Commodities Report

April 16, 2019

 

 

Grain prices were lower over the past two weeks. The USDA report on Apr 9 increased the 2018/19 corn carry out 200 mln bu., to 2.035 bln. That is a big increase, but not totally unexpected considering they raised the March 1 corn stocks 270 mln bu. in the March 29 report.

 

USDA also raised crop estimates for both corn and soybeans in Brazil and Argentina, adding more supply to already burdensome world stocks. Their weak currencies lately also make their supplies more competitive for importers.

 

The demand picture isn’t nearly as friendly as it was a couple months ago either due to the African Swine Fever in China, which has decimated their hog herds. The disease is spreading to other countries, especially in Asia.

 

Speculators sold another 24,000 corn contracts in the latest weekly report, and now are short over 294,000 contracts, a new record. Despite all this added selling, the bottom hasn’t totally fallen out of the corn market.

 

In Dec. 2017, they were short 250,000 corn contracts. They began to cover and by May, 2018, they were long 220,000 contracts. That buying of 2.35 bln bu caused a rally in corn futures from $3.35 to $4.10, for a nice 75 cent gain.

 

Their current record short position could turn into a positive again shortly. Whenever they have too much company on one side of the market, prices invariably change direction, and often in a dramatic fashion. Corn just needs a spark to get the short covering started.

 

Perhaps it will be the North American spring weather that will cause it. There is no doubt that weather is getting more extreme. The US has had a slow start to the 2019 planting season, but it is still very early. Current forecasts look wet until at least the end of April.

 

Traders have learned from the past two or three years, however, that farmers can plant most of the crop in a very short period of time, and even if planting is a bit later, yields can still end up above average. However, the Midwest is somewhat overdue for a subpar yield.

 

Another bullish development is that ethanol prices are record high in Brazil. They derive most of their ethanol from sugarcane, and the crop is very poor this year. They have the world’s most developed bio-fuels economy, so imports from the US will have to increase.

 

The cure for low prices is low prices. Perhaps we are near the low point in the current down cycle in grain prices, which began after the big bull market in 2012/13. At 7 years, it is lasting longer than normal.

 

The other concern for farmers is that input prices only seem to go in one direction. Seed, fertilizer, chemical and equipment prices remain in uptrends. This obviously further squeezes margins for farmers.

 

Let’s hope there is some light at the end of the tunnel here shortly. As mentioned, the best hope for this is to get the large speculators to cover their record short positions.

 

- Frank Backx, Hensall Co-op Grain Marketer

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