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An Initial Look at 2017-18 Crops

This article appeared in the February 27th issue of our Weekly Market Letter. You can get a free trial or subscribe.

The USDA’s Agriculture Outlook Forum this past week presented the first full look at the supply/demand outlooks for the 2017/18 marketing year for corn, soybeans, wheat and cotton. Here are the results of the reports and what they suggest for each market.

Feel free to download the full report as a PDF.

USDA Outlook Forum: Cotton

Cotton futures rallied on Thursday and Friday as the USDA Outlook Forum data was released. Buyers remained active, as traders saw world consumption exceeding production for the third year in a row. But while declining stock levels are a positive fundamental force, the USDA still has global ending stocks at 83.9% of annual usage, which is high relative to the 40%-51% readings that were seen between 2000 and 2010. Chinese ending stocks are expected to decline as well, but they should still represent 107.1% of annual usage.

The market has seen strong gains in recent months, as speculators have built a record high net long position. But the outlook for higher planted acreage in the US and India for the 2017/18 season, bearish spread action, and continued increases in exchange deliverable stocks are all factors that could turn the trend lower in the weeks ahead.

The Outlook Forum put US planted area at 11.5 million acres, up 14.2% from last year. They used a relatively low yield estimate of only 816 pounds per acre, even though the Texas subsoil conditions look favorable going into the planting season. But even with the jump in exports to a seven year high, the USDA sees ending stocks moving up to 5.2 million bales, a nine-year high.

If we assume a slightly better yield of 860 pounds/acre and a somewhat higher harvested-to-planted ratio, ending stocks could come closer to 6.73 million bales, a ten-year high. This would be up from just 3.8 million bales in 2015/16. With a record-high speculator net long position, it will not take much in the way of negative news to see a short term setback.

Suggested Trading Strategy
SELL July Cotton at 78.02 with an objective of 72.65. Risk the trade to 79.32.

USDA Outlook Forum: Corn

Expectations for cheaper supplies from Brazil and Argentina in the near future are starting to get the attention of world buyers. The private Brazilian consultancy Agroconsult has estimated the Brazilian corn crop at 93 million tonnes versus the USDA’s estimate of 86.5 million. They also put Brazil’s corn exports at 28 million tonnes, up from 14 million tonnes last year. Agroconsult’s estimate for Argentina’s corn production is 37 million tonnes versus the recent USDA estimate of 36.5 million.
February comes to a close soon, and the February spring crop insurance price for corn is running around $3.86 per bushel, close to $3.85 last year. The soybean crop insurance price has reached $10.21 versus $8.85 last year. This suggests that if there are shifts in acreage from the USDA’s initial Outlook Forum numbers, there would likely be an increase in soybean acreage and a decline in corn.

The demand tone from the supply/demand estimates is bearish for corn. Granted, corn usage for ethanol demand is projected to be up by 50 million bushels from 2016/17 to a record-high 5.4 billion bushels, but feed usage is down 150 million bushels to 5.45 billion, and exports are down 325 million bushels to 1.9 billion. (This 14.6% drop in exports is likely due to expectations of a surge in South American corn production.)

This leaves the forecast for ending stocks at 2.215 billion bushels, a burdensome level. Our demand numbers are a little less bearish, but they still point to the second highest stocks to use ratio since 2005/06.

While the market may build a weather premium during the April-June timeframe, the short-term fundamental news is negative. We suggest position wait to establish bullish strategies when December Corn pulls back to the key support zone from $3.81 to $3.75 ¾.

USDA Outlook Forum: Soybeans

When looking at the USDA supply and demand projections for soybeans for 2017/18, the driver of the balance sheet is planted acreage. The USDA’s acreage forecast is 88.0 million, an increase of 4.6 million from 2016/17. We agree in the direction that the USDA is taking, but we feel the increase could be more like 5.6 million, which would put planted acreage at 89.0 million.

For most of February November Soybeans have averaged close to $10.20 per bushel, up from $8.85 per bushel for the same period last year. The November Soybean/December Corn ratio is currently around 2.57 and has been between 2.55 and 2.70 for the last three months. The last time the ratio was above 2.55 going into the planting season was in 2014, and that year planted acreage increased 8.4% from the year before. An 8.4% increase this year would put planted acreage at 90.4 million, so our estimate of 89.0 million (up just 6.7%) could be considered conservative by comparison.

