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“I'm Encouraged About 2017 Crop Prices,” Consultant Says

Markets Rally After Record Crop Years

DES MOINES, Iowa --The corn and soybean markets have better chances of higher moves, following a year that set record yields like 2016, according to research conducted by Stewart-Peterson.

What’s the likelihood of a fifth good U.S. corn crop in a row? One way to gauge this is to look at research models, says Eric Fransen, Stewart-Peterson’s commodity consultant.

“Knowing what has happened in the past is critical because history repeats itself. That’s why commodity research is viewed as a price indicator,” Fransen told a group of farmers at this week’s Iowa Power Farming Show.

The metric used by Stewart-Peterson considers that if the yield is within 95% of the previous record, it’s a good crop.

There have been four good U.S. corn and soybean crops in a row. Two of the last three years have set record yields for corn and three straight record soybean crops.

First, it’s important to define what constitutes a good crop.

“We’ve never had a fifth good crop in a row,” Fransen says.

The research is showing that there is only a 6% chance that in 2017 the U.S. corn yield will be within 95% of 175 bushels per acre.

“While that is what the math says, you don’t want to bet on it,” Fransen says. “From a marketing standpoint, we’re not going to look at that math and say that we’re not going to sell any corn unless we see $5.00-per-bushel prices.”

Take note: This is where a marketing plan can help. Fransen bought corn option calls in August, having 30% of the 2017 crop reowned above the $4.50 price level. Using research, it shows that the highs for the past two summers were just above $4.40. So, there is major resistance at $4.45.

What does all of this mean? If there is a weather issue this spring or summer, Fransen sees the market taking out the double-top summer high and rallying to $5.20 or $5.60, basis new-crop corn.

Life After A Record Crop

Going back to 1970, Fransen compared the corn market low of the last half of the year of a record crop with the high the following year.

“You see larger percentage rallies in years after a record crop than in years after non-record crops,” Fransen says. “The reasons for the greater rally are partially because the market is starting from a lower price level, and the odds of two record crops in a row are low.”

Plus, with the big crops of recent years building stocks, demand is also building. “So, that fulfills the saying ‘low prices cure low prices,’” he says.

Case For Marketing Plans

When farmers have a grain marketing plan, it helps them to start to think about extreme price levels.

“Even if there is only a 25% chance of seeing $6.00 corn, you want to think about what your weighted average price is going to be if that happens,” Fransen says.

2017 Highs and Lows

Still looking at market years after record-yield years, research indicates which months the highs and lows will hit.

“For corn, this year’s high is likely to come in the June-August time frame. Or, the month of December,” Fransen says. So, it’s likely you’ll see the highs set in during a summer rally due to weather or after harvest when the smaller crop is confirmed.”

For corn and soybeans, there is a 60% chance that the calendar-year lows will be set in January or February. “And that occurs because we are still chewing through those huge piles of corn and soybean supplies,” he says.

For soybeans, the price potential for years after record-high yields are even more bullish. “We have a better chance of seeing $13.00-per-bushel soybeans than we do $8.00 beans,” Fransen says.

In fact, research indicates that there is a 59% chance that the soybean futures market reaches $13.00, and a 12% chance we see $8.00 bean futures, according to the Stewart-Peterson research.

“If you were going to bet on soybean yields for 2017, I would bet not even at trendline but below,” Fransen says.

 

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