January 18, 2018
After an incredible year in 2017, equity markets continue to reach record highs almost daily as we enter 2018. While there are many reasons for this market strength, one of the most noteworthy policy changes is the well-publicised tax reform the US administration is enacting. Tax reductions are good for company earnings and higher earnings justify higher stock valuations. Greater earnings also allow companies to invest and hire, furthering the expectations of economic growth. Economic growth allows for increasing interest rates and there seems to be a constant expectation for rates to rise further, as the Bank of Canada did mid-January raising rates another quarter point. The Bank of Canada has called the ongoing NAFTA negotiations providing uncertainty that is “clouding the economic outlook.” Even with all-time record high equity markets, increasingly strong oil markets and a weakening US dollar, grain prices continue to languish and are pushing towards recent lows. Eventually increased demand should enter into the marketplace and reverse the overall weak commodity price environment. Eventually can be a long time however and this may be especially true with grain prices at the farm gate.
At this time of year, in the middle of winter, grain market news is hard to come by. Other than winter wheat there are no crop risks to major field crops both locally and in the US as we await planting in the spring. At best for North American production risks, traders can look at weather models and anticipate the upcoming growing season, but this doesn’t provide much pricing impact as few have confidence in how these models might affect crops yet to be planted. Therefore market focus is currently focused on South American production, US exports and usage.
The current outlook in Brazil is for a large bean crop. There are some areas reported to have some production challenges but overall the expectation presently is for Brazil to produce a 110 million tonne bean crop, with a bias for total production to grow. Argentine bean production hasn’t fared nearly as well due to the long term drought that has affected the area. As of this writing estimates are for Argentina’s soybean crop to decline going forward on dryness concerns and the reduction of double crop bean acres. In summary for beans, large Brazilian production should offset the losses in Argentina. South American corn production estimates are currently decreasing in both countries and some estimate that total corn production in both Brazil and Argentina could be significantly lower than last year.
The USDA again confirmed large US production this past season in their January 12th crop production report. In summary they raised average corn yields to a new record of 176.6 bushels per acre, up 1.2 bushels per acre. Overall the carryover of US corn remains large and this should limit price rallies over the long term unless US planting becomes problematic in the spring. In the same January report, the USDA estimated high soybean yields, the second highest yield on record. The bean numbers weren’t as negative as many analysts expected them to be, with estimated yields falling from 49.5 bushels per acre to 49.1 bushels per acre. Lower reported yields for beans appears to prevent ending stocks from exceeding the whopping 500 million bushels analysts were concerned about, but they still remain burdensome at 470 million bushel carryover.
The biggest shock in the January USDA report was to be found in wheat. Soft wheat acreage was generally expected to be down about 5% from last year but rather the report showed acres increasing 4% from the previous season. The question that arises to some analysts is how could the general expectation be so different from the USDA’s data, especially when fall harvest was delayed as long as it was. In past years similar harvest delays would equate to about a 5% decrease in winter wheat plantings. Hard winter wheat plantings were down as predicted but the market was surprised that acres were not down as much as anticipated. Prior to the report, the average trade guess was for total US hard winter wheat acres to be about 31.5 million acres, 1.1 million acres lower than the USDA’s estimate of 32.6 million acres. This acreage is below last years hard winter wheat plantings and the lowest acres planted since 1909. Much of this wheat is in dry conditions, with a little less than half of the US acreage experiencing drought conditions. Oklahoma’s wheat crop is the most affected by drought, with 82% of the states crop experiencing some sort of drought. The conditions in the important state of Kansas are also worsening, with 53% of this crop having moisture stress. Combining these drought conditions with the extreme cold temperatures reaching down into the region, concerns of the survivability of this wheat begin to grow. At present the market does not show concern over winter kill. It is not possible to prove winter kill in mid January. The verdict won’t become apparent until spring.
In regards to cold weather, I recently read an interesting weather fact from the past. This year during early January there were 12 days in Chicago that did not exceed a temperature of 20 F (-7 C). The last time this happened was in 1936 and that year brought one of the hottest summers on record for a large portion of the US corn belt. We do not know if this will happen again this year but what we do know is this is the type of event that needs to happen if you want to see higher corn prices in 2018.