What will the new calendar year bring for grain markets? That is always an interesting question, and one without concrete answers given the uncertainty that comes with weather, government policies and other factors that can’t be known in advance.
What do we know? The world has an abundance of supply for most major crops. Global wheat and corn supplies are fully adequate, and soybeans will be the same if South American weather remains cooperative. Pulses have seen a rebuilding of stocks, and face the added pressure of Indian government policies that have disrupted our exports. From a bigger picture perspective, the combination of improving genetics, technological changes, and advancing farming practices in general means that production has held up remarkably well even when growing conditions have been suboptimal. This provides the fundamental support of the ‘lower for longer’ scenario for grain prices. Each individual crop has its own story, but the general backdrop across the major crops is fairly consistent.
Is this rather pessimistic outlook inevitable? Not necessarily. Markets are forward looking, and a lot of negative sentiment has already been worked into prices. This is evidenced by the huge speculative short position that is held in corn and wheat futures. Weather is always a wild card, and while the large supplies provides a buffer a string of yield challenges in some key growing regions would cause the market to take notice. Low prices have also helped encourage demand, while any wider macroeconomic concerns around a pick-up in inflation might shift attitudes towards commodity markets in general.
It’s interesting that in many ways where we are staring at heading into 2018 looks very similar to where we were a year ago. Prices also reflect this. The March corn futures price is literally pennies away from where it was a year ago, and Kansas City hard red winter wheat futures is only a dime away. Both canola and soybean futures are lower than they were a year ago, by roughly 40 – 50 cents per bushel, a difference that is well within the normal range of week-to-week trading values. Minneapolis hard red spring wheat is well above a year ago, reflecting the relative tightness for this specific class of wheat due to dryness in the Northern Plains and Prairies this past summer, making it the unique exception.
While we have to respect the headwinds to sustained higher prices, 2017 saw windows where the market offered some attractive pricing opportunities (even though it started out with the same seemingly negative setup). We don’t know that 2018 will offer that to us again, but it’s a good reminder that even bearish scripts get ‘edited’ periodically during the ebb-and-flow of a marketing year.
Jonathon Driedger, Senior Market Analyst