Strong U.S. Dollar Headwind For Farmers

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Includes: CORN, DBA, SOYB, WEAT
by: T. Marc Schober
Summary

Grain prices declined throughout January, primarily due to the large South American crop soon becoming available for export.

Throughout northern Brazil, soybean and corn harvests have started and the very first vessels were being loaded for export in late January.

Farmland values continue to remain stable and in some areas are stronger year over year.

Grain prices declined throughout January, primarily due to the large South American crop soon becoming available for export. China cancelled 570,000 metric tons of U.S. soybean orders within the last three weeks, according to the USDA, in favor of pricing cheaper soybeans from South America. The strength of the U.S. dollar also has been a headwind for grain prices and making foreign grain more attractive to importers.

The little to no snow cover across the Corn Belt, due to below average snowfall and mild January temperatures, could lead to a favorable spring planting season if the weather remains constant. The frost level in southern Minnesota is 37" deep as of January 31 compared to over 50" deep in 2014, according to MNDOT. The lack of winter precipitation has lead to little snow cover in the Great Plains to protect the dormant winter wheat from frost and freezing temperatures.

Grain Prices

March corn prices decreased 7.0% in January and closed at $3.70 per bushel. Prices were supported early in the month by strong export and sales information and news of unseasonably dry weather affecting the South American crop. Prices began struggling when production estimates from South America increased and the U.S. dollar strengthened. Despite above average corn sales and export number in January, prices continued to decline through the end of the month.

The average U.S. corn yield estimate was decreased by 2.4 bushels per acre to 171.0 bushels per acre in January's WASDE Report. Ending U.S. corn stocks were decreased by 121 million bushels to 1.877 billion bushels due to the decrease in average yield, partially offset by a decrease in food and residual use. Global corn production was decreased by 3.7 million metric tons to 987.88 due to lower U.S. corn production. U.S. corn stocks stored was estimated to be 11.2 billion bushels, a 7% increase from last year as of December 1, 2014, according to the USDA Grain Stocks Report.

The March soybean contract decreased 5.7% throughout January to close at $9.61 per bushel. Soybean prices were supported by strong global demand, especially from China, according to weekly USDA Export Reports. News of dry weather in Brazil also helped prices edge higher in early January. Slowly, more positive weather reports began to come out of Brazil and CONAB increased planted soybean acres to 78.33 million acres and expected production to 95.8 mmt. Through the end of the month, China, the U.S.'s largest purchaser of soybeans, began a series of three cancellations totaling 570,000 mt of soybeans in favor of future pricing.

The USDA estimated global soybean production 1.6 mmt higher due to increased production in the U.S. and Brazil in the January WASDE Report. The USDA Grain Stocks Report estimated soybean stocks stored in all positions at 2.52 billion bushels, a 17% increase from last year as of December 1, 2014.

March wheat prices decreased 14.8% in January to close at $5.02 per bushel. Prices increased early in the month due to strong demand and concerns over the lack of snow cover in winter wheat growing areas. An estimated 2.35 million acre increase in Russian planted acres, according to Strategie Grains, caused a decline in prices. The U.S. dollar strengthened throughout January, also making U.S. wheat less competitive on the global market.

The USDA increased estimated world wheat production by 1.2 mmt from an already record estimate in the WASDE Report due to an increase in Ethiopian production by 1.1 mmt. The USDA Grain Stocks Report estimated wheat stocks stored in all positions to be 1.52 billion bushels, a 3% increase from last year as of December 1, 2014.

South American Crop Conditions

Throughout northern Brazil, soybean and corn harvest have started and the very first vessels were being loaded for export in late January. Growing conditions have ranged from average to extremely dry throughout South America. Ag Rural and Oil World decreased their expected Brazilian soybean production by 3.7% this month due to the extreme dryness in Mato Grosso and Sao Paulo states.

Argentina's corn and soybean crops have experienced above average wet weather, although early February appears to provide adequate relief. Argentine corn exports are expected to increase by 12.5% to 13.5 mmt in the 2014-15 marketing year due to optimism surrounding the new administration taking office in December 2015. The Argentine Government currently charges a 20% tax on corn shipments and 23% on wheat shipments. The current president, Cristina Kirchner, reaches her term limit in 2015.

Farmland Values

Farmland values continue to remain stable and in some areas are stronger year over year. Minnesota farmland values are up 5% to a record median price of $5,440 an acre, according to sales data during fiscal year 2014.

The Creighton University Farmland Price Index improved to 39.4 this month, its highest level since August 2014. Economics Professor Ernie Goss noted, "Lower energy and grain prices along with weaker exports, continue to restrain growth in the rural economy."

Outlook

A strong U.S. dollar and favorable growing conditions in South America are putting downward pressure on global grain prices throughout January. If Brazil has a bumper crop, loading delays in nearly every port will limit the amount of grain able to be exported. If Argentina has a bumper crop, farmers have been very reluctant to sell any grain in the current inflationary situation as physical commodities have proven to be an excellent inflation hedge.

The lack of snow cover in the U.S., paired with a January thaw, has been a friendly reminder that planting season is just 10 short weeks away. We will continue to monitor U.S. precipitation throughout the rest of winter and its effects on any potential planting delays.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.