There’s increasing evidence that the worst of the bearish cycle is now behind the grain markets. Spot corn in 2016 fell to $3.01/Bu, spot CME wheat fell to $3.60, and while any semblance of a bull market requires adverse weather, our work suggests that new multi-year lows are not likely. Most importantly, world currencies are no longer providing as much incentive to expand acreage in S America & the Black Sea, and assuming trend yield and trend demand, world grain end stocks are likely to correct further in the years ahead. Note that Brazilian cash corn prices in US dollars are down 40% from last year and currently rest near 18-month lows.
The world corn balance sheet through 2019, which assumes unchanged acres through the period, is at left. Without further acreage expansion, and with trend yields, corn stocks reached a multi-year peak in 2016/17.
Global wheat balance sheet changes moving forward, again assuming unchanged seeded area, are less dramatic, but the theme is the same. Domestic Russian cash values are down upwards of 15% from last year. CME futures valued in other currencies (Australia, Canada, EU) are down 6-10% from last year, and ARC’s bearish outlook since 2013 has hinged in large part on global currencies – which have changed substantially in recent months. The longer term global wheat balance sheet is attached (which uses unchanged acres, trend yield and trend demand), and while wheat stocks stay rather large, the most probable scenario includes wheat inventories peaking in 16/17. Also recall much of the increase in 17/18 is due to China, where supplies will not be available to the world market. Wheat area has expanded 10 Mil HAs in 2013-2015, driven mostly by falling crude/weak currencies. Further expansion is far less likely.
The issue in the near term is that the markets still must work through record old crop supplies (and record by a large margin), hence corn and wheat’s lack of reaction to recent weather issues. Also recall that the USDA raised old crop stocks in its May WASDE, and may do it again in June. But notice in the graphic below that periods of stock-building last 3-4 years. Even before 1990 this was the case. Once stocks build, prices fall, and the incentive to expand area and maximize crop inputs erodes. The 16/17 crop year marks the fourth consecutive build in global grain stocks, and indeed amid multi-year low prices and changing currencies, the lack of inventive will move supply and demand closer to balance. It’s premature to be bullish, but the longer term outlook is no longer bearish relative to $3.50 corn and $4.00 wheat.
