The grain markets in 2019 were dominated by headlines tied to the trade war, weather disasters and production concerns across the Corn Belt, as well as weaker demand.
The outlook for 2020 is more optimistic on the demand side as the United States is on the cusp of a more positive trade environment. The big unknown is still the weather for the planting and growing season and what that will mean for acreage and crop size.
Market analysts see potential in the trade deals that have been struck with Japan and the U.S.-Mexico-Canada Agreement. However, they’re cautiously optimistic about the “phase one” deal with China and the possibility of $40 billion of purchases in 2020 and 2021. That’s partially because the shopping list and other specifics are still vague. DuWayne Bosse, president and owner of Bolt Marketing of Britton, S.D., says the devil is in the details. He says commodity funds, which were short in much of the grain complex before the announcement of the China deal, have been covering some of that position and that has produced a rally in the markets. However, he thinks, to keep it going, fund managers want not only a signed deal but confirmed purchases by the Chinese.
The China deal may not be signed until Jan. 15. The U.S. Department of Agriculture World Agricultural Supply and Demand Estimates come out Jan. 10, and Bosse said he doesn’t think the new China demand will be reflected in the report.
“The January report is too soon for USDA to make adjustments,” he says.
Farmers and the industry are anxious for the January estimates because many think the last several reports have failed to adequately account for the record 20 million prevented planting acres in the U.S. and the yield drag from late planting.
Randy Martinson, president and owner of Martinson Ag Risk Management of Fargo, N.D., said he thinks USDA will finally have to recognize those factors in the final report, plus the impact of the late harvest.
“We do know that there will be a reduction in harvested corn acres; it’s just a matter of how much,” he says. However, the report won’t take into consideration the low quality or high moisture of the corn.
Martinson is less certain about what revisions USDA will make for soybeans.
“Most of the soybeans did get harvested. There’s just a few left over in North Dakota and South Dakota. I think yield could come down a little bit though,” he says.
The unharvested acres of corn in the northern Corn Belt will be treated as on-farm storage by USDA, and farmers will have to take their best guess at what is still left in the field when they answer the survey.
“And then we’ll see come springtime when all of it gets harvested what’s really out there,” Bosse says.
However, he thinks the January report could be disappointing for corn because the real adjustments will not show up until the Quarterly Stocks Report.
After report, South American weather is the focus
After the report, the grain markets will quickly turn their attention to the South American crop and weather. Brazil farmers planted record acreage of both corn and soybeans for 2020 with the currency advantage in their country as an incentive.
Weather has been nearly ideal, and so there are expectations for record corn and soybean production in that area. Meanwhile, Argentina had some dryness during the planting season, which may have trimmed acreage and yield for both corn and soybeans, and the wheat crop has already been reduced as a result.
Bosse says at the end of 2019, about 50% of the crop areas were showing stress, but the real critical time period will be the pod filling stage.
“The longer-term weather guys are kind of hinting that it will shift to and stay dry in Argentina, which could produce some fireworks in the markets coming up,” he says.
Acreage and weather wildcard
USDA’s baseline projections call for a record 94.5 million acres of corn in the U.S. in 2020 and 84 million acres of soybeans.
“I think we will see more corn acres. Corn has worked for a lot of growers even last year with the late as the planting. With a little change in hybrids yields were better than most guys anticipated. We had the test weight and moisture issue in the Northern Plains but in most of the Corn Belt farmers will realize how good corn did,” Martinson says.
The question becomes whether farmers can plant that many acres of corn when there is still 2019 crop in the field that hasn’t been harvested. Bosse still thinks it’s possible.
“I’m at more like 93 million corn acres. A lot of that is because the eastern Corn Belt dried up quite a bit going into fall, and they’ve got prevent plant they will be able to roll into corn,” he says.
He agrees though that in the northern Corn Belt, it’s hard for farmers to think about corn when they don’t have last year’s crop harvested, and so they may plant more soybeans or again take prevented planting.
Wheat acreage will be down in 2020 as the winter wheat plantings are already at 110-year lows and there will be less spring wheat planted.
“Spring wheat acres are going to be down because spring wheat didn’t work in 2019 in a lot of areas due to the delayed harvest and the discounts were a killer, especially the falling numbers. And with as wet as we are, it’s going to be tough to get that wheat planted in a timely manner,” Martinson says.
Bosse said he thinks there is a bullish story for spring wheat in 2020.
“I think USDA underestimated the crop that didn’t get harvested. If we have less acres and China buys some spring wheat for blending, that could be positive,” he says.
Both agree that the weather for the planting and growing season will be a big key for market direction in 2020. The National Oceanic and Atmospheric Administration’s 90-day outlook is for above normal precipitation, which could be an unfavorable set-up for the planting season with an already saturated soil profile in many areas. That could produce another spring of planting delays and prevented planting.
However, spring is still a ways away and Bosse says if weather turns more favorable and farmers get the crop planted in 2020, ending stocks for all crops will be much higher than 2019 and that could pressure prices.
Cash and futures market disconnect
While the futures market has not been pricing in less production in 2019, cash basis levels during and after harvest have been the tightest in five years across the entire Corn Belt. This has provided some opportunities for farmers to sell their crop at higher prices than a year ago.
The disconnect between the futures and the cash markets has been perplexing. Martinson says this is a local demand issue that he attributes to the lack of available crop for processing ethanol, soybean crushing and wheat milling. He also points to the slow harvest.
“I think it’s been an incentive to try to get farmers to move corn at a time frame when a lot of them were still harvesting,” he says.
However, Bosse thinks the crop just isn’t there.
“You know that’s what the basis screams is that last year the old crop size just was not there,” he says.
Marketing strategy going forward
So how do producers take advantage of strong cash basis levels and still leave the upside open in case there is a rally in the futures market due to better demand or crop problems? With all the unknowns regarding weather for the 2020 growing season and if farmers will get the crop planted, Bosse has set price targets to sell futures or cash but isn’t going to sell in the spring if there is a rally.
“I like buying the short-dated new crop call options. For soybeans, I’m buying the June options, as I think that will be enough time, and for corn, I’m buying the July and August. Those are short-dated new crop, so they go off the new crop futures, but they expire in the middle of summer, so they’re cheaper.”
He says they are really “courage calls,” which means farmers have the courage to sell when they get to their target.
The strategy is similar for Martinson, including wheat. He says he hasn’t done a lot of pricing for the 2020 crop yet because he’s waiting until after the January report.
“No one is really interested in doing futures-fixed contracts because they don’t know what they’re going to plant or raise. So, I look at puts, and I do like the idea if you sell some cash grain, cover it with the short-dated options,” he says.
Also, for old crop, Martinson suggests using basis fixed contracts to take advantage of the strong basis.
“Move grain against that. The March is decent, and in the short term, we can get the grain into the system right after the first of the year. However, I really want ownership through that January report just in case it’s friendly and we get more specifics on the China trade deal,” he says.