2016 turned out to be the fourth straight year of bumper crops in the United States. In 2012, the world's largest producer and exporter of corn and soybeans and a primary exporter of wheat suffered from a drought that lifted prices to all-time highs in corn and beans and almost $9.50 per bushel in wheat. However, over the following four years, the weather conditions turned out to be ideal for crops and prices fell dramatically.
At the beginning of the 2016 growing season, a brief rally lifted soybean prices causing corn and wheat to follow suit. Poor weather conditions led to low crop yields in South America so the pressure was on the U.S. to produce the grains that feed the world. The upward trajectory of grain prices ended quickly as the growing conditions across the fertile plains of the United States yielded another year of ideal weather for crops to thrive. The prices of the three primary grains that trade on the Chicago Board of Trade division of the Chicago Mercantile Exchange fell as it became clear that there would be no shortages and huge carryover stockpiles at the end of the growing season.
With the Thanksgiving holiday upon us, we can give thanks for another year of an ample grain harvest at low prices. Grains have been trading in a range over recent weeks, but even though inventories are high the low prices could be a temporary phenomenon. After all, each year is a new adventure in the grain markets and only Mother Nature knows for sure if the weather conditions will create supply issues during a crop year. Growing population around the planet means that each year the demand for grains increases. In years where crops are sufficient, plenty of corn, wheat and beans are available for consumption. However, in years where the weather does not cooperate, watch out because we could be the kind of price action that occurred in 2012.
Over recent weeks, grains have been range bound and they have not made new lows. The action in these agricultural commodities is interesting because the dollar has moved a lot higher and that means that U.S. grain exports have become less attractive on the global market.
Range trading in grains despite a dollar rally
As the monthly chart of the U.S. dollar index highlights, the greenback broke out to the upside after a twenty-month period of trading in a range from just under 92 to 100.60 on November 17. A strong dollar tends to be bearish for commodity prices and grains are no exception. The United States is the world's leading producer and export of corn and soybeans and it is a major exporter of wheat. When the dollar appreciates against other currencies it makes the prices of these grains more expensive in those foreign exchange instruments which tends to lead to a decrease in the demand for U.S. grain exports. However, the grains have not moved lower in the face of a stronger dollar; in fact they did not even move to the bottom end of their trading ranges.
Corn in a tight range
The drought of 2012 caused the price of corn to rise to an all-time high of $8.4375 per bushel. In June, December corn futures rallied to highs of $4.49 in sympathy with soybeans. Click to enlarge Source: CQG
As the daily chart shows, since October, when the corn harvest was underway, the grain has traded in a range from $3.3525 to $3.5925. Corn closed on Tuesday, November 22 at the $3.51 level. Despite the rally in the dollar, corn is closer to the top end of the trading range these days and the reason is likely that the price is low compared to where it was over recent years.
November 30 could be a big day for the corn market. The OPEC meeting in Vienna will determine whether the cartel comes to an agreement to freeze or cut oil production to stabilize the price of the energy commodity. All signs are that there will be some accord. Crude oil and oil products have rallied over recent sessions in anticipation of a deal. Meanwhile, the price direction of ethanol hangs in the balance. The ethanol mandate in the United States requires refining corn into the biofuel. Click to enlarge Source: CQG
The daily chart of December ethanol futures illustrates that the fuel has appreciated to over $1.60 per gallon. If the petroleum complex rallies over the coming weeks, the chances are that ethanol will go along for the ride. A higher ethanol price will increase the margins for refining corn into the biofuel and demand for corn will rise. Any decline in the massive stockpiles of corn will be positive for the price of the grain. While corn is currently around 10 cents away from its technical resistance level at $3.60 per bushel, soybeans traded above its resistance on November 22.
Soybeans moving from highs to lows and back
Soybeans rose to highs of $12 per bushel in June because of a palm oil shortage in Asia, which increased the demand for soybean oil. A poor South American harvest added to upside pressure in the bean market. As the daily chart shows, since the beginning of September, January soybean futures have traded between $9.4025 and $10.31 per bushel. The rise in the dollar did nothing to stop beans from trading to a high of $10.3325 on Tuesday.
Soybeans had been trading back and forth over recent weeks however, as the daily pictorial illustrates the oilseed has been making higher lows and higher highs since the harvest season commenced on September 1. From a technical perspective, after a huge U.S. crop price action in the soybean market has been bullish over recent weeks.
Wheat is the sleeper
While corn is trending towards the upper end of its trading range and soybeans are at the very top, wheat has been lagging. The global wheat crop was huge in 2016 and the carryover provides abundant supplies for the months ahead. A bumper crop from Russia has increased the nation's exports and challenged the European Union's position as the leading producer and exporter in the world this year. Wheat traded to the lowest price in a decade this past summer when the nearby futures contract traded to a low of $3.5950 in late August. However, wheat has recovered since with the expiring December futures contract closing at the $4.0725 level on Tuesday. Wheat futures are rolling from December to March, which is now the active futures month. Click to enlarge Source: CQG
As the daily chart of CBOT March wheat futures illustrates, they closed at $4.28 per bushel on Tuesday with resistance at the $4.4575 level. March wheat has traded in a range from $4.1175 to $4.4575 since September 1 and is currently exactly in the middle of its trading range.
In one positive sign for wheat, the December Kansas City hard red winter wheat contract is trading at a premium of over 8 cents to the CBOT soft red winter wheat contract. In March, the premium for Kansas City wheat is at 6 cents. Kansas City wheat has historically traded at a 20-30 cent premium to Chicago wheat but over recent months it fell to a discount. I view the move back to a premium and towards the historical norm as a positive development for the price of wheat.
While all of the grains remain at low prices compared to recent years, the performance over recent sessions has been impressive given the strength of the dollar. One of the important things to remember about grains is that the current levels reflect the fourth straight year of bumper crops and each year is a new adventure.
Do not discount the massive demand level in grains
2016 is now in the books and there are plenty of grain supplies available to feed the hungry mouths around the world. One of the consistent messages from the U.S. Department of Agriculture's monthly World Agricultural Supply and Demand Estimates report is that global demand rises with population each day. Therefore, the world has come to rely on bumper crops. There is no guaranty that crop yields in 2017 will match the past four years. At best, the year will be the fifth straight year of crop levels that will satisfy the ever growing appetite of the world. However, the odds are that one of these years, there will be a shortfall and prices will rise like they did in 2012. In that year soybeans almost traded to $18 per bushel, corn rose to almost $8.50 and wheat was above $9.40 per bushel.
I believe that grains are cheap at current levels given that demand is one a one-way street and people around the world will require more grains every year. Therefore, the current price action in these agricultural commodities in the face of a rising dollar tells us that the downside for all three of the primary grains are limited and the upside potential when it comes to price explosive. It is a good time to start to add grains to your investment portfolio. While commodities always carry a higher degree of risk than other assets because of their penchant for explosive volatility, buying on dips for the long-term in 2017 at current prices means the reward versus risk ratio favors long positions. The recent market action is a testament to the value available today in the grain markets. Keep these assets on your radar and buy on any price weakness.
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.