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Todd's Take
Tuesday, November 29, 2016 1:44PM CST


By Todd Hultman
DTN Analyst

After four consecutive years of good crop weather, the world now has excess grain supplies and low prices, which is good news for the consumers of grain, but financially painful for producers who would like to be paid for their efforts. As crazy as it seems that the market punishes producers for providing an abundance of food, that is the way the world works and markets are often distorted because of it.

The problem I am referring to happens when prices are heavily influenced by current supply conditions and fail to appreciate the longer-term challenges of what it takes to produce grain. A small example of this is how cash corn and soybean prices typically make lows around early-October each year during harvest, even though everyone knows that harvest is a one-time event and that grain will be needed throughout the rest of the year.

A bigger example of this distortion happens over a span of several years when we take into account the vagaries of weather and excess surpluses that a string of good weather years can bring. The king daddy of corn surpluses happened after the fall of 1986, a season in which USDA estimated the U.S. corn ending stocks at a whopping 66% of annual use.

As bearish as that situation was, the $1.60 a bushel spot price where corn traded at the end of 1986 was actually an excellent buying opportunity. Even before a drought hit in 1988, spot corn prices reached $2.00 a bushel by June 1987 as prices shed their earlier harvest pressure.

Two other examples were in 1992 and 2004 where big corn harvests pushed domestic ending stocks-to-use ratios to high levels: 25% in 1992-93 and 20% in 2004-05. Spot corn that ended 1992 at $2.16 1/2 climbed to $3.06 one year later.

The end-of-year corn price for 2004 was $2.04 3/4 and gained a modest 30 cents by July 2005, but then dropped back to $2.15 3/4 by the end of December as another big harvest rolled in. This time, corn's bullish rescue would not come until the following year when the ethanol boom launched prices higher in the fall of 2006.

In 2016-17, USDA estimates U.S. ending corn stocks at 2.4 billion bushels or 16% of annual use. This is no 1986, but it is the highest stocks-to-use ratio in 11 years, and corn prices are below their cost of production for many producers.

These examples can't prove that grain prices will trade higher in 2017, but they do point out how extremely bearish outlooks are often moderated by the uncertainty of time. Given what we know about market behavior, it is fair to say that the big surpluses of 2016-17 are likely keeping prices lower than they should be -- a common, but temporary side effect of big harvests and good weather.

According to USDA's latest estimates, the world is consuming 774 million bushels of corn, 232 mb of soybeans, and 520 mb of wheat every week and not just because of Thanksgiving. There's nothing like a string of good growing years to make us forget how fragile the balance between weather-dependent production and a steadily growing appetite for grain can be.

I can't promise higher prices in 2017, but I do think it's important to keep in mind the consistency of the world's growing appetite. Good growing weather is a gift, which lately has become a curse for producers, but it won't last forever. At least, that's how it's been up until now.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(BAS/CC)


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