Bull-Bear Outlook 2019: A New Reality For Grain Markets

In part 1 of the 2019 bull-bear outlook you'll find the recommendations shared by five commodity analysts. We'll publish recommendations from four more analysts tomorrow. ( Lori Hays )

Geopolitical forces, excessive soybean supplies and a likely shift to more corn acres create volatile corn and soybean markets for 2019. While your grain marketing plan faces many headwinds, don’t be surprised when a few tailwinds provide opportunities for you to capture profits. Below you'll find the recommendations shared by five commodity analysts. We'll publish recommendations from four more analysts tomorrow.

[Read Part 2 Here.]

Brian Basting, Advance Trading - The trade issue with China is critical. Without a prompt resolution, U.S. soybean carryout might expand considerably and pressure prices. With world corn demand expanding, the market is depending on a rebound in South American production. A recovery in output could send the market lower, while another shortfall might provide market support. One potential difference from 2018 might be indications of active investment in Brazilian agriculture by China, which could be negative to prices. Solidifying relationships with long-time trading partners could be a key to fuel price strength. Price prediction is impossible, so marketing flexibility is preferred. Options are a marketing tool to establish a floor for anticipated (or realized) production, but also provide the opportunity to participate in rallies. An advantage of buying a put option is that if a crop problem surfaces (eg. 2012 drought), bushels are not committed to be delivered. It is prudent to add cash sales to your portfolio in addition to the long option purchases. Since the crop insurance harvest price has been established, it is critical to establish downside price protection via cash sales and option management on all bushels in storage. South American weather trends as well as developments in the trade dispute with China will likely be market movers. Monitoring cash basis trends as well as carry in the futures market is prudent. There are too many years where carry opportunities are missed.

Bill Biedermann, Allendale Inc. - U.S. producers will face a marketing challenge this year, no matter if you’re bullish or bearish. The geopolitical hot spots around the world are probably as heightened as they were prior to WWII as the world migrates to a protectionist posture. This will make for extreme volatility as well as an extreme incentive to quickly reach a trade expansion agreement. Corn has a near record tight stocks-to-use ratio. In 2019, projected ending stocks decline by 15% compared to 2018 and decline 30% from two years ago, while world stocks fall 20% and 30% from two years ago. Additionally, an adverse weather scenario would cause an eye-opening move. Maintaining ownership is imperative and will offer the best potential asset gain. But, we all need cash flow. Thus, if you have to sell, replace it with futures. If you’re not comfortable with that, then use options. For 2019, get started when sales near $4.20 or profitable levels. Without trade agreements, soy stocks could hit 1.2 billion bu., while a trade expansion could mean 600 million bu. I would use puts to protect the downside risk, unless your basis has improved and you can sell cash. I would replace ownership with an affordable call. If the trade disputes continue, keep your eye on stock markets and the world soybean price for direction. As long as the world soybean price is strong (north of $11), our cash price is attractive. That’s why our market is holding at prices higher than traders expect. If world prices sink, I’d rather lose a 25¢ premium than lose a dollar in cash ownership.

Naomi Blohm, Stewart-Peterson - For corn, the focus is global ending stocks, which are historically tight. Currently, the U.S. market is assuming there will be a substantial increase in U.S. planted corn acres for 2019, which is why the corn price continues to be stuck in a narrow trading range. The potential for more corn acres, means more supply, which would alleviate the tight global carryout. Should there not be a dramatic increase in U.S. corn acres in 2019, then we might finally see some upward price movement in corn. On the geopolitical front, Russia and Brazil both have leaders with strong opinions. Both countries have strong agricultural production, and the leaders seem to want to continue to assert their presidential influence globally, which will likely impact agricultural trade. Also, continue to monitor the stock market, investment money, interest rates in the U.S. as well as consumer spending. Unless a trade deal is made with China sooner than later, producers should expect to be aggressive with 2019 crop marketing. Soybean ending stocks are record large, with wheat stocks also large. It might be a struggle to find significant price recovery. Quickly figure your cost of production, understand realistic price targets for grain in 2019, and get your cash orders working at your elevator sooner rather than later. This is the year to be current and knowledgeable in all marketing tools available. While the price outlook is dismal now, one good trade deal or poor weather could send prices racing higher. It’s important to know the ways to capture that rally, either with cash sales or options. Monitor cash basis levels, technical price objectives on futures charts, and your own ability to “pull the trigger” when it comes to make sales!

Richard Brock, Brock Associates - Some common-sense rules of thumb are best to remember for market- ing over the next 12 months: Never store a short crop, always store a record crop, and markets peak on bullish news and bottom on bearish news. With that said, this was a large crop, which means it should be stored. The news at harvest time was very negative, that’s how market bottoms are made. Marketing plans that worked last year will not work this year. The long-term ag economic cycle has bottomed and focus this coming year will be on positive price trends, and there will be essentially no similarities to 2018. If prices reach breakeven, there is nothing wrong with selling some of your production. But don’t be too aggressive. If the market rallies above break-even prices, that’s likely to mean it’s going even higher. The market has no conscience—it does not care what a producer’s breakeven is. Its job is to ration supply. Pure and simple. In this environment, one might assume a late-summer peak in prices. At that point in time, I would sell remaining old-crop grain in the cash market, forward contracting some of the new and likely using a combination of futures and option strategies to protect the rest. In the meantime, the next few months will require a lot of patience watching the market do very little.

Alan Brugler, Brugler Marketing & Management - Export pace is the No. 1 factor. Corn should see record exports, with world stocks-to-use ratios tight. For soybeans, the issue is how well sales to other countries replace missing Chinese business. In either case, failing to keep pace is a problem for prices. South American crop losses would definitely get my attention. The degree of acreage switching from soybeans to corn, wheat or cotton will also be significant. The strength of the dollar affects our ability to make export sales. Proposed trade deals with the European Union, United Kingdom, Japan and the Philippines are all intended to open markets for U.S. ag products. The El Niño weather pattern has negative impacts on crop production, which could create sales opportunities. There is a desperate need to reduce surplus soybean supplies in the U.S. and globally. Global corn stocks are tighter than a year ago, but a big switch to corn plantings in 2019 could cause premature death for the corn bull. We like the “Three Buckets” strategy. The first, the “Make Me Do It” bucket is when prices are at least 20¢ to 30¢ above cost of production. Those sales can be done up to 18 months in advance. Second bucket sales are made above cost of production during the growing season for harvest or Jan. 1 delivery. In the third bucket, crops are always binned for returns to storage. Due to multiyear price volatility, that often presents later profit opportunities. Storage hedges should pay, with harvest basis horrible in many areas and the market offering carries to spread out supply. Coupling those with bull call spreads allows participation in upside price moves at a low cost. Forward contracts for fall delivery could work if merchandisers are offering early basis pushes to get volume on the books.

More stories from the 2019 Outlook series:

Bull-Bear Outlook 2019: Headwinds Ahead For Grain Marketing Plans

2019 Outlook: Corn Markets Hinge On Acreage Battle