January USDA report out of the way—now what?

The January 2018 World Agricultural Supply and Demand Estimate report from the U.S. Department of Agriculture has come and gone, providing very little incentive for grain prices to trade out of the technical trading ranges that have held prices captive for months.

We view it as positive that despite mostly bearish data, grain prices did not fall substantially lower as much of the negative news was already anticipated. Let’s take a quick look at the highlights of the report and consider various price and fundamental scenarios that could unfold into 2018.

Corn: anticipate sideways trade

Perhaps the biggest surprise on the report was the increase in the United States yield, which is now pegged at a record high 176.6 bushels per acre, up from the 2016 average yield of 174.6 bushels per acre. With the increase in yield, ending stocks for the U.S. also got larger, now coming in at 2.477 billion bushels. With the negative news, we are indeed impressed that corn prices did not fall substantially lower. This is a good sign as the market seems to have found sure footing for now.

We feel prices will likely trade sideways in the short term, with March 2018 corn futures likely in a range of $3.40 to $3.55 a bushel. What could make prices go higher? We need a combination of less than ideal production in South America, continued strong ethanol demand in the U.S. (and for export) and a lower U.S. dollar. It is worth noting that global ending stocks, when looking at the big picture, are starting to slowly trend lower. Global demand is strong and China is slowly using up its stockpile of old corn thanks to their interest in ethanol.

Cotton: lock prices in

There are more cotton acres being devoted in parts of Kansas that were traditionally planted as wheat acres. Be sure to take advantage of the recent month long rally and get cotton cash sales locked in. The USDA pegged 2017 all cotton production at 21.3 million 480-pound bales, up nearly 25 percent from 2016. U.S. cotton yield is estimated at 899 pounds per acre, up 32 pounds from last year. While demand has been hot for cotton in terms of exports (especially to China), U.S. ending stocks did not go down as much as trade was hoping for. Ending stocks are now at 5.7 million bales (trade was hoping for a drop down to 5.51 million bales), which is just a touch smaller than last month’s number of 5.8 million bales.

Wheat: watch the weather

Not the friendly report trade was looking for. The planting intentions report for the wheat market came in at 32.6 million acres versus the average estimate of 31.5 million heading into the report. This number is nearly in line with last year’s number of 32.7 million acres. This will, however, be the lowest planted acreage for wheat in our country since the early 1900s. The specific category breakdown for wheat planted acres is as follows: white winter—3.56 million acres (versus 3.5 million last year); soft red winter—5.98 million acres (versus 5.7 million last year) and hard red winter—23.1 million acres (versus 23.4 million last year). The trade is very aware of the dry conditions in the Plains and will be closely monitoring winter wheat crop conditions in the coming weeks and months.

U.S. ending stocks continue to be large (despite smaller acreage), coming in at 989 million bushels, up from 960 million bushels last month. Global ending stocks for wheat remain stubbornly large at 268 million tonnes, verses 268.4 million tonnes last month. The price-defeating element in this market is the gigantic wheat crop harvested in the Black Sea region. For a significant rally to occur, we need to see not only a smaller crop here in the U.S., but smaller crops in every major producing country as well. Keep an eye on global weather in Australia, Europe and especially Russia in 2018. Without any fresh, friendly, fundamental news, Kansas wheat futures will likely nestle into “range trading” in the short term with prices testing the $4.10 low, with $4.40 as overhead technical resistance.

Sorghum: red hot exports

According to the USDA, U.S. sorghum grain production for 2017 was estimated at 364 million bushels, down nearly 25 percent from 2016. Grain yield is estimated at 72.1 bushels per acre, down 5.8 bushels from 2016. Separately, as many of you know, sorghum exports are red hot. While there is not a futures market for sorghum, according to a very recent post on the National Sorghum Producers website, “Prices remain strong with central South Dakota sorghum priced at 111 percent of corn, central Kansas sorghum priced at 116 percent of corn and Gulf sorghum for export priced at $4.98 per bushel or 123 percent of corn.”

Soybeans: surprisingly bullish

The USDA report for soybeans was generally as expected; slightly smaller yield and fewer soybeans for export. In December, USDA had U.S. soybean yield at 49.5 bushels per acre and revised that number to 49.1 in the January report. The total number of soybeans for export were dramatically reduced, now viewed at 2.160 million bushels, versus 2.225 million bushels last month. The number of soybeans for crush was increased by 10 million bushels to 1.950 million bushels. Overall U.S. soybean ending stocks are growing with a final number of 470 million bushels, up from 445 in December. Global ending stocks are also climbing due to large production in South America, coming in at a staggering 98.6 million tonnes, versus 98.3 in December. We did find it quite surprising that in the face of this negative news (of larger ending stocks) soybean futures dug their heels in and posted friendly technical reversals higher on daily charts. This often times is a technical indicator that a short term low is in place. For the short term, March soybean futures will likely find solid support at $9.50, while overhead resistance will be at $9.80.

Summing it up

2018 could be another year of potentially quiet grain markets as global grain supplies, at the moment, are ample. However, overall grain demand is very strong and continues to grow. Because of this, any weather hiccups that might occur around the world will be closely monitored in terms of final crop production. Lastly, in addition to production and demand, there are those outside market influences that could pop up and move the market unexpectedly. Keep an eye on crude oil prices (which are trending higher) as this will be supportive to corn prices via ethanol. Please also monitor seasonal price trends, “fund” money activity, geo-politics, and the value of the U.S. Dollar (as a lower U.S. Dollar is supportive to grain exports). Be sure you make time weekly to monitor these fundamental factors, so you are ready for any price scenario that could unfold into 2018.

Editor’s note: Naomi Blohm is a marketing advisor with the Stewart-Peterson Inc. and she is a regular contributor to the Iowa Public Television series “Market to Market.” She can be reached at [email protected].