Grains start uptrend?
01/24/17 — We finally have the Jan. 12 USDA report behind us, the last report which will update 2016 yields, and therefore major changes in carryout, of corn and soybeans. While we had record large yields of both corn and soybeans in 2016, the yields were actually reduced somewhat in the Jan. report so that it was considered friendly to the market.
So prices have trended higher since the report, boosted by the winter wheat acreage figure which also was nearly 2 million acres smaller than expected. Winter wheat planted acreage was cut almost 10% in 2016, and again cut nearly another 10% in 2017 planted acreage. So while wheat prices are low and stocks are high, low prices are influencing farmers to plant less wheat.
They always say that the best cure for low prices is low prices, and while that takes time the lower winter wheat acreage the past 2 years is certainly one sign that farmers are responding to the market incentives. Another key question for the market is what is the potential acreage shift from corn to soybeans? Currently, the price ratio of soybeans to corn is about 2.60. Historically that ratio has been between 2.0 and 2.6, so we are currently on the high end of that ratio which favors planting soybeans. The ratio has been higher earlier this year, but corn has gained a bit in price for new crop relative to soybeans recently.
The trade seems to be trading a range of expectations for corn and soybean acreage, with most expecting a 4-6 million acre reduction in corn acres and a 3-5 million acre rise in soybean acres. Some seed dealers seem to be suggesting the acreage shift could be more substantial than that as orders for soybeans have increased more than expected.
Another interesting thing to note is that current new crop prices for HRS wheat, corn, and soybeans are higher than last year at this time in spite of much larger carryout projections. Corn prices are currently trading at $3.93 Dec. 17 futures, and last year’s Feb. average for crop insurance purposes was $3.86. So while corn carryout has risen, the insurance price election for 2017 may be higher than last year. Soybeans are even more pronounced, with Nov. 17 futures at $10.22 today, and last year’s insurance price that was $8.85 (last year’s Nov 16 average futures price during Feb 16). HRS wheat prices are also higher than last year, currently trading Sept. 17 at $5.59, while last year’s insurance price was $5.13. So insurance prices might be about 7c higher in corn, $1.37 higher in soybeans, and $.46 higher in HRS wheat.
With carryout of all three commodities much higher than last year, it is surprising that new crop prices are currently trading above last year’s levels at this time. Soybean carryout is projected at 420 mb vs. 197 mb last year, corn at 2.355 billion bushels vs. 1.738 billion last year, and wheat at 1.186 billion bushels vs. 976 million last year. So it is an odd situation today, with insurance prices to start being set in February of 2017.
The market seems to have bottomed earlier this year, basically with most bottoming in early September (corn, soybeans, and HRS wheat). While trading mostly sideways to higher since then, we haven’t gained a lot in price. But then, bottoms usually last months while tops last minutes. So it shouldn’t be surprising that our bottom has taken a while to form.
Now, all commodities are looking at trending higher, with the two winter wheat markets (CBOT and KC) the last markets to turn trend to higher. But this is the most positive sign in at least 6 months that prices are beginning to trend higher. Farmers will need it, as the only crop that currently projects much profit is soybeans of the 3 major crops.
As we mentioned last week, one thing is certain – we will not be projecting record large yields for 2017. Instead, we typically start with trend yields which are considerably lower than 2016 yields (especially for soybeans). So the supplies may not be nearly as big as 2016, and depending on the weather, we have a 50% chance of having a below ‘trend’ yield in 2017. So all possibilities remain for 2017.
The outlook is basically the same as last week; while prices don’t have to move sharply higher anytime soon as we won’t run out of supplies in 2016/17, prices look like they want to trend higher. And as we get closer to spring and focus more on the 2017 year, prices can start moving a lot more than they are right now as more possibilities open up with a new production year and a typical weather premium put into the market in spring. So finally things are turning more to the bright side in grain farming, and as the uptrends continue, optimism should grow.