit on Russian wheat exports could increase U.S. wheat exports and prices throughout the rest of the year. We also expect wheat prices to continue to move along side corn prices as wheat is still a logical feed alternative to corn at current prices.

Chinese Imports

China, a historically self-sufficient corn producer, is harvesting a record-large crop of 166.6 million tons for the 2011/12 season. Despite the record crop, China will still be structurally short of corn for the seventh out of eighth year as use is estimated at 170.1 million tons. The U.S. Grains Council projects China to need to import 5-10 million tons of corn for the 2011/12 season, a significant increase from the USDA's estimate of 2.0 million tons.

As China's demand for protein increases over the next decade, corn needed for livestock feed will be substantial and result in a shortfall of over 20 million tons. The increase in demand will not be met by domestic production forcing China to look elsewhere for corn supply. Importing record amounts of corn will leave global supplies depleted. Strong Chinese demand may result in corn prices well above the record $8 a bushel set in June and drive profits for the largest global exporters of corn.

Farmland in a Bubble?

The Creighton University Farmland Price Index remained unchanged at 66.9 in October. This marks the 21st straight month the index has been above growth neutral. The farm equipment sales index decreased to a still strong 63.1 from September's 65.4.

Recent sales of Midwestern farmland have been reaching prices of $10,000, $12,000, and even $16,000 an acre. The media and well-known market pundits have been highlighting these high dollar sales and making an argument that farmland is in a bubble.

Rising grain prices and strong farm income over the last few years have driven strong interest in agriculture and the farmland market. Farmers and investors have allocated capital to farmland and prices in the Midwest have increased 17% in the last twelve months and 12% in 2010 according to the Federal Reserve Bank of Chicago.

Is farmland in a bubble? No. We think it is unfair and inaccurate to take a few data points and assign these assumptions to the whole market. Yes there have been some irrational sales that may take years to realize their value, but the market average is rationally priced and represents its fair market value based on near-term commodity expectations.

See our report on Farmland Forecast from October 31st for more information.


Corn harvest is coming to an end for many farmers across the Midwest and farmer attention is now turning to acquiring more land. We have been seeing a very strong number of farmland sales throughout the past few weeks and believe the selling season will continue to pick up speed through the end of 2011.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.