In The Grain Doldrums Amid A Winter Mirage of $5 Corn

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The December USDA report is usually a misnomer especially in a year when harvest has been long over.  The January USDA report is one of the big three of the year and with its “final” designation often is a market mover.  The holidays in between often serve as a time where low volumes make for some slow trade.  The USDA December report did not diverge from that this year.  The December USDA report does not say anything about crop size, always looking more at the stock’s position and the different facets of demand within the grain complex.

The USDA set corn-ending stocks at 1.785 billion, with the 2015/2016 ending stocks to use ratio of 12.9%.  The USDA left everything alone in the soybean complex with ending stocks at 465 million bushels.  The ending stocks to use ratio is a 12.4%.  The wheat balance sheet was also left unchanged with the USDA noting that in Canada here we had better wheat than the year before.  Simply put, the bearish tone in the grain complex is almost institutionalized.

So today my elevator manager phones me and said she had something for me.  She said I’ve got a price of $5 for wet corn delivered in the fall of 2017 what you say?   She is a wonderful person and I would’ve liked to say something positive but I was a bit flummoxed.  So I told her no, I’m holding out for $6.  I then went on to tell her about all the risk involved between fall 2017 and now.  I ended the conversation by saying I might not be here at the end of 2017, we’ll see about the corn.

So what does that say? Does it say that I’m the proverbial optimist when it comes to corn farming or am I just flat out stupid?  You can reserve the right to judge me in the fall of 2017 but we’re so close to $5 now in Ontario I didn’t really feel like locking any crop down so far into the future.  The Canadian dollar has been so volatile and grain futures so moribund, frankly, I’m hoping for better things.

Of course I heard rumors this week that my friend DTN Senior Analyst mentioned soybeans futures with a 6 in front of them surely referring to some type of even greater bearish scenario.  However, let’s not fool ourselves.  Futures are moribund.  I said that in my last speaking engagement in Guelph Ontario and I plan on saying it a couple more times this winter.  Unless things change, all three of our grains are in the lower range of the last five years.  If we plant even more corn next year and if South America has no production issues this winter, it is pretty hard to see that changing in any significant way.  Yes, it looks now that $8.49, corn’s all-time high is safe.

Of course at the same time in Canada the price optics are the same, but oh so very different.  This past week we have watched as the US dollar went up and the Canadian dollar fell down into the $.73 range.  Of course oil dipped down to $37 a barrel.  It just furthered the assertion that commodities have been the worst performing asset class in the last few years and it seems to be getting worse.  However, in my local area the cash price of corn is higher than it was a year ago and it is about the same for soybeans.  You can make an argument that Canadian producers are being fooled and American producers are facing the music.

Of course some people would argue, probably correctly that nobody should be fooled. We should know the difference between the futures and basis.  What we need in Canada is a run in futures to combine with this big basis.  However, the reality is it will come one of these days, but it’s hard to get up for it with all this bearish hype in the way.  There seems to be Grain Mountains everywhere.

It is the true nature of our agricultural economics.  Turning off the supply tap is never easy.  The incentive is always to produce as much as we can on an individual basis every year because we are price takers.  Add new technology to the mix and it becomes a vicious cycle.  Overproduction is always the result.  It’s just that over the last seven years we’ve had a bit of a demand explosion.  Now, supply has caught up with that demand and we need some real fresh news, a.k.a. a black swan or a S American production calamity to shake this bearish price environment.

The saying goes, it is always the darkest before the dawn, at least for our American colleagues.  They don’t get calls asking them to contract corn for $5 in 2017! Needless to say, the loonie has created a winter mirage.  Whatever you call it, it is what it is.  We’re in the grain doldrums.    In agriculture, change is our only constant.  Mother nature has a job to do.  Where it’ll happen, nobody knows.

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