The Rest of the Story: Crop Report Opportunities

Rest of the Story with Jerry Gulke - April 2 2018
The Rest of the Story: In-Depth Analysis from Jerry Gulke ( Lori Hays )

Last week’s “The Rest of the Story” ended with thinking there would be a surprise(s) in last Thursday’s report. There were surprises on all accounts: acreage of corn and soybeans as well as stocks as of March 1. As suggested in my radio interview program on Friday, the report information created a whole new ball game.

While our internal survey suggested a drop in corn acres more than trader guesses—at 87.8 versus Friday’s report at 88.0 on Friday—it was on the high side of soybeans—at 91.9 versus the report at 89.0. Our survey of hrsw acreage back in early February revealed an increase of from 860,000 to 1.2 million acres versus the report at 1.6 million acres more for 2018. Odds as time wore on into March, more spring wheat acres were contemplated.

The report was released during our Spring Outlook Conference in Chicago, and attendee responses to the soybean acreage number was one of disbelief. However, market participants will have to trade the USDA numbers until the numbers are proven incorrect in the June 30th update or next October’s report.

Corn stocks as of March 1 were 182 million bu. higher than average guess. Soybean stocks were 77 million bu. above expectations. The corn stocks increase was like finding a million acres worth of production and soybeans about 1.5 million acres more production. Those increases in stocks will be dealt with in the April USDA report. Wheat stocks were about as expected.

An equally important statistic of the report is smashing the myth that farmers love to plant corn!  Those that bet on that idea were losers once again. The winners were the producers, as prices rose swiftly and significantly in response to what has to be a game-changer affecting our financial outlook from negative to positive. It is now up to the market to decide if it is content with 88 million acres of corn and 89 million acres of soybeans? Will there be a rob-Peter-to-pay-Paul scenario, and what kind of price it will take to make that happened?   

Producers now hold the cards, and that should make global buyers concerned, if not nervous. USDA will come out with a new old-crop S/D number in the April report next week. But, unfortunately, USDA will not address 2018/19 revised acreages/production until the May S/D , leaving a lot of questions to answer in next 10 months when we get the final FSA report on what was actually planted versus intentions. 

Rest assured, however, the market will extrapolate the March 29 stocks and acreage in deciding if the extra stocks are a result of better crops last year or less demand than anticipated. Either way, USDA will have the flexibility to increase demand due to the South American dilemma, against an increase in old crop supplies. So, for the USDA, which was suspected of kicking the can down the road in its Ag Outlook Forum estimates of 90-90 corn/beans, got their way and can now focus on demand for corn and let buyers dictate if increase demand will erase the extra stocks found.

So, the combination of old-crop stocks, where it is and who has it, coupled with shocking acreage muddied the waters somewhat and will keep analysts guessing with a wide range of ideas with more price volatility as we have seen today in the first post-report trading day (also the start a new week, new month and new quarter).

Producers are caught in the middle, of course.

The report findings were in a backdrop of politics, tariffs and responses to the tariffs, especially by China which have likely gotten worse. If you listened to CNBC today, there was no shortage of negative vibes on agriculture—especially pork with new sanctions. No mention of soybean tariffs, yet. We do not sell much, if any corn, to China, nor wheat. So, the least dependent on exports to China was the least affected. The task of market analysis got more difficult now that they have underestimated corn acreages.

Corn and soybeans now have a long-term story with which to contend, making flexibility that much more important. If in the final analysis producers switch acres to corn, shame on us. But the larger question is from where will those needed corn acres come from? Less soybeans? I doubt that will happen as 89 million acres of soybeans should be unacceptable to even China!

Will the bankers suddenly get marketing religion and opt to go full bore with funding for high-tech machinery, seeds and expansion of acres? I think not.

Will the firm who promoted getting a floor locked in by buying puts and rolling them higher have the nerve to exit? Money was lost again, as usual, as that strategy is nothing more than an easy way out of doing due diligence. So was the thinking that we would never get out of the mound of corn that would depress prices for years.

The secondary myth is that on-farm storage is wrong as the report last Thursday showed who owned an increase of the pie of the stock piles. The farmer with on-farm storage, gave fits the last few years to those who thought they would buy production at the extreme lows. No wonder executives in charge of making money trading, speculation or merchandising grains on the chopping block. Those that promote that farmers sell at the low and buy at the high likely never made a dime in production ag. If you are associated with someone like that, time for the chopping block. Perhaps I can help in that venue as well?  

Traders will be watching a lot of things including:

  • spreads
  • market carry
  • the large stocks versus acreage shock
  • the outcome of actual South American production
  • weather in the U.S., which currently reflects a situation unlike that of 2016 or 2017.

Can price now really affect the need for more soybean acres? Or is it largely too late? Or are more acres actually needed, if China’s needs are overstated?  Re-read “An Acreage Battle Looms.”

A case can be made for a significant cut in 2018/19 ending stocks for both corn and soybeans from what is currently estimated. But that is a long way off.

Meats have the weight of the Trump tariffs. And, Chinese retaliation in pork and feeder cattle are beginning to suggest feed-grains could be a problem in 2018/19.

Argentina losing perhaps 35% of its soybean crop yet responsible for something close to providing 50% of the soybean meal and oil exports, it places a burden of a good U.S. crop this year and no hiccup in South American again next year.

The technical picture changed with the report making the big picture more positive. The start to a new month/quarter and week is seeing profit taking and reversals off the knee-jerk reaction to the report. A close into new highs for the month of April will be important and likely not go un-noticed by the traders.

The market will not make it easy for the bulls or bears, and the algorithm traders will have their day, but I secretly expect them to get their heads handed to them. The debacle in equities should instill some money to move to commodities as result of the game-changing report last week. However, with our governmental administration more excited about creating jobs, we seem to be the least of their worries in an uncertain global market.

Last week’s column’s final paragraph contained the statement that “the average analyst still believing we like planting corn for the fun of it; perhaps there will be another eye-opening event as there was both here in the U.S. last year and in Canada where farmers in both countries opted for the least cost decision.” A myth was dispelled again and producers seem to be in a better place now with a decision of which crop will profit the most rather than what crop will lose the least.  

The market will now concern itself with short-term gyrations. A chart can be worth 1,000 words—see the Dec corn chart here:

Corn Chart Gulke Group
Click the image or here to view larger version of this chart.





It may become even more and more difficult to dissect innuendo with fact. Hopefully “the rest of the story” helps put things in perspective? If not perhaps we can help further?


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Good Marketing,


Jerry Gulke