Most agricultural economists try to give farmers some ray of hope they can hang their hats on when they give presentations at county Extension meetings, commodity conferences or farm organization events.
Sometimes the optimism pans out; sometimes it doesn’t, but, in general, ag economists have the type of low-key personalities that don’t allow them to gloat. That was the case with the University of Arkansas’ Scott Stiles at the Ag Council of Arkansas’ spring board meeting.
“I mentioned a few times in the county meetings (last winter) that when you look at the supply/demand numbers and the ending stocks on the surface, yeh, the price outlook is pretty dismal,” said Stiles. “So what we need is three things: The dollar to make a correction; crude oil prices to run higher; and a major yield-impacting, weather event needs to occur somewhere.”
The dollar has stabilized, crude oil prices have been moving up toward $50 a barrel and weather events have developed in Brazil in South America in the Black Sea region, he said. As a result, soybean futures have moved above $10 a bushel and corn was selling at a 30-cent premium in the Mid-South the day he spoke in Pickens, Ark.(May 27).
Displaying a photo of a corn field in north-central Brazil, Stiles said: “This is what a lot of their crop looks like today; it just will not rain in north-central Brazil, and they are in a mess. They exported too much corn early this year. Local prices in Brazil are about $6.50 a bushel, and they’re importing corn from Argentina.”
In April, USDA was estimating Brazil’s crop at 84 million metric tons. In May, they trimmed the estimate 3 million metric tons down to 81 million metric tons because of the lack of rain. Brazil’s equivalent of USDA, meanwhile, has an even lower estimate at 79.9 million metric tons.
“So at some point we may see a further reduction in Brazil’s corn production estimate,” says Stiles. “The weather pattern they’ve seen over the past month is still in effect, and it remains hot and dry there so we may see that estimate come down.”
USDA also lowered the Argentine corn production estimate by 1 million metric tons. “When you combine the reduction in Argentina and Brazil of 4 million metric tons you’re getting close to 160 million bushels,” says Stiles.
Weather delays are also of some concern in the eastern U.S. Corn Belt where three states still had 4.8 million acres to plant at the end of May based on USDA’s March 31 Planting Intentions Report. Indiana, Michigan and Ohio are double-digits behind on their five-year average.
“June is coming up soon, and I’m curious about how much of those 4.8 million acres they intended to plant actually goes in the ground and how much shifts to soybeans,” he said. “Nationwide we’re 86 percent planted with 14 percent left to plant. Will all of that get planted? Some of it certainly will. But some of it could shift.”
Higher soybean and corn prices have also helped the outlook of some producers in the Mid-South, judging from comments at the Ag Council’s meeting. As one said, “soybeans are up $2 a bushel, corn has a 30-cent premium and there’s hope for rice.”
How long prices will remain at those levels will be the subject of speculation among commodity analysts for most of the summer, but Stiles believes growers have certain indicators they can follow to help make pricing decisions.
“I think this is probably the most important thing you need to pay attention to in the corn and soybean markets and that is the size of the net long positions of the speculators in both of these markets,” he said.
Speculators’ net-long positions were one of the first indications that prices might be showing improvement, he said. In mid-April, large speculators begin moving from net-short positions to net-long positions in the corn market.
“That started April 12, and you began to see the price trend change in corn,” said Stiles. “Today the large speculators have built a net-long position of 147,000 contracts (which represents a sizable amount of grain on the Chicago Mercantile Exchange).
“Each Friday the CFTC puts out a report called the Commitment of Traders. What I’m looking at is the net position of managed money and other reportables. The position will change from week to week, but you need to look at the trend. When they begin to liquidate their net long positions, that will be our signal the top is in these markets.”
Stiles said he believes it’s “fruitless” at this point to think growers can look at all the right fundamentals and pick the top in this market. “I think the commodity funds will give you the best indication of where the top is, and I think they will stick around to the middle of the year or until they can get an assessment of what size crop we actually have.”
When that happens, producers can go back to focusing on the fundamentals. “Yesterday (May 26) we saw the September contract on corn make some new highs, closing at $4.0725, the highest it’s been since last October,” Stiles said. “It’s beginning to push higher, and I can’t tell you how far it will go.”
The market will undergo some brief corrections, he noted. “But don’t convince yourself the top’s in and try to guess where the top is. As long as the fund participation is of the size it is, there will be brief dips and corrections, but there will be good support, and I think the funds will be in this market heavy until mid-summer.”
For more on the Agricultural Council of Arkansas, visit http://agcouncil.net/