Market Analyst: A very happy new year

Ray Grabanski
Special to the Farm Forum

Farmers are smiling a lot more often to start 2021, with soybean prices in the teens and corn near $5 to start the year.

The world seems to have a shortage of soybeans right now, and South America appears to have a below average crop, so the outlook is bright for U.S. farmers. The outlook is bright not just for soybeans, though. Once we plant more soybeans (at the expense of corn, wheat, and other crop acreage) there could be a shortage of just about every other crop as well in 2021.

Most everyone now is aware that South America is not having the best weather, as rainfall has been less than average (which is hard to measure daily when it rains every other day in a tropical environment). But overall, rainfall the past few months has been less than ideal, and that is shrinking crop potential. South American weather forecasts today are moderating a bit, with more precipitation and cooler temps in Argentina for the eight-to-14-day forecast the past few days. Brazil is forecast to have slightly below normal precip the next week, and then back to normal for the eight-to-14-day precip. This is a slight improvement for the crop, but then again, the South America weather forecast seems to always trend toward “normal” in the eight-to-14-day period.

On Jan. 12 the U.S. Department of Agriculture guesses new U.S. production estimates for corn and soybeans, and they will need to reduce soybean yields again (with no room for reductions at 175 million bushels carryout in December). Another half bushel reduction drops carryout to 135 million bushels and export increases drop it even further — 100 million bushels is considered “pipeline” supplies. Trade estimates for corn carryout are at 1.38 billion (vs. 1.7 billion in December, per the USDA), although some doubt reductions in South America corn, China corn, or increased exports will be as much as private estimates. Expectations are for U.S. corn yield reductions between one-half and 1 bushel per acre, too.

Corn prices as of today have traded higher 14 straight days, gaining 80 cents in less than three weeks! I don’t know if I’ve ever seen that, even during the heady days of 2008 and 2012 and the historic rallies to $8-plus. Usually, a rally that quickly and so one sided is indicative that we might be near the end of a rally — at least for a while. While long-term charts suggest the market will get stronger perhaps for three years, at this pace it is not sustainable as we’d be at $18 soybeans and $6 corn by the end of February. So it becomes more and more likely at this pace that ag prices will suffer a significant setback at some point (maybe to $4.60 for corn or $12 for soybeans?). In fact, that might be healthy for the market long term if, indeed, it will rally for the next few years as long-term charts suggest.

Soy carryout estimates are near 100 million bushels (pipeline supplies), but some traders doubt USDA will be dropping the South American crop production numbers this much this early, or increasing China imports or U.S. crush with no U.S. supply able to meet that demand. They might just hike the price projection and say “rationing” will limit demand (which it has to do eventually). At Pro Ag over the years, we’ve noticed during bull markets USDA provides mostly bearish reports, and during bear markets, at least once in a while, its bullish. USDA’s job is not to push the market higher, its to keep it steady (a cheap, stable food supply), so don’t look for them to lead the bull market higher.

The Kansas wheat crop is rated 46% good or excellent, up from 33% in November and 40% last year. However, Colorado was 19% vs. 20% in November and 57% last year. Illinois was 50% vs. 79% in November and 48% last year. South Dakota was 37% vs. 57% in November and 73% last year.

Expectations in the January USDA report are for higher winter wheat acres than last year (slightly), even though soybeans and corn prices rose much faster than wheat. But that mostly occurred after winter wheat planting. Perhaps more winter wheat will be grazed out and planted to corn and soybeans? Planted winter wheat isn’t as important as harvested winter wheat acres. Look for increasingly volatile trading sessions in 2021, as we’ve already had a few 50-cent daily trading ranges in soybeans already this year. We haven’t seen this in years!

So things are getting more and more interesting in 2021, and that might continue well into 2022 and 2023. In fact, while the market is discounting prices into the future, I fully expect 2021 prices to be higher than 2020 and 2022 to be higher than 2021. If you look at spreads between the years in almost all markets, they are discounting future prices, which means traders are pricing 2022 less than 2021 and 2021 less than 2020 prices. I would be very surprised if that will be correct based on long-term chart indicators. In other words, the outlook is extremely bright for crop agriculture the next few years.