Corn & Soybeans...Optimal Conditions Ahead

Grain markets were range bound in April as they digested the implications of last month’s planting report. Soybeans have continued their rally and now stand at a three-year high after the USDA announced that U.S. farmers will plant the largest corn crop since World War II at the expense of soybean acreage. China shocked the market at the end of the month by buying 1.5 million tons of U.S. corn, the largest one-day sale since 1991. Optimal weather has farmers planting at a record pace across the corn belt as 53% of the entire corn crop has already been planted compared to the five-year historical average of only 27% by the end of April.

Grain Prices
Corn prices closed at $6.60 per bushel and increased by 2.5% in April due to an end-of-month rally spawned when China placed the single largest corn order in 21 years. Prices declined throughout the month as speculators sold off positions, taking profits amidst concern over the estimated 95.9 planted acres for 2012. Favorable planting conditions have some analysts expecting a bumper crop for 2012, although the last few years have shown the weather can be unpredictable.

Soybean prices continued to increased this month by 7.1%, closing at $15.03 per bushel, a three-year high. Prices increased due to commercial and speculative buying throughout the month of April on fear of decreased production in the South-American crop. The USDA's April WASDE Report revealed a decrease in Brazilian soybean production of 2.5 million tons as warm temperatures and insufficient rainfall continued to impact yields. Additionally, the highly accelerated corn planting season should lead farmers to maximize corn acres at soybean's expense.

Wheat prices declined by 2.0% this month, closing at $6.47 per bushel. Prices again remained stable throughout the month as the USDA estimated U.S. wheat ending stocks for 2011/12 at 32 million bushels lower in April due to an increase in feed and residual usage. Excellent wheat conditions have also put pressure on wheat prices along with an increased planting pace of spring wheat across the U.S. The wheat belt has experienced excellent planting conditions compared to recent years.

Chinese Record Imports
Over the past few months, we have been suggesting that China will be providing a hypothetical price floor for U.S. corn by placing orders at opportunistic times. On April 27th, a reported 1.56 million tons of U.S. corn was sold, with 1.44 million tons rumored to have been bought by the Chinese, giving support to new crop corn in the U.S. Amazingly, the USDA estimated only four million tons of corn would be purchased by the Chinese throughout the 2012 marketing year.

The International Grains Council recently estimated that Chinese imports of corn may increase 50%, to six million tons in the new marketing year starting July 1. Such an increase will continue to drive corn fundamentals even more bullishly.

Farmland Values
The National Council of Real Estate Investment Fiduciaries’ (NCREIF) Farmland Index had a total return for the first quarter of 3.78%, comprised of 2.77% appreciation and 1.00% income return. The 3.78% return is the strongest first quarter since 2006 and the second highest ever for the first quarter going back to 1991. The mountain region was the strongest performer with a 10.08% total return, followed by the corn belt at 6.31%. Stephen Kenney, Chairman of the NCREIF Farmland Committee and vice president with Hancock Agricultural Investment Group, noted that "Even with strong appreciation numbers in many of the NCREIF regions, the farmland-asset class continues to garner interest from institutional investors as a conservative investment that historically has provided stable cash flow."

The Creighton University Rural Mainstreet Index (RMI) decreased slightly this month, to 57.1, but remained well above growth neutral. The farmland price index declined in April, indicating slower growth in values, but remained above growth neutral for the 27th continuous month. The farm equipment sales index increased to 62.4 from March’s 61.5.

Bankers were asked this month what percentage of sales were purchased by non-farmers. Bankers indicated that 20% of sales were purchased by non-farmers. DeWayne Streyle, CEO of United Community Bank of North Dakota reported, “Nonfarmer and recreation investors are driving the farm land valuations (higher).” We find this statement inconsistent with the data we have observed. In fact, we believe farmers are the primary reason farmland values have increased.

The amount of farmland sales has decreased recently as a majority of purchasers have been preoccupied with this year's crop. Farmers make up 74% of all farmland purchasers, according to Iowa State University, thus the amount of potential buyers for land is much lower. Landowners who are considering selling their land are aware that it is not an ideal time to sell when farmer income is tied up in crop production and farmers are busy with field work. Once farmers have their 2012 crop planted and a portion of their crop presold, there may be more farmland sales as they find time to focus on expanding their operations with additional acreage.

Planting Progress and Conditions
U.S. corn farmers have been planting at a record pace, as 53% of the entire corn crop is already in the ground, compared to only 12% in 2011 and the five-year historical average of 27%. Twenty-five percent of the U.S. corn crop was planted in the last week of April alone. The USDA estimated that 15% of the crop has already emerged, compared to the five-year historical average of just 6%.

Farmers have also been ahead of schedule planting soybeans, with 12% of the U.S. crop already planted, compared to the five-year historical average of 5%. Winter wheat is in considerably healthier condition than in 2011, as 64% of the U.S. crop is currently in good or excellent condition compared to only 34% in 2011.

Regions in the upper and western corn belt have been experiencing nightly frosts that have delayed some corn planting in isolated areas. If corn planting continues at its accelerated pace, soybean acres could dwindle, thus building soybean prices even more bullish on lower acres. The current price of soybeans is near the point where farmers could see more profit from beans than corn. Still, switching acres this late in the season is difficult as seed is typically purchased well in advance of planting.

Outlook
The record sale of U.S. corn at the end of April will set the bullish tone for grain prices throughout the summer and into the new crop marketing year. Look for China to be an opportunistic buyer through year's end. Planting has progressed at a rapid pace, but expect weather conditions to dictate short-term crop prices once planting is complete. Soybean planting across the corn belt will start after farmers finish planting their corn in late May.