2018 Outlook: Profitable Grain Rallies in 2018 Will Be Scarce

08:00AM Dec 19, 2017
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It is likely commodity prices will continue to be under pressure throughout 2018. However, some analysts also see opportunity in export demand from China and the potential for weather woes. Opportunities to sell for a profit in 2018 will present themselves in short windows. Be prepared to maximize their potential by revisiting your marketing strategy and setting price goals guided by experts you trust. Keep in mind these recommendations shared by seven commodity analysts in the following pages.

Bill Biedermann, Allendale Inc.

Volatility in 2017 dropped to historical lows as prices fell below producer breakevens. Is this a sign of what to expect in the future? Maybe in the next one to six months, but not in the next two years. Starch grains and oilseeds have huge supplies.

But the market is doing its job. In the past three years, world corn demand has increased 10% to a record 1,064 million metric tons (MMT), and soybean demand has increased 9.5% to a record 344 MMT. Yet all we hear is how bearish everything is. This is long-term bullish. First, grain and oilseed markets are well balanced. Second, funds will buy grains. Since 2008, world-orchestrated government stimulus initiatives have caused significant economic growth that is now being reinvested. Funds are building an inflation-based position around food and fuel.

Unless NAFTA completely breaks down or U.S.-China relations result in an ag-related trade war, or something else causes a serious crash in stocks, funds are highly likely to buy grains soon. Producers should retain all ownership into 2018. I would replace every bushel sold with an option strategy that makes you long immediately and allows you to gain 60¢ upside in corn while keeping the downside open for 40¢ for a premium cost of only 5¢ and in soybeans a gain of $1.20 if the market goes higher while keeping 60¢ open on the downside for a cost of 3¢. Never sell a dull market short.

Richard Brock, Brock Associates

Corn use in China is a key fundamental to watch over the next five years. For more than 40 years, many in the industry have been touting China as the savior for commodity prices. They have been a large consumer of pork and soybeans, for sure. But their corn purchases have been nearly nonexistent. As they increase ethanol usage, that might change for the long-term benefit of corn.

With the sharp increase in yields farmers have experienced this fall, many are already over breakeven levels. Breakevens change considerably when corn yields go from 200 to 240 bu. per acre. It doesn’t normally work well to be an aggressive seller at break-even levels after a period of losing money. Once the market gets above breakeven, prices normally trend higher.

If cash flows are tight, start selling at breakeven. In corn, keep scale-up selling for the next 50¢ on old-crop corn. If it keeps going, start selling some of the new crop. In soybeans, do the same. Start scale-up selling at $10.20 basis the March futures.

Alan Brugler, Brugler Marketing & Management

The biggest macro risk to U.S. agriculture in 2018 is likely either the partial loss of NAFTA markets or something EPA does to screw up ethanol. A correction in the U.S. stock market might actually help drive more investment dollars to commodities. A weather scare will pose the best upside potential for wheat, similar to what happened this year when the U.S. and Australia experienced drought problems. Global stocks outside the U.S. and China are likely to tighten in 2018, so supply surprises should have more impact. A crop problem in Russia would have the most impact.

Storage spreads supply over time. In a low-price situation, look for price perceptions to change over time in the bullish direction. For hedgers, bin space allows stronger basis bids than others can get because producers can move grain at very low board-price levels. November through January is one window for moving grain from storage if weather blocks other supplies. July futures failed to rally enough to cover storage costs from the fall high in more than half of the past 40 years.

Angie Setzer, Citizens Elevator

Watch the safrinha crop in Brazil very closely. It is responsible for nearly 75% of Brazilian corn production. A smaller-than-expected crop could result in larger-than-anticipated corn exports for the U.S. in the last half of the marketing year.

Pay attention in 2018, as geopolitical tension with the usual suspects will remain. Closely monitor economic developments as the U.S. transitions away from global stimulus and cheap money, too. While the market might feel comfortable with supplies, the fact China is holding on to 48% of the world’s wheat cannot be ignored forever.

Producers should look at the opportunities that presented themselves this year. Next year will present a very similar pricing path. Cash flow and space are the two main determinants when it comes to making sales decisions. What producers can’t hold and what must be turned into cash are the two main drivers in their marketing decisions. Make sure profitability drives selling decisions, not what could happen.

Bob Utterback, Utterback Marketing Services

The five-year average forecast by several U.S. government agencies for domestic corn and soybean prices suggests a U.S. average of $3.60 corn and $9.57 soybeans, and it could be accurate. Most on-farm costs lie close to those numbers, suggesting an extended period of extremely tight margins. Great uncertainty lies ahead for 2018; price improvement might not be seen until stocks are reduced, and that might not occur until 2020.

Downside corn and soybean cash price risk exposure will present itself from January to March if no South American weather stress develops. Expect a modest April-to-July rally with old crop soybeans leading the way. Corn will be hampered by big on-farm inventory levels. If no weather event occurs in U.S. crops next year, the final flush in prices will be from the fall of 2018 into the winter of 2019 for all crops.

