World supply and demand fundamentals support increased grain prices for 2017 — maybe nothing robust enough to cover all costs, but possibly enough to allow some producers to make headway against variable expenses.
And if grain farmers are watchful, they should be able to sell at a profit at some point during the year, says Mark Welch, Texas AgriLife Extension economist for grain marketing, who spoke at the Red River Crops Conference at Childress. He says he expects corn prices to trade in a range from $3.64 to $3.94, likely holding at around $3.79. “Economists like ranges — we like to leave a little wiggle room.”
That $3.79 estimate is not enough to pencil in a profit at usual yields, he says, but it’s up from last year’s $3.49. “Conditions are right for modest gains in grain prices — corn, grain sorghum, and wheat — but not enough to cover all costs.”
Burdensome supplies continue to weigh on the market, Welch says. “We had an all-time high corn yield in 2016.” Wheat and grain sorghum production were also good. “That’s why we have low basis.” The U.S. corn crop has enjoyed four straight years of record production.
Weather, as usual, will play a role in 2017 grain sales. “Look for opportunities during the year to sell at a profit, he says. “The market provided such opportunities for the last three years. Producers may be able to cover costs plus make a little profit.”
MARKETING TAKES DISCIPLINE
Grain marketing requires discipline, Welch says. “It takes time and requires building relationships.”
He likes to space sales throughout the year. “The first sale is the hardest,” he says. “It’s sometimes hard to pull the trigger, and we can hope that first sale is the worst of the year.” He likes to sell some grain before planting, some in season, and some post-harvest.
He also commented on the annual quandary of whether to sell corn at harvest or store it, hoping for prices to go up. It’s a risk, he says, and is more similar to buying contracts than most folks realize. He showed examples of storing corn and selling later — with both higher and lower prices at the time of sale. He also looked at the option of selling corn at harvest and using proceeds to buy contracts.
The end results of both strategies are almost identical — gains with higher prices, and a loss with lower prices, in storage or with hedges, are within a few hundred dollars of each other.
“We are comfortable with storing grain, but not with buying contracts,” Welch says. “But, if you store grain, you are a speculator in the grain market. If you have unpriced grain, you are speculating.”
UPWARD DEMAND FOR CORN
Grain market improvements, though slight, come from several factors, he says. Corn, for instance, continues a trend of increased world demand that began before the renewable fuel standard (RFS) was initiated.
“For the last 15 or 16 years,” Welch says, “corn use worldwide has continued on the same upward trend, even now with a mature (no longer rapidly growing) ethanol industry.”
Improving incomes and a desire for better nutrition in emerging countries are driving much of that trend. The middle class is growing and they want to eat better, he says. “Maintaining access to those markets is crucial to U.S. corn production. Trade is important.
“Corn disappearance has been good for the past few years — industrial, feed use, fuel use, and export have been positive. Exports have been especially encouraging. Price is competitive, and U.S. grain quality is good. With good quality, foreign markets will buy U.S. corn.” He says ethanol export potential is also growing as other countries look for green energy.
Corn planting for 2017 could decline by 1 million acres, down to 93 million, he says, and changing projections could affect the market.
Increased corn acreage the past few years has been a response to high grain prices in 2012. Increased plantings and record crops have added to the world supply — 35 billion bushels to 45 billion bushels in the last five years — but the stocks-to-use ratio has remained constant, Welch says. World Days of Use on Hand for corn is at 78 days, a comfortable level, and on par with the trend of the past 20 years.
“The last three years have stayed at about that level, too,” Welch says. “We’ve had a sustained stocks-to-use ratio, with high production. But we are in a time of highly volatile prices. A reduction of just a few days in days of use could cause a significant change in price.”
Unlike other grains and soybeans, U.S. corn planting intentions and production set the market, he says. “The stocks-to-use ratio still depends on U.S. plantings. The U.S. is the crux of the world corn market.”
The wheat market is set elsewhere, he says, and the supply situation is more burdensome, about a four-month supply. A 90-day Days of Use on Hand “is comfortable for wheat,” he says. “If it gets below 90 days, the market is sensitive.” At current levels, wheat needs “help from other growing areas” to see any significant rebound.
“A 1 percent change in use on hand in the corn supply is equal to a 5 percent change in price, going back for about the last seven years.”
Corn acreage is still unsettled, Welch says, pointing to an Illinois crop budget that shows soybeans to be a better option in 2017 than corn. Last year, corn acreage was 4 million higher than soybeans, so if half of those switch back to beans, the effect could be significant.
The farm program also may affect planting intentions. Benefits from the Agriculture Risk Coverage (ARC) program will begin to disappear after 2017 as yields adjust. Price Loss Coverage (PLC), based on commodity prices, will offer better payments following several years of low prices.
“We have one more year of substantial payments from ARC,” Welch says. “In 2018, it goes away, unless it’s revived in another farm bill.”
A long-term trend line indicates 2017 corn yield will average about 167 bushels per acre, but he expects USDA to bump that to 171 bushels as they discount recent drought years. Yield will also be a factor in price, he says. “Price is sensitive to small changes.”
The decision by Midwest growers on whether to increase soybean acreage or maintain recent levels of corn will be a factor in 2017 pricing, he says. Weather at planting time may influence those planting decisions.
Growers should look at several marketing alternatives and consider risks, Welch says. He contends that farmers may be more afraid of high prices than they are of low prices, a fear that often prevents them from locking in profits. Many are afraid of selling too soon and missing a higher price. Selling in segments, he says, allows producers to take advantage of later price rallies.
Often farmers sell and then hope the price falls. “That means they were right,” he says. “But the truth is, the more wrong they are, the more money they make. Grain prices will go up, and they will go down — no one knows what the market will do.”
With that in mind, Welch advises farmers to manage the things they can control. “Be the low cost producer,” he says. “And develop a financial plan — know your break-even prices and your cost of production.” Without that information, he says, producers are marketing in the dark.