Had one only used the closes for yesterday’s grain and soy markets, it might have been easy to assume that the figures released by the USDA were neutral at best and possibly even a bit negative. Of course, we all know what can happen when we ass-ume something. Granted, the figures released by Uncle Sam are quite preliminary and guaranteed to change through the year, but I believe you would be hard-pressed to find anything remotely negative. Using ending stocks as the final barometer, which they realistically are, domestic wheat ending stocks are projected to fall by 155 million bushels or 10.7%, corn down 500 million or 33% and this after a 175 million bushels haircut in usage, and beans down 115 million bushels or 21.7%, but in this case, after a 232 million boost in usage, primarily in exports. Obviously, the USDA is little concerned about the US/China trade spat or else they believe South America is headed for a production issue this next year. As it turned out, the only US crops that did not reflect a reduction in final inventories were oats, 24%, rice, up 18%, and cotton, up 10.6%. Reductions were not limited to the domestic scene either as world ending stocks were trimmed for the major crops as well. World wheat carryout is projected to be reduced by 6.13 MMT or 2.3%, coarse grains down 37.23 MMT or 16.7%, corn down 35.7 MMT or 18% and bean down 5.46 MMT or 6%. Even world cotton is projected to lose 5% in final inventories.
So, the next logical question has to be; “If all this news is so positive, what’s up with the market? I thought lower ending stocks equated to higher prices?” While in a general sense that is correct, it is even more correct to recognize that when markets do not respond in like fashion to news, they are telling us a story. Now that story could be 1.) we do not believe what we have been told, or 2.) we have pretty well factored the information into the price already, so it is time to step aside until we find something new. The latter would seem to be the most logical in this case.
Regardless, we have truly raised the bar so to speak in the world grain/soy markets. Keep in mind that the numbers projected assume normal trendline based production figures, and while there is nothing to suggest at this point that this is not realistic, there is also little room for error. Like the rest of the manufacturing world, global grain trade exists on a “just in time” inventory philosophy (with China a possible exception) which means if there is a production hiccup, there could also be an end-user panic. Do keep in mind that for now, there is no eminent threat, and we could continue to chop along in a very broad sideways pattern as we have now for the past four years, and in the case of the corn market we are already approached the upper 20% of the prices range we have been in throughout that period. Good risk management/marketing strategies should never be ignored no matter what the scenario. That said, as I have written numerous times over the past couple years, cyclically we should have turned the commodity sector higher back in 2016 and while the ag sector has been on the tail end of the overall recovery, it would appear that we finally have the fundamental news to suggest it could play catchup as we move through 2018 and into 2019.