Consider increasing soybean acres. Sell any price bounce into $10.30 to $10.60 per bushel to get 100% of insurance-expected bushels sold. In March, buy September calls to defend against a possible weather scare. If producers aren’t willing to buy calls, they should use a long put roll-up strategy to establish a short position. Do not sell futures until July. For 2018 corn, get all insurance bushels sold basis the December 2018 contract at an average of $4.10 and roll to July 2019 contract at 25¢ carry next fall. Defend with a September 2018 call starting in March and hold until mid-July.

Naomi Blohm, Stewart-Peterson

It will take poor wheat crops in more than two leading wheat-producing countries to get global wheat prices to rally. A wheat acreage battle might happen in 2019.

Be ready to pull the trigger if prices reach break-even levels. Although demand is strong and has been growing, prices are stuck in a range because of bumper crops over the past three years. A price rally in grains hinges on poor production somewhere in the world. If South America and the U.S. end up producing bountiful crops in 2018, prices will be stuck in this sideways trading range for another year.

Focus first and foremost on cash sales. Corn basis will likely stay wide this year, so focus on using futures and options to capture price opportunities with your marketing. On rallies this winter, make those cash sales and buy puts on unpriced grain. Print off a continuous weekly futures corn chart and tape it to your truck’s dashboard. Corn futures rarely trade above $4. Next year, when corn futures top $4, look at the chart to recall how little has happened in the past few years. Have courage to pull the trigger.

Mark Gold, Top Third Ag Marketing

South American weather will most likely be the most influential factor through the end of the year. Markets will need to see something that reduces carryouts in the near term. Trade issues might be the most influential geopolitical factor. Will President Donald Trump use trade to try and push his agendas with both NAFTA and China?

There are several factors that could help prices recover, including production problems in South America or a reduction of planted acres in the U.S. We need to reduce U.S. acres by 5 million to 10 million to have a major effect on carryouts. There are 4 million acres of soybeans that could move back into corn, but with corn prices this low, it is more likely farmers will reduce corn acres and plant more soybeans.

Knowing your breakeven is critical in determining how efficient your own farm operation is relative to other producers. Too many marketing gurus use break-even prices in determining cash sales. Re-own 2017 cash sales with call options and look for a rally to establish a floor, using a put option to protect 2018 prices. Look for a spring rally to sell 50% of what’s in storage and a summer rally to sell the other half.

Ray Grabanski, Progressive Ag

Most U.S. supply factors are known. Only the January revisions to corn and soybean yields are left for the 2017 crop year. Demand, especially export demand, is always uncertain. That’s especially true for Chinese soybean imports. Soybean exports have been hiked considerably this year, and while USDA in the past has underestimated exports to China, this year could be different. The major near-term factor is the size of the South American crop.

The biggest geopolitical factor seems to be the Trump administration and the change it represents compared to the previous administration. The stock market especially appreciates that change and has rallied to new all-time highs. Wheat prices have struggled lately. Winter wheat acres have shrunk by an unprecedented 10% per year for two years, representing huge declines. But the fact producers have lost money on wheat (and corn for that matter) and made money on soybeans makes their choice for 2018 easy: expand soybean acres and cut wheat and corn acres. Sell options aggressively in 2018 at opportune times, as prices are just not moving much in any commodity right now. Collecting that premium up to five or six times per year might be the difference between losing and making money.

Key Takeaways From Our Analysts

• Chinese ethanol demand has the potential to increase corn demand.

• South America continues to pose the greatest threat to U.S. corn and soybean prices for the foreseeable future.

• A global glut of wheat will continue to plague markets until the supply and demand equation is better balanced.

• The Trump administration is expected to be the greatest geopolitical threat facing commodity markets.

• An export demand boost is essential to help prices rally higher. Watch NAFTA negotiations closely.

• Be prepared to make cash sales when prices meet marketing goals. Re-ownership is always an option.

How To Assess The Trump Threat

Many analysts agree: the No. 1 threat to U.S. grain markets in 2018 is the administration of President Donald Trump. There is concern among many producers about actions he might take on trade policy and tax reform.

“There’s no doubt that the majority of farmers and analysts are concerned,” says Jim Wiesemeyer, Pro Farmer’s Washington policy analyst. “You have to remember that Trump and his top people are agents of change—not just change, but major change—and that means more volatility until we get a greater viewpoint of what’s going to happen.”

The markets appear to be factoring in the possibility of a worst-case

scenario because President Trump is challenging long-held Republican views of foreign policy, trade and tax, Wiesemeyer says.

A major point of concern for American agriculture is the president’s threat to withdraw from NAFTA. “Trump threatens it every few weeks,” Wiesemeyer says. “The market doesn’t know for sure what withdrawal means. Will it go to the court? Will industries challenge that? What would the U.S. Congress do? The consensus is this is very bearish.”

If Trump withdraws, other factors will be set in motion to temper the effects. “Be nervous, but look at the underlying trends,” he recommends. “I haven’t seen much bite, to tell you the truth. I’ve seen a lot of bark.”

Hear Jim Wiesemeyer share his 2018 policy outlook for agriculture at Top Producer Seminar from Jan. 23-26 in Chicago. To register, visit TopProducerSeminar.com.



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