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2017 Market Movers Reads Like Grocery List

Demand and weather take stage first.

If you go by the headlines, 2017 is expected to be a year in which farmers will experience tight margins for a fourth year in a row.

Why?

Well, commodities prices are seen staying at just-near profitability levels or lower. There are not a lot of market watchers forecasting big rallies for agricultural commodities. However, profitability is expected to return in midyear for the big grain users such as hog and cattle producers, according to Iowa State University Extension.

When taking a closer look at the early 2017 grain market fundamentals and technicals, the corn and soybean markets seem to have a solid serving of both bearish and bullish items to consider.

Bearish Support

The market starts the year by still chewing on the USDA’s bearish fundamental news in its December U.S. 2016 Crop Production Report. It estimated that U.S. growers likely produced 15.2 billion bushels of corn on yields of 175.3 bushels an acre, and 4.36 billion bushels of soybeans on yields of 52.5 bushels an acre, all record highs, according to the Department of Agriculture.

Meanwhile, investors became less bullish to end the year, as more beneficial rains fell on Argentina’s growing crops. In mid-December, investors were net-long 121,859 soybean futures contracts, down from 124,758 the prior week, the Commodity Futures Trading Commission said in a report on December 16, 2016. Speculators were net-short 69,050 corn futures contracts, up from 65,428 contracts the prior week, the CFTC said.

And then in late December, AgRural, a well-followed private consultancy in Brazil, released its 2016/17 winter corn crop estimate at a record 59.9 million tonnes, up from 40.7 million tonnes in the previous season.

Brazil’s total corn crop is projected at 88.3 million tons, up 33% from 2015/16, after yields were hurt by dry growing conditions.

Need more bearish fundamental news? This one carries more of a long-term effect. With new short maturity corn seed, Canadian acres could increase from 9 million acres to 13 or 14 million acres over the next five years, according to crop experts in that country. So, pressure is coming from both Northern and Southern Hemisphere countries.

Bullish Fundamentals

Sal Gilbertie, Teucrium Funds, says that in 2017 supply and demand fundamentals will likely be key to determining any price action in the grains sector.

“In terms of supply, we’ve not had a major yield decline that negatively affected combined total global corn, soybean, or wheat production since 2012. In fact, thanks mainly to near-perfect weather conditions, global combined harvest totals of corn, beans, and wheat have risen over the past four years to record levels,” Gilbertie says.

Global demand has also risen to record levels, which means the world seems to have become dependent on bumper harvests of corn, soybeans, and wheat to meet steadily increasing global demand for these products, Gilbert says.

With China buying U.S. soybeans at rip-roaring levels, in late 2016, the question becomes whether that insatiable appetite will continue in this new year.

As of late December, accumulated U.S. export soybean sales are running 4% above where the U.S. should be on the five-year average pace of the WASDE estimates.

“This means if sales  continue on this pace for the remainder of the marketing year, add roughly 80 million bushels of total soybean demand,” says Dustin Johnson, AgYield’s senior strategist.

Weather, Weather

“Weather is, once again, the primary driver of the future price of grains. Good weather will likely mean plenty of supply to fulfill demand. Poor weather could possibly negatively affect production. The conundrum for grain consumers is this: Combined total global demand for corn, soybeans, and wheat is likely to increase again to a record level in the coming year, but if the weather turns less agreeable to farming, will there be adequate grain production to meet that record demand,” Gilbertie says.

Angie Setzer, vice president of Grain for Citizens LLC, says that the 2017 market will continue to look for confirmation on crop size out of South America for the first quarter of the year. The concern over a production loss similar to what was seen last year will remain in the forefront of traders’ minds lending support to the market early on, most specifically supporting soybeans.

Acreage Rally?

As we work through the first quarter of the year, the market will start to discuss acreage potential, Setzer says. “With the soybean-to-corn ratio trading at a 20-year high the first part of December, I think the idea that corn acres could see a dramatic cut will begin to gain traction. If we were to see 4 million acres or more taken out of the corn acreage pie with a continuation of current demand trends, carryout could get tight in a hurry with any type of production weather problem,” Setzer says.

She adds, “As a result, I feel we could see a corn rally take place as we work toward initial acreage estimates from the USDA at the end of March.”

Price Calls

Settler says that from a price standpoint, anything in the mid-$10.00 range is a great starting point for aggressive sales in soybeans. “Anything above $3.75 for old crop and $4.00 futures for new is a good place to get sales on for corn,” she says.

Pete Meyer, PIRA Energy grain analyst, says that corn prices can remain fairly steady through the first half of the year. “The $3.25 to $3.75 area would be an adequate range, although $3.35 to $3.65 seems more likely. The big story in the first half of 2017 will obviously be acreage, and I expect to see a corn acreage number of between 91 and 92 million. That said, stocks are cumbersome, and Brazil looks like it can harvest a good first and second crop, limiting the upside,” Meyer says.

Soybeans are very vulnerable to downside pressure, Meyer says. “I expect that 2017 acreage will be between 88 and 89 million acres, on top of what looks like a nice Brazilian crop. Argentina remains the only wildcard at this point,” Meyer says. 

Meyer sees the current soybean market being supported by strong exports and the hedge fund long. “And, I expect that to dissipate into the first quarter of 2017. The recent highs around $10.60 seem pretty solid in my opinion, while risk to the downside point to between $9.50 and $9.75 for prompt futures.”

Meyer says the middle part of 2017 all depends on the weather. “I have no idea what that will look like come April.”

The Trump Factor

Last month, Bryan Doherty, Stewart-Peterson, suggested in a weekly article on Agriculture.com that there is a chance ag commodities come back into favor with outside investors.

“One thought is that, with a new administration coming, there will be a more proactive business environment, in part due to the potential for tax breaks. This could imply that commodities may be viewed as a value (as more dollars seek investments), and you may also see a resurgence of the idea that fund managers will be purchasing commodities as a hedge against inflation,” Doherty stated.

Doherty added, “Despite a rally in the dollar, fund managers have flowed money into commodities as experienced in soybeans and cattle. Another factor that could be at force is soybean oil leading a surge higher, as world vegetable oils tighten.”

Dollar Impact

Setzer sees trends in the dollar having significant grain price influence, as well, with any type of geopolitical shifts weighing on market direction for any period of time. “Once through March, we will work our way into planting weather likely seeing a risk premium build for the U.S. crop. Without a weather issue, though, it is likely prices will stagnate and return to lower levels recently seen,” Setzer says.

 

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