Wheat, corn, soybeans: Which one will lead?

by World Grain Staff
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KANSAS CITY, MISSOURI, U.S. —With the onset of spring in the Western hemisphere, even more attention turned to the planting of U.S. corn, soybeans and spring wheat as well as watching the development of the winter wheat crop. Price lows appeared to be in for all three commodities, but which, if any, will take the lead in setting market direction? The first “mega” report of the season, the U.S. Department of Agriculture’s (USDA) Prospective Plantings report on March 31, should provide insight to refine preliminary projections made in late February by the USDA at its annual Agricultural Outlook Forum.

While wheat, corn and soybean futures have rallied from early March lows, many attributed gains principally to short-covering after commodities became oversold in the process of setting the lows. At the same time, weakness late last week was attributed by some to markets becoming overbought as traders overreacted to the oversold positions. What may be ascertained from such trading, or reasons given for such market activity, was that there was a lack of fresh fundamental news to move the markets.

That may change with new USDA data soon to be available and weather re-emerging as a key market factor. It remains to be seen which grain will become the market leader.

The weakest case likely may be made for wheat because of the U.S. declining stake in world exports due to the strong dollar and ample supplies both domestically and globally. Most analysts agreed that Chicago, Kansas City and Minneapolis wheat futures bottomed (on a nearby continuous basis) at multi-year lows in late February and early March. Since then, values for the nearby May contract have climbed about 10% in all three classes through early last week.

Support has come from some weakening in the dollar, which still was historically strong, short covering after contracts became oversold during the slide to multi-year lows, and weather concerns in the form of dryness in both the hard red winter belt (Kansas City futures) and the as yet unplanted spring wheat region (Minneapolis futures) and excessive wetness in parts of the soft red winter wheat growing area (Chicago futures).

The USDA in February at its Agricultural Outlook Forum projected 2016 U.S. wheat production at 1.99 billion bushels, down 3% from 2.05 billion bushels in 2015 due to the smallest planted area in 46 years. Still, the average price paid to farmers in 2016-17 was projected at $4.20 a bushel, down 16% from 2015-16 and the lowest since 2005-06, with ending stocks rising 2% to 989 million bushels, the highest since 1987-88. Barring a weather catastrophe, which wasn’t expected, and with condition ratings, at least for U.S. winter wheat, much improved from a year ago, it was hard to make a bullish case for wheat.

Corn continued to be the leader in terms of planted area, total bushels of grain produced and, in recent years, profitability for growers. But there was some question whether corn will be the price leader this year. The nearby May corn future was up about 4% from contract lows seen in early March, which was only fractionally above multi-year lows put in late last summer.

The USDA in February projected 2016 U.S. corn production at 13.82 billion bushels, up 2% from 2015 and the third-largest crop on record, if realized, on a 2-million-acre increase in planted area due mainly to lower input costs for fuel and fertilizer. Total corn supply in 2016-17 was forecast to be record high. Prices were forecast to decline for the fourth consecutive year to an average of $3.45 at the farm level, the lowest since 2006-07. Much like wheat exports, corn exports continued to struggle amid ample to record domestic and global supplies.

That leaves soybeans, which were facing many of the same bearish market fundamentals as wheat and corn, namely ample domestic supplies and record global supplies and lower prices from a year ago. But recent activity suggested some life in soybeans. The nearby May future was up 5% from early March after breaking through resistance at $8.90 a bushel on March 11.

Soybean prices also were forecast lower for the fourth consecutive year, to $8.50 a bushel in 2016-17 and the lowest since 2006-07, although planted area and production were expected to decline slightly. The latter, at 3.81 billion bushels, still would be the third-largest crop ever. Soybean exports meanwhile will depend largely on demand from China and competing exports from South America. Despite stiff competition from Brazil and uncertainty about China’s economy, the USDA expected U.S. soybean exports to rise to the second-highest level ever in 2016-17 due to lower prices.

Pricing of the three major commodities, as well as cotton, sorghum and other small grains, was important as crops “compete” for planted acres based largely on farmers’ potential profit (or loss) margins for specific crops.

With prices of all three major commodities struggling to find reasons to move significantly higher on a sustained basis, it was more a matter of which will be the highest of the lows. Farmers who saw their incomes tumble and land values decline last year may expect more of the same this year. But food processors and manufacturers should benefit from another year of lower costs for basic ingredients.



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