With the USDA currently projecting only a 3% decline in spring wheat acreage from last year and with many soybean producers reporting 50 bushel-per-acre yields last year, we could see more spring wheat acres going over to soybeans in the upcoming reports, especially if spring weather cooperates in the Northern Plains. The total planted area for the eight major crops (corn, wheat, soybeans, cotton, rice, oats, sorghum, barley) is forecast at 249.8 million acres, down 3.6 million acres from last year’s total of 253.4 million. All of this decrease is coming from corn, soybeans and wheat. This indicates that US acreage has not “maxed out,” and with the economics clearly favoring soybeans, it would not be surprising to see some additional acreage going in that direction.

Here are the results of our analysis:

  • We have adjusted our crush forecast down 5 million bushels from the USDA’s forecast, but it is still up 10 million from last year. We agree with the USDA’s slightly higher pork and poultry production assumption, and that should keep meal usage steady to slightly higher.
  • Our export forecast is 50 million bushels lower than the USDA’s, but the number could be lower yet given the recent surge in Brazilian soybean production. Almost half of Brazil’s crop was planted with the same high-yielding seed the US used last summer. With good finishing weather, the Brazilian crop could approach 109 million tonnes, up 5.0 million from the most recent USDA estimate.
  • We are using a yield of 48.5 bushels per acre, down 6.9% from last year’s 52.1 bushels. The USDA’s yield forecast of 48.0 bushels per acre was derived from a weather-adjusted trend from 1988 to 2016. Soybean yields have gone up the last three years with the use of higher-yielding seeds, but clearly last year’s weather was nearly perfect.
  • Our ending stocks estimate is 578 million bushels versus the USDA’s 420 million.
  • We feel additional acres is a real possibility, and a larger crop in Brazil could take away from US export potential. Ending stocks have been above 500 million bushels only twice in history. If the average yield were to come in 50 bushels per acre, ending stocks would swell to 711 million bushels. An ending stocks figure of 578 would likely push November Soybeans down to $9.00 or even lower.

Long-Term Trading Strategy
BUY a November Soybeans $9.40 put and SELL a November Soybean $8.40 put for a net cost of 22 cents on the spread, and SELL a July Soybean $11.60 call at 14 cents or better, for a total cost of 8 cents on the entire strategy. Look for the July calls to erode in value over time, and stay long the November put spread with a target price of $8.85 in November Soybeans. Risk a total of 20 cents on the entire trade. You can also use a gain of 65 cents on the entire trade as an objective.

USDA Outlook Forum: Wheat

The Outlook Forum projections for wheat have all-wheat planted area at 46 million acres, down 4.2 million from last year. The Winter Wheat Seedings report in January showed a decrease of 3.8 million from last year, and the spring wheat and durum plantings are expected to decline 3%. We feel the decline in spring wheat plantings could be a little larger and could take the all-wheat plantings number down to 45.5 million. Producers in the Northern Plains have had recent success in planting soybeans, with North Dakota averaging 41 bushels per acre last year and South Dakota averaging 48. There were anecdotal reports of producers getting 50-plus yields as well. We expect to see additional spring wheat acres going over to soybeans, especially with November soybeans trading $10.20 this February compared to $8.85 a year ago.

In our analysis, we have the US 2017/18 all-wheat yield at 46.5 bushels per acre versus the USDA’s 47.1. The weather in the Southern Plains remains a concern, with 96% of Oklahoma abnormally dry or in some type of drought stage, according to the US drought monitor. About 65% of Kansas and 89% of Missouri are facing the same challenges. The recent warm weather across the entire US has been a reminder of the type of temperature swings we could see going into the critical April-May period. Wheat yields were at record-high levels last year, but they can be quite volatile. In 2014/15 the yield came in at 43.7 bushels per acre, in 2015/16 at 43.6, and last year it came in at 52.6.

Our USDA wheat export forecast is 925 million bushels versus the USDA’s 975 million. Export competition will be fierce with the recent revision in Australia’s official 2016/17 wheat production to 35.1 million tonnes (versus the recent USDA estimate of 33.0 million) and upward revisions in Argentina’s output to 18.0 million tonnes (versus the USDA’s 15.0 million. Also, the EU is expected to have a larger crop and plentiful exports this year after experiencing unfavorable weather conditions last year.

Still, our ending stocks figure is down to 955 million bushels from last year’s 1.139 billion. If there is a weather problem that takes yields back to 43 bushel per acre, ending stocks could fall to 800 million bushels or lower.

Suggested Trading Strategy
Bull Call Spread – BUY a July Chicago Wheat $4.70 call and SELL a July Chicago Wheat $5.40 call at a net cost of 12 ½ cents on the spread. Use an objective of 29 cents on the spread and risk 6 ½ cents.

– Terry Roggensack & Matt Connelly

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