Grain end-users should guard against complacency. Don’t become overconfident that supply will drive prices significantly lower. On normal or seasonal declines in corn, wheat and soybeans prices, consider using option plays to define maximum prices to be paid for 2017 and 2018 needs.
With 2016/17 world ending stocks expected to be at record highs for soybeans, corn and wheat, the short-term fundamentals are clearly bearish. However, global stocks could be close to reaching a peak, and prices tend to bottom when that happens. World ending stocks of corn and soybeans are expected to be lower in 2017/18. US ending stocks of corn and wheat are expected to be lower as well. World ending stocks of wheat are expected to be up slightly because China‘s stocks are expected to surge higher.
We are of the opinion that the US dollar could significantly weaken this year, and this would be a supportive force across the grain markets. Also, be aware of the oversold condition of the grain markets. The most recent Commitments of Traders reports showed that as of May 23rd, managed money traders held a near-record net short position of 352,069 contracts in corn, wheat and soybeans combined. This represents more than 1.76 billion bushels.
For soybeans, the current forecast calls for only a modest decline in world ending stocks from last year, but a minor drop in yields in the US or China could quickly turn a small decline into a major reduction. Demand for soybeans from China in recent years has been like an oil tanker – difficult to stop. Furthermore, recent demand trends suggest that the USDA will need to adjust its 2016/17 estimate of Chinese soybean imports higher.
Soybean seed technology and yield growth have been impressive, but counting on having another year of exceptionally good weather in late July and into August could be risky given the recent volatile weather conditions around the world. The weather this year has been extreme to say the least. This past year, the US Corn Belt saw its second warmest December-March period in history and its fifth wettest April-May. Don’t rule out more extremes this year.
If China’s demand continues to expand and it drives them to increase imports and if US yield slips below trend to the simple 10-year average yield of 44.3 bushels per acre (still the 4th highest on record), the US ending stocks and stocks/usage ratio could drop to record lows. We are not predicting a drop to a four-year low in yield, but we cannot dismiss this possibility. The “what if” study below shows how quickly almost record-high ending stocks projections could slip to a record lows with a strong demand scenario and uncertain weather.
END USERS might consider scale-down buying, as a 30 to 50-cent break is all that might be expected between June and late July. The key weather period is in August.
For corn, the huge ending stocks that China has built in recent years are starting to come down, as the government there is focusing on increasing demand for ethanol, other industrial usage, and feed. Their planted area is down as well.
The chart to the right shows the current USDA forecast, which calls for a drawdown in world ending stocks, as well as projected drawdowns that would result from modest 5% below-trend yields in the US alone and for China and the US combined. This chart illustrates how even a minor weather issue could result in a near-record drawdown in world ending stocks.
The weekly US Crop Progress reports are indicating that this year’s corn crop is off to a slow start. Many traders are already expecting below-trend yields and a potential loss of 1-3 million planted acres from the current USDA estimate.
END USERS might consider buying futures for needs and buying puts for protection, as a minor weather problem could quickly snowball to a major draw-down in world ending stocks.
For wheat, record-high world ending stocks may have already been priced into the market, with nearby futures in 2016 reaching a ten year low. US ending stocks may have peaked for the 2016/17 season. The USDA already is showing a drop for 2017/18, mainly due to the dramatic drop in planted area in recent years. While the market may need some help from inclement weather to see any significant rally, the smaller planted area in key world exporting countries suggests that the basic supply/demand fundamentals will not get more bearish.
World ending stocks are at a record high, but 50% of the world’s stocks reside in China. If we exclude those from our analysis, world ending stocks are at a four-year low. China is neither a major importer nor exporter of wheat, so excluding their stocks makes sense.
END USERS might consider scale-down buying of December Chicago Wheat out of the money calls on seasonal weakness as protection. On a break to the $4.55 to $4.40 zone, consider selling out-of-money puts to help pay for the call premium.