Combines are still rolling on some farms, but the influence of bearish supply fundamentals has crested. The market’s attention will now turn to the status of the South American crop and the intensity of global demand in reaction to lower commodity values. The bulls suggest demand will quickly bounce back because crude oil, copper and other major manufacturing inputs are experiencing multiple year lows. The bears argue supply is out of balance with demand and it’s going to take more than just a few months to stimulate usage. Who will blink first—producers with inventory or end users?
If exports don’t pick up this fall as the bulls expect, there could be an excessive amount of production hitting the market during the first quarter of 2016. If there’s a need for cash flow after the first of the year, take care of pricing before the December USDA Supply and Demand report. Feed buyers should make plans to have all spring and summer feed needs purchased in the first quarter of 2016.
In the mean time, I’m worried producers haven’t forward sold much of their expected 2016 corn production. I realize some farmers are still trying to decide what and how much to plant next year. According to USDA numbers, soybeans made money in 2014 but corn didn’t. While it’s still a little early to know exactly how bank accounts will cope this year, the price outlook for 2016 looks flat while costs remain relatively high.
I expect U.S. soybean acres will grow in 2016 just like they did in South America. When placing this against a backdrop of slow demand from China, stocks could build next year if we see anywhere close to a 46 bu. average in the U.S.
On the other hand, supply fundamentals are slightly more positive for corn. We’re starting out with lower stocks, potentially lower planted acres in South America and some production problems in Europe. However, I sense domestic producers aren’t excited about increasing corn acres because of high cost outlays.
In 2016, the stage is set for soybeans to be a disappointment, but corn could have some potential if we experience any yield adversity when El Niño transitions to La Niña. It will be July before we know anything, though. Therein lies the big problem—waiting until summer to price old and new crop on a weather scare event that doesn’t occur could result in producers finding out how it feels to sell corn cheaper than their cost of production.
In the weeks to come, scale up selling December 2016 corn between $4.15 and $4.45 and have a plan in place to manage upside risk exposure if a late summer weather scare event occurs. Buy out-of-the-money September calls and sell nearby premium to have positions paid for by early spring.
All great bull markets usually start with a period of economic weakness—and we’re entering the final stages of this low cycle. I believe the function of the 2016 grain markets will be to align supply with demand.
With that in mind, it’s best to limit risk. For example, if it’s possible to forward sell close to breakeven, do it, but have a plan to take advantage of a July weather event if it occurs. The real prize for farmers will be to simply get through the bearish time period and be in a position to take advantage of the building demand base while facing low commodity and reduced projections.
Looking ahead to 2018, the deck is stacked for a major price event—similar to 1988. However, we must survive a period of economic stress first. Remember, the rougher it gets now, the more bullish it will be later on!
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