Commodity analyst reviews grain, dairy market outlooks

Ray Mueller
A key to the direction of corn prices is whether investment funds start to drop their holdings, meaning that they don't expect a profit on them.

WALDO – Don't be reluctant to lock in per bushel prices of $4 for corn and $9.50 for soybeans to be grown this year.

That was the advice from commodities broker Mike North of Commodity Risk Management Group at Platteville in a presentation at a crop insurance update sponsored by Premier Insurance Solutions. North disclosed that he has obtained put options to protect a floor price of $9.50 for 75 percent of the soybeans he expects to harvest this year on his farm.

“I know a lot of guys who have what they think will be $5 corn that they sell for $3,” North stated. “Don't be a victim. Have a plan on how to sell.”

For 2019, North is more optimistic about the prices for corn than for soybeans. That's due in part to the record high stocks to usage ratio for soybeans and uncertainties about exports, especially to China, he pointed out.

Wherever it obtains them, China buys about two-thirds of the world's soybeans that are exported by the growing countries, North observed. The current soybean harvest in South America is likely to be a record, adding to the overall world stocks, he stated. “Be very careful about a price risk on soybeans.”

Mike North

Corn observations

“China is not a player in the corn market, either as an importer or exporter,” North continued. “We're also expecting more corn from South America this year.”

Although no USDA estimates on crop acres were available at the time because of the partial federal government shutdown, North indicated the possibility of up to a 6 million acre cutback for soybeans this year in the United States and somewhat of an increase for corn, based on his recent contacts with corn growers in 17 states.

Average corn yields per acre have been up for five years in a row in the United States, hitting 178 bushels in 2018, North pointed out. “Since 1995, only three years have fallen below the trend line of annual increases per acre.”

Despite his overall view of a better price outlook for corn than for soybeans this year, North urges corn growers to be aware that the December corn futures have fallen to as low as $3.43 per bushel at least once every year since 2014. He doesn't expect it but an increase of 6 million acres of corn in 2019 would add up to 1 billion bushels of production and greatly increase the already high stocks to usage ratio, he warned.

“The goal is always to produce more,” North remarked. “There's a heavy investment in corn production from planting to harvesting to storing.”

“Don't be surprised if corn production remains high despite disasters such as drought here or around the world,” North stated. “Use your crop insurance to defend your production bushels.”

A key to the direction of corn prices is whether investment funds start to drop their holdings, meaning that they don't expect a profit on them, North advised. If the prices happen to go up, livestock and poultry feeders could substitute lower priced wheat for corn, he noted.

Dairy correlations

In reviewing the historical price charts, North sees a strong correlation between corn and milk prices – they tend to go in the same direction. As with grains, he advises obtaining a floor price put option for Class III milk when the prices are somewhat attractive.

What those prices will be is suggested by history, North stressed. He noted that the Class III milk base price was above $20 per hundred for only 18 months in the past 10 years while hovering between $13.50 and $17 for 88 of those months.

“Go after any high prices with a bazooka. Be aggressive,” North urged. “You have to figure out where your bar is.”

Although there are some good signs, North doesn't expect Class III to move out of a $13 to $17 per hundred range anytime soon, somewhat resembling the $2 range for nearly eight years in the 1990s. But he does not rule out a return of some $20 per hundred Class III months.

Categories of optimism

Recent Class III futures prices were averaging $14.85 per hundred for the first half of 2019 while the Class IV futures were holding at an average of $16.22 for the entire year compared to their record high of $23.09 for 2014, North observed.

It's in those prices for Class IV (butter and milk powders) that North detects some optimism. He cited how the prices for butter are holding and how the European Union reduced its surplus of skim milk powder to 4,000 metric tons.

North is also pleased with some of the new provisions in the federal dairy revenue protection policies, such as a buy-up option to a multiple of 1.5. However, he warns of the possibility that some agents who are selling the policies might lack a proper understanding of the provisions, thereby overpromising what producers can expect to obtain from their premiums.

Downside concerns

The downside for milk prices starts with the record high current inventory of well over 1 billion pounds of cheese in the United States, North stated. He also mentioned the continuing tariff fights with countries which have been leading importers of dairy products and the 6 percent early season jump in milk production in New Zealand, which exports the equivalent of 97 percent of its milk production.

Increases in milk production in the United States continue despite a cutback of 44,000 milking cows from the recent high of 9.4 million head, North remarked. From 2015 through 2018, there was not much of a correlation between changes in cow numbers and milk prices, he observed.

Despite the challenges of recent years, especially regarding prices, North is confident that farmers are well poised for the future. That's because consumers are looking for more of what's produced here – protein from milk and soybeans and energy from corn, he explained.

This applies to additions to the middle economic class, for which Asia will account for an estimated 88 percent of the increase during the next decade, North said. Those increases to the middle class will include 380 million residents in India, 350 million in China, 210 million in other countries in Asia, and 130 million in the remainder of the world, he indicated.