Rally time

Ray Grabanski Special to the Farm Forum
Farm Forum

2/27/18 — Grain markets have had a nice time rallying the past 6 weeks, with soybeans leading the way with $1 gain from the lows made just on January 12, the Jan. USDA report day. Recall it was a negative report, but grains all rallied anyway. In fact, the past 2 months have been quite bearish USDA reports, and the market has rallied every time following the report.

It is becoming painfully obvious to the bearish people who follow fundamental analysis that they are on the wrong side of the market. In fact, those bearish fundamentals they are still talking about (and it has been going on for about 6 months) is probably the reason most markets have formed a bottom in the past few weeks. After all, prices dropped for 6 months after topping in July, with most markets reversing the premium put in place for weather problems that were perceieved at that time. Instead, we produced record large corn yields, and the second largest soybean yields. HRS wheat was better than expected, and prices quickly formed a retreat. Futures traders built into prices the next 6 months those bad fundamentals. By the time USDA “caught up” to the market with their high carryout projections, the market had basically already bottomed because it was already built into prices. In the meantime, new developments have started with U.S. winter wheat in horrible condition after a dry, open winter. And Argentine soybeans are in the midst of a drought.

Winter wheat, corn, and soybeans have rallied aggressively since mid-January. Only HRS wheat is the lone bearish market yet, with March HRS futures pushing to a new low just yesterday — the lowest price in about 8 months!

But the rally of the other markets is indeed impressive. We have a full blown rally going on in soybeans, with South America having a growing crop in the fields. Argentina production prospects are dimming fast, as they are losing yield potential due to an ongoing drought that has been locked in place for the past 3-4 months. Brazil production looks promising, but if the weather remains cool and wet they could have increased harvest losses amid difficulties harvesting the bumper crop. With over $1 rally in just 6 weeks, soybean producers have garnered roughly another $50/acre in revenue if they waited to make sales.

Soybeans had a sharp rally yesterday early, moving into double digit gain territory before reversing and closing lower. That was a negative technical signal, but with meal/oil both closing higher was not a very convincing signal. Winter wheat and corn prices held most of their gains, and closed near the highs of the day. Positive overnight gains in Kansas City wheat of another 7c were reflective of another week of deteriorating wheat condition reports out of HRW wheat country. Kansas, Texas, and Oklahoma all are still very poorly rated, and indicate a below trend yield is likely in winter wheat, along with higher abandonment rates. However, HRS wheat prices had moderate losses yesterday in running to new 8 month lows.

South American weather suggests better weather the next 7 days, with Brazil temps warming to near normal and precip about normal as well. That is better harvest weather than cool/wet weather (which they’ve had the past few months). Argentina rainfall improves in the northeast the next 7 days, with above normal precip there. But the southwestern portion is still below normal precip (dry). Temps are forecast above normal in Argentina the next 7 days, and below normal in Brazil yet.

The 8-14 day forecast returns to one of above normal precip for Brazil, and below normal for Argentina. Temps are forecast to cool seasonally for both regions, back to near normal for Argentina, but below normal for Brazil. Overall, this is not a great change from the forecast in South American all year, and still is somewhat supportive to soybean prices.

U.S. weather is forecast to have above normal temps in the Corn Belt, HRW wheat area, and the eastern two-thirds of the U.S. The western one-third of the U.S. is forecast to have below normal temps the next week, with the 8-14 day forecast similar. Precip forecasts the next 7 days are for below normal in the HRW wheat area (more drought), but normal eastern of there and actually above normal in the HRS wheat region, at least the eastern half. The 8-14 day forecast is for below normal precip in the western 2/3 of the U.S., but normal in the eastern one-third of the U.S. That again is not a good forecast for dry HRW wheat areas.

Given the crop problems already emerging in 2018, USDA’s trend yields projected just last Friday in their annual Ag Outlook seminar already look outdated. The market is clearly already subtracting out bushels from both the U.S. winter wheat crop as well as Argentine soybeans. And 2018 is just getting started! Already, the negative fundamental picture of the fundamental grain traders is outdated. It is already changing in 2018, the only question now is how much it will change by the end of 2018, and how much your marketing plan will need to change as a result.

Ray Grabanski can be reached at raygrabanski@progressiveag.com.