While traveling around the Midwest this winter, it’s obvious producers are watching the market’s every move. I sense there’s still a lot of unpriced inventory on the farm and very little of the anticipated 2016 crop has been priced. Farmers are all asking the same question: How long are prices going to stay down?
For the past few months, I’ve written about the uncertain macro outlook for the global economy in 2016. I still suggest the best we can hope for is sideways, stable demand for many ag markets. The burden of higher prices disproportionately falls on the supply side of the equation for the 2016 marketing year. A major feed grains and oilseed producing country, such as the U.S., must either fail to get the crop planted or experience a major yield reduction event; otherwise stocks will continue to build. We also need a sustained drop in the U.S. dollar, stabilization in the equity market and oil values must rebound. I’m not saying it can’t happen, but it’s not time to bet the farm!
My concern is the same as in spring 2012. Factors were set for lower prices, but in 2012 we experienced an extremely abnormal yield reduction event that really bailed us out from 2012 to 2014. Can we bet on it again?
Producers will be very resistant to reducing production. Some economists suggest driving prices below the variable cost of production is the only way to eat up excess stocks. However, that will take time. Instead of a “V” bottom like the 2008 financial event, I’m looking for a “rounded” bottom and significant acreage reductions to hold off until spring 2018.
Unless we see a major yield-reduction event in the U.S., China or South America, the earliest I see a long-term low for corn and soybeans will be the fall of 2017. Farmers should move into full-scale sell and defend mode. All of 2015’s crops should immediately be moved and a large percentage of expected 2016 inventory should have a floor under the market before the April supply-demand report. If we do experience a July to August weather-scare event, use this strength to price a large percentage of your 2017 crop.
Corn. Take advantage of any minor price bounce from March to April to price expected 2016 corn inventory. The April supply-demand report will confirm low exports and higher carryover prospects. This, combined with increased acres, makes early planting extremely bearish. Focus on pricing the December 2016 contract between $3.90 and $4.05. If you didn’t buy call protection, wait until the end of May. Only buy calls in the September contract if and when a clear technical breakout is seen.
Soybeans. The prospect of a solid South American crop, increased domestic plantings and high existing stocks suggest an average yield of 46 bu. will push ending stocks to historically high levels. This will force carry back into the soybean complex and widen basis levels. Farmers should: (1) reduce soybean plantings to the lowest possible level, (2) have the expected crop sold before it’s planted, and (3) only buy upside protection if we see a clear technical breakout after planting. This is not the time to get cute with your soybean marketing plan. Cut your exposure and keep it simple.
Wheat. I’m not going to break my rhythm; wheat could get even weaker if we start seeing production potential come out of Europe and Russia. Like the soybean outlook, keep it simple. Get it sold and don’t reown unless you have a clear technical buy signal. If you buy, be just as aggressive liquidating the trade as you were getting into it and keep equity exposure tight!