The 2018 marketing year has not failed to have its share of supply and demand surprises. As we started the year some south American growing regions had weather concerns. Argentina’s soybean and corn crops were hurt with dry weather that was finally confirmed in the June USDA supply & demand reports. brazil’s soybean crop was ok, but its corn crop came under some weather stress. This, when dovetailed with the Chinese reduction of domestic corn stocks due to their increased use of ethanol and some domestic weather stress, has created some concerns about global stock levels. In fact, the June USDA supply & demand reports reduced the U.S. corn carryover from 2.102 this year to 1.577 next year, soybeans went from 505 to 385, and wheat went from 1080 to 946 million bushels.
These global stocks reductions now have the world corn reserves falling from this year’s adequate 192.6 million metric tons to a possible 154.7 million metric tons. While this number alone is still big, when you compare the total bushels to the total usage (stocks-to-use ratio), it implies a much more robust picture. Essentially, the corn stocks-to-use ratio will fall to a level not seen since the early 70’s. The soybean global stocks reserves [at 87 million metric tons] also create an environment of potential price events for the 2019 season as well.
The potential for corn and soybean price improvement in the future is high as long as the stocks numbers are correct and global export demand (as suggested by the USDA) is confirmed. So I have listed some of the questions that one must ask:
1. Do you believe the 2018 corn and soybean yields suggested in late June (possible 180 U.S. average corn yield and 50 bushel average soybean yield) will be confirmed?
While this was the fear leading up to the long liquidation going into mid-June, one must realize there still is a lot of growing season left. I have to believe the crop conditions will seasonally deteriorate, but how much? If we conclude in August/September that the U.S. corn and soybean yields will exceed those of 2017, one has to be prepared for seasonal price weakens all the way into September and October. The worst case is the December 2018 corn contract would be between $3.50 and $3.60, while November 2018 soybeans should find it difficult getting below $9.20.
2. How do you believe the lateness of planting in the northern production regions of the U.S. will affect prices?
Since it’s a fact that a lot of corn and soybeans were planted late, I believe we must assume that some concerns will develop from late August to early September. This, combined with the long-term positive outlook on tighter global stocks, would suggest that the fall lows will be higher than one would normally expect. This suggests looking for pre-harvest lows. With any type of negative local basis, this should result in many producers selling below the cost of production. Since many expect the trade will be talking a lot about a 2019 positive demand outlook, I expect many producers will be extremely reluctant to sell unpriced inventory off the combine below breakeven. Bottom Line: Be very wary of extreme downside price targets for fall lows.
3. In the spring and early summer of 2018 I believed a lot of new crop soybean inventory was forward priced for fall cash movement done primarily because of cash flow and storage restrictions.
Long-term, if the global stocks of 383 is truly realized, this makes the price recovery of soybeans from harvest lows to the spring of 2019 a serious possibility. Subsequently, producers should definitely look at reownership of soybeans before corn from September on.
4. What does a producer do if he has unpriced 2018 inventory in the bins?
This is an annual question about this time of year. The problem is, if weather problems have not arrived by mid-July, time is working against the bull. My answer is simple: Either sell now and reown this fall or fill up the bins and hold it clear to next summer and hope that the demand argument is confirmed and adverse weather shows up someplace other than your farm. My gut tells me that more corn will be held forward than soybeans, which implies the soybean market will be the first to react to South American weather problems. Then corn will have to eat through inventory before it can react to a spring/summer weather event. Price immediately or build bins and get an understanding banker to loan you more money.
5. What should a producer do about getting prepared for possible market uncertainty in 2019?
Since the start of the corn ethanol and Chinese buying spree [that started in early 2000], there have been several opportunities to sell some level of weather scare markets between April and July. I believe that overall a producers’ ability to sell these weather market rallies has been poor. Why will next year be any different? The big risk now is, since many producers missed out on selling 2018, they may be inclined [due to financial pressure] to sell earlier than normal and not take on the risk for higher prices. My gut tells me there is a big risk sellers could get caught next year. There is a solution: One must have flexibility in their marketing plan. Rather than selling cash or selling the futures and having a firm price, I strongly suggest buying out-of-the-money September 2019 corn calls and November 2019 soybean calls on harvest weakness this fall to insulate one’s ability to sell cash or futures in the spring and summer of 2019. Otherwise, in the spring of 2019 buy deep-in-the-money puts and roll up to maintain flexibility until the crop is known. Both of these selling strategies require commitment and cash flow; now is the time to talk to your banker and marketing advisor to make plans that will be implemented.
In regard to the meat sector, 2018 has overall been a disappointment as far as profit potential. There has been adequate supply, while there has been a lot of demand uncertainty with regard to our ability to export due to NAFTA and Chinese buying uneasiness. The good news is, once the dairy herd liquidation concludes, the beef sector supply side should tighten up. Because of this, along with the expectation that export demand will be growing in 2019, I see the possibility of better beef and pork prices going into 2019. Subsequently, I would only want seasonal coverage from August to October using put positions at breakeven. In fact, most of your efforts should be on cost containment which strongly implies being very aggressive on locking up all feed costs on any September to October price pressure. Overall, as we proceed into 2019, look to only have floors below the market with the flexibility to react to upside price potential. This implies keeping out-of-the-money puts at breakeven, not cash or future sales.
ABOUT THE AUTHOR
Bob Utterback is the President of Utterback Marketing in New Richmond, IN. Call Bob for strategy updates at 877-898-4324. Email comments on Outlook to email@example.com.
The opinions stated herein are not necessarily those of GreenStone Farm Credit Services.
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Link to the full Summer 2018 Market Outlook article: