A review of grain marketing fundamentals

Back at 2017 fall harvest, when grain prices had capitulated to the depths of over-supply price gluttony, the agriculture industry sentiment was grim. Low prices and global crop surplus had become the norm. When talking with farmers back then, and even this early winter, I stated that in order to get prices to move higher, a series of events would need to occur:

• A crop disaster needed to happen somewhere in the world.

• Crude oil prices would need to rally.

• The value of the U.S. Dollar would need to work lower.

• Funds needed to find incentive to invest in commodities again.

• Global grain demand had to stay strong and improve.

• Global economies must continue to stay strong, allowing for more disposable income.

It sure is great when a plan comes together. While the odds were looking grim back at harvest, the fundamentals that matter most to the grain markets have indeed shifted to the positive. Let’s break it down with an updated synopsis of the “Nine Need to Knows” for grain marketing fundamentals:

Supply

Four years of near perfect grain production around the world finally came to a halt this winter with the drastic reduction of corn and soybean supplies out of Argentina. Soybean production in particular is down a whopping 31 percent from last year. And now with the surprise friendly USDA planted acreage numbers for corn and soybeans, any weather hiccup this summer in the United States will provide incentive for price rallies. For example, assuming recent USDA corn acreage data, the most recent USDA demand figures for corn, and applying a national average yield number of 173 bushels per acre, ending stocks for 2018-19 could drop to 1.4 billion bushels, down from the current number of 2.18 billion bushels. That would put the stocks to use ratio for U.S. corn at 9.7 percent. In the chart below, you can see the years when the stocks to use ratio for corn dropped below 10 percent. And if you think back to those years, corn prices rallied significantly. Weather matters this summer. 

Demand

Global demand for corn, soybeans and wheat continues to be strong. The years of low prices created new demand in the form of increased livestock production, more grains used for bio-fuels and more exports around the world. Demand is fabulous overall. Globally speaking for corn, according to the USDA, this will be the first year where global production will not meet global demand. Therefore, if northern hemisphere (China, Canada, Ukraine, and United States) corn production comes into question, prices could potentially rally as three quarters of the world’s global corn production comes from the Northern Hemisphere.

Weather

A slow start to spring planting due to freak blizzards, parched soils in the Southern Plains, and a U.S. Drought Monitor Index that appears ominous are keeping traders on their toes. As expressed above, weather and yield are paramount this summer, more than ever. Trade volatility and price action volatility based on every single weather forecast is highly likely. 

Geo-political drama

Trade Wars, Syria, NAFTA, Renewable Fuels, Russia, China, North Korea—these are the headlines to watch for potential “black swans.” Remember, even though the fundamental stage is being set for potentially supportive prices this summer, one negative story from any of these topics, could create a negative price reaction that could bring a bull run to a screeching halt. Therefore, it is paramount to have a plan in place to know when or how to prices your grain, just in case one of these black swan stories emerges, sending prices into a spinning free-fall lower.

U.S. dollar

The value of the U.S. dollar has been trending lower since early 2017. All you need to remember, is that when the value of the U.S. dollar is down, it makes it cheaper for other countries to import our commodities due to currency exchange rates. A lower dollar increases demand for corn, soybean and wheat exports.

China

China is important to monitor for many reasons: their economy and GDP, internal grain production, grain demand and demand for feed for livestock. Thanks to the overall growth of the economy in China, the middle class within China is employed with more disposable income to spend. Because of this increase in income, food consumption for higher protein has also increased in the form of dairy, poultry and pork. China is also increasing demand for corn by expanding their interest in cleaner fuel alternatives. Partly as a way to use up old stockpiles of corn, and also due to need to improve air quality, China will greatly increase their ethanol use. In September 2017, the Chinese government announced a new nationwide ethanol mandate that expanded the mandatory use of E10 fuel from 11 trial provinces to the entire country by 2020. Lastly, China is important to monitor in terms of potential trade wars and the market volatility that could follow.

Energy markets

As I suggested last fall, energy prices have been due for a rally. Global demand for energy continues to be strong and growing, OPEC has banded together to reduce output and there is enough political uncertainty throughout the world to keep crude oil prices supportive. And keep in mind that when crude oil price rally, gasoline and ethanol prices can rally as well. If ethanol prices are rallying, then odds are, corn prices are rallying too. Last year, according to the most recent USDA report, U.S. farmers grew a 14.6 billion bushel corn crop and 5.575 billion bushels of corn were used for ethanol. That means, that 38 percent of the value of corn is directly tied to energy.

Funds

The funds. The big investment money that partakes in the trading of commodities. The fund managers also watch and monitor all of the fundamentals listed above, as they are looking for opportunities to invest and make money. Every week, the government requires the funds to disclose the amount of positions bought or sold during the week. From there, we can track if they are amassing a long position in the market or a short position. As of this writing, the funds are keenly aware of the strong demand and lower global supplies, and have been buying corn and soybean futures.

Seasonals

Seasonals are still important to monitor for grain markets. When are grains usually the cheapest? At harvest, when supplies are plentiful. And when are grain prices often the most attractive? Late winter, early spring or early summer, when the size and potential production of the crop is unknown. Being aware of these seasonal time frames, can help you make smart pricing decisions for your crops.

Balancing all “Nine Need to Knows” and being aware of how they fluctuate throughout the year will help you to best manage marketing opportunities and minimize market risks. While the market outlook for now has turned from negative and bearish, to potentially supportive and friendly, one timely rain this summer, or one geo-political event can wreak havoc on the best laid marketing plans. Re-visit these fundamentals often. Fundamental news continues to shift weekly. Be ready to act on pricing opportunities as they become available. Do your best to stay alert to all fundamental and technical aspects of this marketplace, because, as evident from the recent rally, prices can shift on the fly. As always, have action plans ready for whatever market scenario unfolds, so you can act on your strategies before things shift again. Remember, marketing is how you get paid for your hard work. Farm market scenario planning is hard work; and those who take time to strategize and execute, realize their pay day. Prices can turn on a whim, be confident and ready.

If you have questions, you can reach Naomi at [email protected], or find me on Twitter at @naomiblohm.