Multiple factors trim grain price outlook
SEYMOUR - A combination of domestic and international factors suggests that growers who sell corn, soybeans, and wheat cannot expect any significant price gains in the near future.
That the assessment of CHS Hedging market analyst Brian Rydlund, who was a returning guest speaker at the 2017 annual meeting of the Outagamie County Forage Council. He is based at the St. Paul, MN home office of the firm, which also has regional offices at Kansas City and Indianapolis and has clients in 36 states.
As a full service commodities broker, Rydlund said CHS Hedging aims to help its customers “make the right decisions for the right reasons.” For himself, Rydlund strives to decipher the direction in which the markets are going to lean and he urges all sellers not to trust anyone who predicts a definite price top or bottom.
In his assessment of current futures prices for corn and soybeans, Rydlund believes they're a bit on the high side. Compared to three and four years ago, they're relatively low but low prices bring one definite benefit – they spur market demand, including with exports, he remarked.
Rydlund's experience in the commodity grain business goes back to 1983, which was a volatile year in the world's markets that coincided with the federal payment in kind program for growers to reduce their acres of grains. Though probably not as severe, what's on the near horizon raises many questions and concerns, he observed.
The current market outlook stands against a background of potential record carryovers of 2.355 billion bushels of corn and 420 million bushels of soybeans in the United States alone, very high production in the latest cycle around the world for those crops, and a world-wide abundance of wheat, Rydlund noted. Based on his contacts with clients, all of whom had soybean yields above the reported national average of 52.1 bushels per acre in 2016, he believes that the country's crop is underestimated.
With soybeans, crushing for oil continues as a strong market and with good margins for the processors, Rydlund indicated. But the market for soybean meal is weak, he added. Rydlund believes that “New York money” invested in funds fueled the early winter boost in soybean futures prices.
Beyond those facts, Rydlund is concerned with the potential fallout for grain exports as a result of the Trump administration's spat with Mexico and the talk of a trade war with China involving tariffs. He noted that China is the world's largest importer of both soybeans and corn and that Mexico accounts for 24 percent of the corn exports by the United States, 11 percent of the wheat, and 7 percent of the soybeans. (Another source puts those percentages at 28 for corn, 13 for wheat, and 6 for soybeans.)
Rydlund is also wary about the fate of the Renewable Fuels Standard (RFS), which has provided a major outlet for corn sales in the past decade. Not only do Trump's relevant cabinet appointees have a history of opposition to the RFS but ethanol plants are operating with very tight margins today and ethanol stocks are building, he pointed out.
With China opting out on purchases, the market for dried distillers grains – the byproduct of ethanol production – crashed in late 2016, Rydlund added. He said the market for ethanol exports also shows signs of weakening. Another deterrent to exports is the high value of the US dollar, he observed.
In South America, both Brazil and Argentina have record high acres of corn for the upcoming harvest, Rydlund noted. In Argentina, growers were motivated to grow more corn in the wake of a virtual doubling of their net selling price thanks to elimination of an export tax by a newly elected President – a change that did not include soybeans, he explained.
At current levels, the United States has 36 percent of the world's soybean production, Brazil had 32 percent, and Argentina has 18 percent, Rydlund noted. He pointed out that Brazil's Mato Grosso state alone is nearly as large as the major part of the Corn Belt in the United States and that the weather in internal Brazil has more market influence than the weather in the United States.
Rydlund advised watching the crop acreage in South America, monitoring the hemisphere's weather patterns depending on the Pacific Ocean-based influence is El Nino, La Nina, or neutral, and the March 31 report on planting intentions for 2017 in the United States.
Corn pricing trends
The 17 billion bushels of domestic corn that were tabulated on September 1, 2016 were a definite price limiter, Rydlund indicated. With a stocks to use ratio of 16 percent, the historic prices have hovered close to $3.70 per bushel – right on target for recent prices, he observed.
Growers have done well in selling old crop soybeans but the same is not true for old crop corn, Rydlund remarked. He would have the holders of old crop corn sell it now and consider selling 2017 corn at above $3.95 per bushel in a market not likely to top $4.40 to $4.50 per bushel in the futures and not likely to exceed $4 in the cash market because of the negative basis.
With a world stocks to use ratio at 21 percent for corn, those prices are likely to prevail unless one or more major production areas “screw up” heading into their next harvest, Rydlund stated.
As suggested by the current pricing advantage for soybeans, the early outlook is that soybean acres will be increase by about 4 million in 2017 while corn acres will drop by about 4 million, leaving both at close to 90 million, Rydlund observed.
Dairy market observations
After noting that he doesn't have experience with the dairy sector and crediting his observations to colleagues, Rydlund suggested that it has some elements of optimism but that the Trump administration's scuttling of the proposed Trans-Pacific Partnership trade agreement will definitely hurt the prospects for better milk prices.
Milk production cutbacks in the European Union and weather-related reductions in New Zealand and Australia are a good sign for the dairy sector in the United States, Rydlund said. Another good sign, he pointed, is the likelihood is the China appears ready to boost its volume of dairy products by as much as 20 percent.