Farm Futures - Weekly Market Recap

Weekly Market Recap
Bryce Knorr, Farm Futures senior editor
December 2, 2016

USDA releases its regular monthly World Agricultural Supply and Demand Estimates Dec. 9, providing the latest updates about 2016 prices and surpluses. But the market is already thinking about 2017, thanks in part to another report from the agency.

One reason for this forward looking perspective is the tendency for the agency to make only minor adjustments in December. U.S. production estimates for corn and soybeans aren’t updated until January, when grain stocks data from the September-November quarter will also be available.

Another reason for the turn to 2017 came from release of long-range projections for agriculture at the end of November, forecasting production, supply and demand for major crops and livestock to 2026. This 10-year outlook is done as a part of the federal government’s budgeting process, so long-term farm spending can be plugged the government’s deficit projection, among other forecasts.

The 10-year outlook will be expanded and updated at USDA’s annual outlook conference in February. The trade for the most part ignores these long-term numbers, which basically just project current trends into a future that always changes, rendering them obsolete.

Still, analysts look over the forecasts because they contain USDA’s first look at planting intention for the coming year, along with projections for supply, demand and prices.

The outlook put corn seedings at 90 for 2017, down 4.5 million from 2016, but in line with some recent estimates. The soybean number of 85.5 would be 1.8 million acres higher thank 2016, a number that could go higher. USDA put wheat acreage at 48.5 million, the lowest total since at least World War I if achieved.

The acreage projections didn’t cause much of a stir in the market. Nor did forecasts for carryout when the 2017 marketing years end in 2018. The numbers were close to the estimates we’ve been working with all fall, which basically don’t show much improvement in burdensome inventories as long as production is normal.

For corn, the government put 2017 carryout at 2.3 billion bushels, down around 100 million from the 2016 crop year but not enough to make much of a difference. For soybeans, surplus inventors might fall just below 400 million bushels. That’s a big drop from this year, but still would be a burdensome number for the market to handle.

While wheat prices made new contract lows after the report came out, USDA actually had the most positive outlook for that crop. The agency said carryout could fall a little below 1 billion bushels, down around 150 million bushels from 2016-2017 levels. Still, that wouldn’t affect prices much; the agency sees average prices improving only 30 cents.

These early forecasts have their limits: The assumptions about acreage are based on statistics, not surveys of farmers, for example. And the government’s yield estimates assume normal growing season weather. As a result, much can change by the time the dust settles months from now.

Corn prices faltered to two-month lows as trading in December got underway. News wasn’t all that bad: Exports are decent enough, usage for ethanol is better than expected, and cold weather should spur livestock feeding. Despite weak basis in the cash market, no corn was put out against the December contract as it went into delivery.

Generating rallies in December is difficult, however. Conditions are decent enough in South America, removing the only major production uncertainty in play right now.

USDA should make only token adjustments to its forecasts Dec. 9, perhaps trimming ending stocks a little. Most major adjustments will wait until after the agency looks at Dec. 1 stocks and final production data in its big Jan. 12 reports.

Soybeans couldn’t hold a post-Thanksgiving rally to new five-month highs, retreating from profit taking in a steady but orderly fashion.

The pullback came despite a surge in crude oil caused by the OPEC deal to cut production for the first time since 2008. The move triggered investors’ appetite for commodities, but the love didn’t extend all the way down the food chain. And there was only one report of a sale of soybeans to China hitting the daily USDA wire, raising concerns that demand was starting to shift to South America. Argentina had some hot weather, with patchy rain, but overall conditions remain good.

Seasonal trends are still looking bullish, suggesting the rally may not be over. Still, growers shouldn’t be holding many old crop soybeans now. Those whose finances are shaky can consider locking in some new crop protection for 2017, but better prices typically come later in the bean market.

Wheat markets fell to a series of contract lows for winter wheat. Even spring wheat saw some deliveries, despite strong export sales and a big premium to lower protein classes. But there were a few signs that maybe the tide was turning.

Huge volume in options Dec. 1 – more than either corn or soybeans – saw nearly 35,000 new contracts opened. With implied volatility – one of the factors of options’ cost – showing signs of a seasonal bottom, the action could be sign funds are beginning to scale back on bearish bets headed into 2017.

Wheat is overdue for a long-term cycle low, but changing the dynamics likely will take one or more weather disasters in the year ahead. Winter in the northern hemisphere is the first hurdle fields face, one reason for funds to move to the sidelines.

Bryce Knorr first joined Farm Futures Magazine in 1987. In addition to analyzing and writing about the commodity markets, he is a former futures introducing broker and is a registered Commodity Trading Advisor. He conducts Farm Futures exclusive surveys on acreage, production and management issues and is one of the analysts regularly contracted by business wire services before major USDA crop reports. Besides the Morning Call on he writes weekly reviews for corn, soybeans, and wheat that include selling price targets, charts and seasonal trends. His other weekly reviews on basis, energy, fertilizer and financial markets and feature price forecasts for key crop inputs. A journalist with 38 years of experience, he received the Master Writers Award from the American Agricultural Editors Association.

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