Market analyst: Ag Outlook

Ray Grabanski
Special to the Farm Forum

02/11/20 — It’s Ag Outlook time for USDA this month when they present not only an outlook for the next year, but also the next 10 years in their annual Washington, D.C., conference. Yet they’ve already tipped their hands somewhat in an early February 16-page dissertation on the China-U.S. trade agreement and how it will be handled by USDA. They kind of indicated that they would not project any change in exports based on the two-year agreement. Instead, they will just wait to see if China buys more and then raise exports once it has already been sold rather than in advance. Seems a bit like a cop-out, but essentially it takes any bullish news from the agreement and mutes it somewhat for agriculture.

The USDA February report was released on Tuesday at 11 a.m., and typically there is very little in the February report that moves markets. South American soybean production forecast updates are usually the big movers, and this year expectations are for another hike in February due to good SAM weather so far this winter. USDA obliged by raising Brazil soy production 2 mmt to 125 mmt, but left everything else unchanged. U.S. ending stocks of corn were unchanged (bearish), while soybeans were cut 50 mb on higher exports to China. Surprisingly, wheat ending stocks were also cut 25 mb on higher export projections as well. World ending stocks were cut 1 mmt in corn to 296.8 mmt, up 2.2 mmt soybeans to 98.9 mmt, and cut 0.1 mmt wheat to 288 mmt. Overall, the report was neutral to friendly grains.

This year in February is USDA’s first guess at the impact of the China-U.S. trade agreement; although, they’ve already pretty much said in the early February statement that they would make almost no adjustments for it. Instead, they are going to wait until they see actual sales and shipments to China to up any demand numbers. That’s obviously much less aggressive than they were to cut Chinese demand when the trade war was raging. True to form, the only reflection of potential $12 billion more in ag sales to China from the trade agreement was a small 50 mb increase in soybean exports in the February USDA report. Perhaps more is to come?

The other major market mover is the extended weather forecasts for SAM, which continue a bit on the dry side for the next week before current long range forecasts call for better rain chances in the 8-14 day forecast. Overall, somewhat unfavorable weather is forecast the next week or so before a return to more favorable weather.

One thing that is prevalent in 2020 is the negative market attitude that almost everyone has. It’s as if the bottom of the market will last forever (and we are at the bottom of historical prices), and prices will never go up! Everyone is so bearish that expectations are that prices will go even lower — and already we are essentially at the bottom. I am taking the opposite view — that prices are already at the bottom, and there is almost no risk left from these levels. The last thing in the world I want to do is sell now, as you pretty much cement selling at the bottom of the market if you do so. In contrast, I think today might be the best buying opportunity I have seen in 6 years.

Why am I bullish? I have noticed some positive developments since last May that I cannot ignore.

1. Soybeans bottomed on monthly charts, with a upside reversal in May19 that has not been violated to date. In fact, the uptrend line has held through the past 9 months perfectly.

2. Corn broke out of a 5-year bottom range last May, projecting improved corn prices the next 5 years.

3. Trade agreements galore have been approved in the past 6 months, including Japan, Mexico, Canada, and China.

4. More trade agreements are likely, including Phase 2 China, the United Kingdom, and the European Union.

5. We came off a disastrous season last year with 20 million acres of prevented planting (almost 10% of corn/soy acreage) and 5% below trend yields in corn and soybeans. Do we really have plentiful supplies?

6. It’s likely we’ll have 10-20 million acres of prevented planting again in 2020 with some spring adverse weather.

When everyone is bearish, buy! That’s an old trade rule, and perhaps the reason it is so successful is it catches everyone leaning the wrong way. Is that the situation now?