Head to Head: What Might Upend Sleeping Grains

February 6, 2018 11:57 AM
 
Pile of corn

Q:    The grain markets have shown little movement since the end of harvest. Do you see this trend continuing? And if there is to be more advanced price strength, when do you believe that will be? Do you believe the corn market is seeing expanded demand at these relatively lower price levels?

Cycles Could Align In Farmers’ Favor

Dale Durchholz, Senior Market Analyst, AgriVisor

USDA’s January reports are a fundamental benchmark that helps us know the size of the 2017 crop and provide us a foundation for the structure of the market. By mid-January into early February, corn puts in a 20-week low and soybeans put in a 32-week low. Cycle lows are coming due, so the market could see some modest and maybe even meaningful strength.

The effect of money on markets remains a concern. In 2017, hedge funds were short corn, but were on both sides of soy. The comments we hear suggest they think the long side of grains is the place to be in 2018.

How will these cyclical lows fit into the mix of South American weather? We have a mild La Niña underway, so there’s a tendency of being dry in Argentina and southern Brazil. In March, the northern parts of Brazil transition from the rainy season into the dry season. Because the soybean crop was planted late, corn planting could be three to four weeks later than normal.

Generically there is expanded demand. The steady rise in crude oil tends to prop up ethanol prices. Livestock numbers show profit potential, so in aggregate, you have increasing feed demand. Low prices are having the necessary impact: They are invigorating demand.

Contact Dale: ddurchholz@agrivisor.com 


Burdensome Stocks Will Limit Price Gains

Stephen Nicholson, VP, Grain & Oilseeds, Analyst, RaboResearch

At best, futures prices are expected to be stable. Our 10-year baseline model shows steady prices and little price volatility. Opportunities for buyers and sellers will be limited, so when pricing opportunities arise, they must be seized.

Under the current supply-and-demand situation, upside price strength is limited. Despite dryness in some of the major growing areas in 2017, futures and basis levels were under pressure due to burdensome stocks. Also, end users don’t feel the need to extend coverage because of limited upside price or supply risk.

If there is price strength this year, it will come from a supply-side shock. However, any price strength will be muted by large stocks and the producer’s ability to respond to higher prices by overproducing the market.

Traditionally, lower prices have bought demand. Cheap feed prices will encourage more livestock production.

However, corn demand is facing head winds. Changes with U.S. biofuel policy and driving habits might limit potential ethanol demand. And, export competition is stiff. The currencies of export competitors like Argentina and Brazil have weakened against the U.S. dollar, which gives their grain a price-competitive advantage.

Contact Stephen: stephen.nicholson@raboag.com 

 

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.

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