A review of ‘9 need to know’ grain marketing fundamentals

In recent conversations with producers, many questions are emerging about varying aspects of grain marketing. The top five:

1. Why are corn and soybean prices not higher due to the potential lower crop size?

2. What will final corn and soybean acres and prevent plant acres be?

3. With the late planted crop, surely yield will be lower, won’t it?

4. What about those U.S. Department of Agriculture numbers; will we truly receive current data on that Aug. 12 report or do we have to wait until the January 2020 final production report?

5. How am I supposed to market my corn and soybeans when I’m not sure what my new crop will yield?

All of these questions are important. All of these questions are top of mind for producers and the overall agriculture industry right now as they ultimately lead to buying or selling opportunities. Unfortunately, the above questions are unable to be answered for a few months, until the crop is harvested. In the meantime, you need to be aware of all the other price components tied to the grain market, so when we do finally understand where yield and acres are, you are ready with a mindset that is ready to capture both market opportunities and manage risk. Let’s break it down with an updated synopsis of Naomi’s “Nine Need to Know” grain marketing fundamentals.

Supply

Five years of near perfect grain production around the world finally came to a halt this spring with the relentless rainfall that hammered the Midwest, and the crop was extremely late to get planted. Prices rallied on the odds that late-planted crops seldom yield better than trend-line average. Currently, I have heard yield guesses that range from 155 to 170 bushels per acre, which while is a wide range, is all below the average United States trend-line yield. Going forward, weather watching will matter from now until Thanksgiving, August heat, early frost, rainy harvest are all weather factors that could allow a quick price rally in grain prices.

On the acres side, we will receive our next fundamental update on the Aug. 12 USDA report. On that report planted acres will be updated, along with information on prevent plant acres. The USDA will also be able to tweak the yield numbers if appropriate as well. Depending on acres and final yield, we could see a price situation similar to the past few months, or one that screeches higher. For example, if U.S. corn planted acres are 91.7 (using the July USDA report data) but yield drops to 163 bushels per acre, then ending stocks are at 1.85 billion bushels. That example keeps corn likely in a range of $3.75 to $4.50 into 2020. However, if planted acres are 89.7 million acres, and yield drops to 163 bushels per acre, then that pegs ending stocks at 1.55 billion bushels, which is a quick argument for $5 corn futures. 

Demand

Global demand for corn, soybeans and wheat overall is hearty, with the exception of less soybean demand in the short term in China due to African Swine Fever, and the drastic reduction of the herd. However, over time that herd will be rebuilt, and in the meantime poultry demand is increasing, so overall soybean demand hasn’t exactly halted.

Also, specifically speaking for corn, as of the July 11 USDA report, the world will not grow enough corn to meet global demand this year. You read that right. Lucky for the world, there is enough global old crop ending stocks to make up for the deficit. Therefore, if northern hemisphere (China, Canada, Ukraine and U.S.) corn production comes into question in the coming months, prices could potentially rally as three quarters of the world’s global corn production comes from the Northern Hemisphere. 

Weather

A historically slow start to spring planting due to freak blizzards and torrential rain in May and June brought the weather watching importance to the forefront. Now trade is watching August weather closely. Will it be hot and dry? Will it rain? The bulk of the corn crop is going to be pollinating in August (which is historically late). The soybeans are going to be flowering soon as well, also late. Weather watching is also paramount during September as the crop reaches maturity, and even in October as harvest will be late. Trade volatility and price action volatility based on every single weather forecast is highly likely.

Geo-political drama

Trade wars, Middle East turmoil, 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 heading into 2020, 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 price 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 in a slow uptrend since 2018. Will that continue or not? 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. Lastly, China is important to monitor in terms of further trade wars, and the market volatility that could follow. 

Energy markets

Crude oil futures have been hovering between $50 and $60 a barrel for over six months. Supplies are sufficient and demand is also strong. Keep in mind that sometimes, when the crude oil price rallies, 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 14.42 billion bushel corn crop last year, and 5.45 billion bushels of corn were used for ethanol. That means, over a third 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 overall strong demand for corn and beans, are watching final production numbers closely.

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 we all continue to anxiously await the Aug. 12 USDA report to find out what the planted acres/prevent plant acres are, there are other fundamentals that need to be constantly monitored as well. Re-visit these fundamentals often. Fundamental news continues to shift weekly. Be ready to act on pricing opportunities as they become available. Have action plans ready for whatever market scenario unfolds. 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.

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].