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Corn Revenue Moves Lower

At all of my summer seminars, farmers asked, “When will farm prices and farm profits begin to improve?”  One older farmer at a southern Minnesota meeting said, “I am used to the ups and downs in farming. Since I started farming in the late 1960s, it was usually two to three years of improving profits followed by one to two years down. I have never watched prices and profits go lower for five years in a row!”

I agreed with the farmer that the five-year downtrend in the corn market was one of the longest bear markets I have lived through. I also pointed out what I saw on my charts. 

The year-to-date lows on my corn and soybean charts show that both corn and soybeans have held higher lows (the seasonal lows in 2017) than the lows in 2016. 

At the time I wrote this column, the 2017 low in corn was 30¢ per bushel higher than the 2016 low, and the 2017 low in soybeans was 50¢ higher than last year. This sets up the potential pattern on my long-term continuation charts of higher lows and then higher highs. 

So when will farm prices and farm profits begin to improve? To answer that question, I find it useful to first review what happened to take prices lower and then to look ahead to what can take prices higher. 

corn-revenue-chart

what caused grain prices to drop

Here are the three key factors that have kept grain prices under pressure for the last five years. 

  1. Prices were very high before 2012. This resulted in a huge increase in global corn, soybean, and wheat acres. Once land is converted from pasture to tilled farm ground, it is very unusual anywhere in the world for that land to go back to pasture. High acres stay high.
  2. Slower global economic growth slowed global grain demand. After the last U.S. recession, Europe went through a major economic slowdown. Asia remained the global engine of growth, but its economies grew at a slower rate. Global demand was still growing, but global supplies were increasing faster. This resulted in year after year of larger global grain stockpiles. 
  3. Good weather and large crops for three consecutive years. In the U.S., we have had some regional weather problems. However, for the last three years, we have had large corn and soybean crops. The same has been true in South America.

Argentina has struggled with too much rain, and some dry areas have been reported in Brazil. For the last three years, however, both countries have had huge crops. 

I am not a weather man but the odds of this favorable weather pattern in both hemispheres continuing is very small. 

soybean-revenue-chart

what can take grain prices higher

Economic growth rates around the world have started to increase. Global wages are improving, too, which is positive for commodity demand – especially meat and protein prices. I expect growth rates to increase to 2.5% to 3% for global commodities in 2018. 

I also expect global grain stockpiles to shrink. The stockpiles increased for several years and are finally showing just minor changes month to month. If demand grows, then it is just a matter of time until global stockpiles move lower. 

Most long-term market lows develop when demand starts to improve, and then they kick into high gear when weather problems develop. It is not a matter of if; it’s a matter of when

So watch the first month that nearby CBOT corn, soybeans, and wheat prices close above the two previous months’ high to signal a major low.

NOTE: Trading of futures and options has substantial financial risk of loss and is not for all investors.

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