Signs of outlook improvement

Ray Grabanski Special to the Farm Forum
Farm Forum

1/30/18 — As we start a new production year in 2018, the initial outlook is not very bright as we’ve produced relatively big crops the past few years. Specifically, we had record yields in corn the past 2 years, a very large soybean crop in 2016 (record shattering yields), and 2017 was the second largest yielding soy crop ever. South America also had a banner production year in 2017.

Stocks of most grains are relatively large, with corn near 2.5 billion bushels carryout, soybeans at 470 mb, and wheat at 989 mb. The only grain with smaller carryout projected than last year is wheat, which had a yield drop and acreage drop from 2016, with yields down 6.3 bu/acre from last year’s 52.6 bu. Wheat ending stocks at 989 mb are down nearly 200 mb from the 1181 mb last year.

But prices are also relatively cheap, which means essentially the negative outlook is already built into prices. In fact, prices have been relatively stable recently, which suggests we are likely near a bottom on grains. This is especially true in the case of corn and wheat, with prices languishing in this current price range for months now. Typically bottoms last months, and tops last hours or minutes! So the inactivity in the corn and wheat market the past few months does reinforce the idea that these markets are in the process of completing a bottom. On an encouraging note, both wheat and corn are rallied last week, so the bottom may be behind us.

Soybeans are a little different animal. This year is the first year in many that USDA has had to cut projected export levels due to the slow pace of exports to date. In recent years, it was the opposite as China continued to scoop up U.S. soybean imports at an unprecedented rate. That is different this year, with USDA cutting projected exports 25 mb in the Dec report, and another 65 mb in the Jan. 12 report. So the direction of ending stocks is going up, not down, as it has in past years. It seemed there was a question in traders’ minds the past year if China could simply import all the the soybeans the U.S. could produce. With ending stocks going up from 301 mb to 470 mb this year, it appears the answer is “no!”

However, there is a limit to the downside even in soybeans, with relatively big ending stocks projected. Since the Jan. 12 report (which was bearish due to the export cut), soybeans have rallied nicely, trading higher from a low of $9.44 that day to a high of $10 March futures 1/25/18. That is 8 consecutive days of higher closes, which is actually a pretty good rally for January! We are getting back to where price levels might be worthy of some additional futures sales.

For most of the other markets like wheat and corn, the best sales opportunities will likely come as they have the past 3 years, during the growing season of the US crop. With big stocks, the best price improvements come when we have a growing crop threatened by weather, with weather premiums likely to be added into the market as the threats emerge during the year. Recently those have occurred in June and July the past 3 years, so perhaps that moves a little later this year into July/Aug./Sept.? Every year is different, but one thing seems to remain constant, and that is marketing opportunities do present themselves over the course of the year. Recently, with large stocks, those opportunities don’t last long (only a few weeks), so you have to take advantage of them when they do present themselves.

Currently, South American weather forecasts remained mostly unfavorable for Argentina, still forecasting little precip the next 14 days, and with above normal temps. That will put additional stress on corn and soybeans there and continue to be a problem. In contrast, Brazil still has a mostly favorable forecast, with below normal temps and above normal precip in central Brazil. That could become a problem, though, once harvest begins as it could be difficult to get the harvest out in the wettest areas in central Brazil. Southern Brazil actually will see some below normal precip, following in the line of the recent Argentine weather pattern, and forecast for the next 14 days. Overall, the stress in South American southern regions continues.

Supporting the wheat market is a continued dry period forecast for winter wheat areas in the U.S., where it has been a mostly dry and open winter, with little snow cover. Recent cold snaps put more question into what the impact of the very dry, open winter will be, with virtually no or little snow cover for the dormant crop. KC wheat is sharply higher again overnight, showing the concern the market has for the HRW wheat crop.

We hit a target of $10.13 July soybeans to make catch up sales or advance sales to meet cash flow needs. Both soybeans and wheat (especially KC wheat) have rallied nicely in recent weeks. Finally the wheat market has started to pay attention to the developing drought and open winter in HRW wheat country. The 40c rally in KC July futures the past 5 trading days indicates the market is now thoroughly aware of the problems this weather presents. Finally, the bottom is likely in for the wheat market this winter. The next question is, how far can the market rally? Certainly, though, it can rally more than one week!

Its nice to see some strength in markets after the past 3-4 months of discussion about how markets could never go up with the large stocks currently present for grains. Of course, prices retreat to low price levels eventually due to big stocks and a negative price outlook (as discussed by everyone the past few months), and eventually we just get prices low enough that when a new season approaches, we can rally! We may have finally gotten to that point, and hopefully in most grains we have achieved our price bottom.