Renewable Farming

Outlook specialist Sue Martin: “Don’t get trapped in negative price talk.”

Sue Martin, founder and owner of Ag and Investment Services Inc., presented a mildly hopeful outlook for ag commodities at the Dec. 13 Spraytec “knowledge exchange” seminar in Ames. Rather than detailing her points, we’ll simply share notes on her analysis, with a little context around them.

The tone of her talk could be summed up in two sentences. She emphasized to farmers:  “Don’t get caught up in the negative talk, there’s opportunity coming. Much of that trade chatter is static to get you to sell.”

Sure, the dollar is expensive, velocity of money is slow, grain stocks are glutted. But that creates a base for demand, which is strong and growing. Some of Martin’s turnaround points:

1. The velocity of money is about as slow as it gets. The velocity index is 1.438 and will probably rise, which means inflation. Her comments came a day ahead of the Federal Reserve’s announcement of a 0.25% increase in the short-term federal funds rate this week, probably followed by another 0.75% increase next year.

2. Weather around the world has been rather benign, not many real famines in recent seasons. This is exceptional, and 2017 may not be as productive. An interesting weather pattern:

Fall 1929: Sioux Falls, S.D. had record rain. The following season, U.S. corn yields fell 20%.

Fall 1973: Sioux Falls, S.D. had record rain. The next year, corn yields were down 21% from the previous season.

Fall 1981: Sioux Falls, S.D. set a new rainfall record. U.S. corn yields fell 28% the next year.

Fall 2016: Sioux Falls, S.D. had received a record 12.36 inches of rain. Does this mean U.S. corn yields will fall in 2017?

Though wheat, corn and soybean ending stocks are high in bushels, the carryout is not oppressive measured in days of use. Martin said, “Wheat stocks are large, but we are using lots of feed wheat because it’s cheap. Thus, ending stocks could disappear rather quickly.”

The 40-year cycle in wheat calls for a low this year… could be in January. We have record funds short in wheat, and in corn. They’ll have to cover shorts. Wheat is the cheapest in relationship to the CRB index since 1970. If wheat turns into an uptrend, corn will follow. 

One of Martin’s favorite charts is what she calls the “foreign production deficit.” That means the global supply of each commodity without the United States, minus global demand outside the United States. In corn, the foreign production deficit for the current marketing year is 71.2 million metric tons. “The rest of world needs that much from us,” she says.  Why isn’t corn cheaper? There’s some positive forces under corn you don’t hear much about. China’s total grain production fell down 10% in 2016. The CRB index in relation to corn is near a point where previous lows have been made.

The foreign production deficit of wheat is 19.5 million metric tons with U.S. supplies out of the picture.

In soybeans, the foreign production deficit is record high 55.2 million metric tons, so a lot depends on U.S. stocks. Crush margins are high. Beans may make a cycle low in January. Global oilseed ending stocks are tight, at 7.3% of usage, which is in the low end of global range.

Ending feed grain stocks are at a record. But grain consuming animal units is also at a high. Wheat stocks are high; Kansas wheat is 50 cents per bushel below corn. That means U.S. wheat stocks have another “disappearance” route.  The rest of the world needs U.S. quality wheat too, for blending, as much of the global crop is lower quality.

Farmers in Brazil are not aggressive in selling. Dollar is up, but they are not more than 38% sold, compared to 46% or so in average years. Brazil is building four new airports and working with China on new shipping capacity, plus new ocean ports for expanded grain exports.

Martin maintains that “corn and soybean markets will work higher into 2017. Farmers will sell aggressively into the uptrend. The next time $4 cash corn comes around, funds will push the long side. Have a way of owning it back on the board in July-September corn if you make a cash sale.”

If money moves out of common stocks, following new highs, the cash will move into commodities, Martin said. Baltic freight rates are already reflecting that. Interest rates are still low, so commodities will benefit from the shift.

“A big swing to soybean planting should be expected this year. There’s talk of doing beans on beans. Farmers are somewhat slow to commit on seed this season. If we have late spring, more beans. However, 2017 yields will probably not be like 2016’s outstanding yields for soybeans.”