USDA’s National Agricultural Statistics Service (NASS) report in September was not what the market had expected or hoped to see, yet soybeans shrugged off a slight increase in yield. Corn feebly came along for the ride while wheat, plagued with huge U.S. and global stocks, posted a weekly reversal higher. Price action was technically positive, supporting the notion that harvest lows were posted in the last week of August. I am not that certain. Finding positive corn fundamentals is a little difficult, and the soybean outlook might have gotten ahead of itself.
The October report should indicate an increase of 850,000 to 1 million more planted soybean acres than indicated in USDA’s Planting Intentions report June 30. This is still 1.5 million acres less than our survey back in March, but it is still closer than most trade estimates by far. Corn acreage could drop an insufficient 500,000 acres in October’s NASS report.
Dose Of Reality. Changes to USDA’s world corn numbers resulted in a 1.6-million-metric-ton increase for 2017/18 ending stocks. Reduced production and carrying stocks were more than offset by reduced usage. Brazilian exports of near-record amounts of corn this year will likely be a drag on our ability to export well past our harvest. Any noticeable narrowing of corn basis in the U.S. is unlikely until the second quarter of 2018, when our exports should rebound.
The corn market is saying, “I don’t need your corn now, but I might in six months, and I will pay you to store it.” The lion’s share of profit in the unsold portion of the 2017 corn crop can be found in capturing the carry. It speaks volumes of the headwinds ahead. Given a normal scenario, corn will trade a year from now at about the same level as it is today.
The expected average farm price for corn in the year ahead is expected to be between $2.80 and $3.60, according to USDA. Given the variance in basis levels from north to south, it’s a reasonable bet to use what you got this year for your cash-flow analysis for the coming year. Using on-farm storage wisely might be the only untapped profit source other than significantly lowering production costs through lower cash outlays and lack of reliance on above-average yields.
Irrational Exuberance. The trade was skeptical of the soybean crop and seems to be dialing in increasing global demand and an eventual drop in yield of 1.5 bu., which would suggest a carryover of 360 to 375 million bushels. If that happens, it changes the dynamics considerably early in the marketing year. The market understands it cannot afford an eventual drop in U.S. production of 90 to 120 million bushels and a crop problem in South America. (La Niña concerns are already surfacing).
If there is a concern I have, it is that the market perception for the soybean outlook is for increasing global demand, because it underestimated demand for the previous three to four years. Recall the $3 rally in 2016 because of misdiagnosis of the price outlook. This new focus is in stark contrast to that of years past, when most observers missed seeing global demand in spite of evidence to the contrary.
A respected major analytical firm has penciled an increase in exports by major exporting countries of nearly 12%. Total available supplies on Sept. 1, including carryout of stocks of the big three—the U.S., Argentina and Brazil—plus U.S. production is over 800 million bushels greater than a year ago. That level is sufficient to withstand a further demand increase or production shortfall.
Irrational exuberance regarding global demand might create demand disappointment in January 2018 with the exception of a weather problem occurring in South America. TP
Jerry Gulke farms in Illinois and North Dakota and is president of Gulke Group Inc., a market advisory firm with offices at the Chicago Board of Trade. For information, call (707) 365-0601. Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee the advice we give will result in profitable trades.