Market Advisor: Happy 2018

01/02/18 — As we start a new year, it is always a good idea to look back on what has just happened in 2017 to get a feel for where we are at, and where we might be going. Corn had a record yield in 2017, following a record shattering yield in 2016 so that supplies are more than adequate at near 2.5 billion bushels. Demand for corn is good, but with the large supplies due to record yields, demand just isn’t growing fast enough to use up all that grain.

Soybeans also had a good yield in 2017, although not nearly as good as 2016’s record shattering yield. Still, we have built up stocks of soybeans in spite of larger demand than anticipated the past few years. In fact, for the first time in years we are projected to have over 400 mb carryout, and this time it probably will occur (unlike previous years when they projected it, but then demand was larger than expected and it never happened). This year, demand is actually smaller than projected so far, and for the first time we are seeing USDA start to hike ending stocks due to slow demand (not cut them due to large demand). Unfortunately, unless this situation changes, we are likely to see further hikes in ending stocks of soybeans.

Wheat yields were down from 2016 in 2017, with a HRS wheat drought in western growing regions. So ending stocks of wheat are down from 2016, but still we are over 900 mb. Wheat acreage has been cut sharply the past few years (2016 and 2017 had nearly 10 percent cuts in acreage, back to back). Essentially, it seems the U.S. is going out of the wheat business somewhat, and are expanding soybean acreage to meet the growing world demand for soybeans (mostly China). Wheat has a chance to go up with one more year of cuts in ending stocks, but it will take time for this to develop.

Of course, 2018 is a new year, and with it comes all the possibilities of a new production season, which in the U.S. begins in about late March and extends into early November typically for most states. Once a new production season gets under way, anything can happen as once in about every five years a production problem occurs in a grain such that about a 10 percent below trend yield can develop. And about every 20 years, we see a problem to the point that a yield 20 percent below trend can develop. Essentially, it doesn’t matter much what the carryout is if you have a yield 20 percent below trend — prices are going to go up!

So with a new year, comes many possibilities. We can also have a crop yield 10 percent above trend, and in that case stocks will grow (much like they have the past two years in corn and soybeans). When stocks grow, usually prices sag.

It just so happens that we start the year with relatively large stocks of grains, with the 3 major crops that represent about 80 percent of the planted land annually all showing large relative stocks (wheat, corn, and soybeans). Most of the other crops also have relatively large supplies, as with low prices in the three major crops, the other crops have attracted more acres and we’ve got plenty of stocks of almost everything right now.

But hope springs eternal, and with a new year comes the possibility that some of those stocks could be reduced, especially if the crops develop a problem somewhere in the world. For now, the only growing crops are in the southern hemisphere, with Brazil and Argentina the center of attention as they are the two countries that export the greatest amount of grain. So far, Brazil weather has been relatively cool and moist, almost perfect conditions to produce another large crop.

But Argentina is a different story, as they have battled periods of warm and dry weather for extended times already in 2017, and as they start 2018 they have a forecast of more warm/dry periods occurring intermittently. That is not conducive to having a good production year. So based on today’s conditions, it looks like Brazil will have an above average crop in 2018, but Argentina will have some reduction unless growing conditions improve in the near future.

Happy new year!