Bull markets?

Ray Grabanski Special to the Farm Forum
Farm Forum

04/10/18 — The winds of change, they are really blowing now! Last week, we highlighted the fact that the bear market was likely over. In fact, our specific quote was: “We have been a HRS wheat bear since last July, but that bear market is likely to end soon. Time to buy back HRS wheat.” How timely, as HRS wheat prices are up almost 50c since that statement. Now the new winds of change are at hand, namely a full fledged bull market in grains. Its been a long time since we’ve been able to say that, but finally the change seems to be coming.

While many wannabe and university analysts think this is not possible with our large stocks, that only fans the flame for the funds. We’ve had relatively subdued markets the past 3 years, lulling us into complacency regarding the ability of the US farmer to produce big crops under any circumstances. Yes, our technology is great, and it does improve each year. But that is already built into ‘trend’ yields. We’ve been above trend the past 3 years because we’ve simply been treated well by mother nature. But that sword cuts both ways.

So far this year, we are learning that lesson over again (as we do every 5-6 years), and yields do go below trend. In fact, by definition, they go below trend about half the time. So we actually are due after 3 years above trend, for a crop below trend. The market outlook might depend mostly on how much below trend we go.

In the past week, we’ve rediscovered the ‘government policy’ risk in markets, with the recent trade tensions with China. Tariff wars (or at least a war of words) ensued, with both sides threatening equal tariffs. Except the US buys $500 billion/year more from China than China buys from us. That is the ace in the pocket for the US, although generally no one wins a trade war. The best thing that can happen is a ‘settlement’, and since there is overwhelming benefit on both sides from a settlement, that is likely to happen. The only question is, when?

In fact, Pres. Trump was quoted April 8 in his twitter account as saying: “President Xi and I will always be friends, no matter what happens with our dispute on trade. China will take down its Trade Barriers because it is the right thing to do. Taxes will become Reciprocal & a deal will be made on Intellectual Property. Great future for both countries!” So at least one side is optimistic this can be resolved.

Much has already been discussed about this trade dispute, but actually corn and wheat are higher than before this problem emerged, and soybeans have recovered most of their losses, too. So the market seems to be paying more attention to growing season weather and the disaster that unfolded in Argentina this year. And so far, that is good for grain prices.

U.S. weather remains relatively adverse, with the next 7 days actually the best forecast. It is still frigid/cold in the corn belt and HRS belt the next 7 days, but the western corn belt and HRW wheat region will be relatively dry (good for corn belt, bad for winter wheat). Precip in the northern half of the U.S. (including the northern corn belt and HRS country) will be above normal, along with the eastern 1/3 of the US (and eastern corn belt). So this is not a good planting forecast. It gets even wetter in the corn belt and HRS wheat belt in the 8-14 day forecast, with increasing precip amounts in today’s weather runs. This is a forecast for more adversity in planting corn and HRS wheat, and more stress on HRW wheat crops.

South American weather is still forecast warm in Argentina, and cool in Brazil the next 14 days. The northern portions of Brazil will remain wet, but southern half of Brazil and all of Argentina will see below normal precip. So the harvest season continues in SAM, with harvest beginning to wrap up in some areas.

Crop conditions and progress yesterday showed winter wheat declined 2% to 30% G/E, well below last year’s 53% rating. Poor/very poor category rose 5% to 35% vs. only 13% last year. Western areas are most devastated as its remained dry and warm there. Eastern areas might actually get some harvest, with potential normal yields in high moisture areas. But overall, this crop appears to be a bust. Corn planting is 2% complete, equal to average but most planting is in Texas. Cotton is 7% planted (vs. 5% normally), with sorghum 17% planted (2% ahead of normal), rice 21% planted (1% behind normal), and sugarbeets only 1% planted (vs. 5% normal). Oats are 27% planted vs. 34% normal, and HRS wheat is 2% planted (vs. 4% normal) and barley 4% planted (vs. 12% normal). The only HRS or barley planting is in the Pacific Northwest of Idaho and Washington, as the big HRS regions are still frozen.

Soil moisture is 77% adequate/surplus, about 10% behind last year while subsoil is 72% adequate/surplus, 12% behind last year. Its not so much wet soils delaying planting, but the cold temperatures across the nation. We are gripped in a Antarctic weather pattern that won’t go away, and that is hampering planting. Remember that farmers harvest the sun, and planting late means less harvest of the sun, and therefore likely lower yields. Because of late planting and a potentially short season in 2018, we are likely to have below trend yields.

The April USDA report is today at 11 a.m., and will show how the USDA handles the stocks surprises in the Mar. 29 report. However, as we said yesterday, in bull markets often the USDA reports are bearish. It is also news from the past, that has already been traded by the market for at least a few months (buyers and sellers have been interacting in the current supply/demand framework). Now, the future news is the 2018 northern hemisphere planting season, and so far that has been adverse.

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