DNT analyst is bullish on 2015-16 corn, but thinks soybean could plunge to $5.60
CHICAGO, Ill.—Grain market fundamentals are ugly, but the technical charts paint a completely different picture, says a leading analyst.
That’s what prompted Darin Newsom to title his annual grain industry outlook, “Here Comes the Sun.”
“My way of looking at things is in complete contrast to everything that we think we know about the markets at this point,” DTN’s senior analyst told the 770 delegates attending the company’s annual summit.
There was massive global production of corn and soybeans in 2014-15, resulting in soaring ending stocks.
It has most analysts forecasting a grim outlook for crop prices, but Newsom firmly believes that old crop corn, soybean and wheat markets have bottomed out and are heading higher.
A technical bullish key reversal happened in October when nearby corn futures established new price lows and then recovered by the end of the month, topping the previous month’s close.
Newsom said that pivotal moment marked the end of a long price slide that has seen corn prices tumble from a high of $8.40 per bushel in mid-2012.
Read Also
Critical growing season is ahead for soybeans
What the weather turns out to be in the United States is going to have a significant impact on Canadian producers’ prices
Investment money is coming back into corn markets, which seems odd given the forecast for a bloated two billion bu. of U.S. corn ending stocks.
A measure of corn futures spreads versus the cost of carry indicates that the markets are neutral to bullish on corn.
As well, the basis is improving while futures markets are rising, which shouldn’t happen if the market was bearish.
“Basis is telling us something is out there. Demand is out there, stronger demand possibly than what has been projected,” said Newsom.
He believes old crop corn prices will establish an early winter high in December, and the nearby futures will rally again in spring to about $4.50 per bu.
The national average cash price in spring should be around $4.10 as strong global demand continues to support the market.
DTN is forecasting 88.3 million acres of corn in 2015, down from 90.9 million acres last year. Yields will drop to 165 bu. per acre from the record 173 bu. in 2014-15.
Newsom is calling for 13.3 billion bu. of production in 2015-16. Ending stocks are projected at 1.47 billion bu. for a 10.6 percent stocks-to-use ratio, which is far better than the 14.7 percent forecast for 2014-15.
Based on years with similar stocks-to-use ratios, he is forecasting an average new crop cash price of $4.70 per bu., which will peak at $5.20 in the summer of 2016.
The soybean outlook is much the same for old crop but vastly different for new crop.
World ending stocks for 2014-15 are forecast at 90 million tonnes, way up from 67 million tonnes the previous year and 56 million two years ago.
“We’ve got an enormous supply of soybeans,” said Newsom.
“We have these bearish numbers, but again I don’t think the market believes it.”
Soybeans saw the same bullish key reversal as corn in October.
The ratio of futures spreads to the cost of carry is bullish, investors are starting to build a net long position in the crop and the basis remains strong even with improving futures values.
The market clearly thinks supply estimates are overblown or demand will be stronger than estimated, said Newsom.
He believes futures prices will climb to $12 per bu., but prices and basis levels could weaken as the South American crop comes off.
“That could be when the soybean market starts running into trouble,” said Newsom.
Trouble will continue to build when U.S. farmers plant an estimated 88.3 million acres of the crop, up from 84.2 million acres last year.
He is forecasting an average yield of 45 bu. per acre, which will result in 3.94 billion bu. of production and 4.4 billion bu. of supply, up from 4.07 billion bu. this year.
U.S. ending stocks will soar to 723 million bu. resulting in a 20 percent stocks-to-use ratio, up from 12.5 percent this year. That wouldn’t be a record, but it would be the highest since the 1990s.
“This could be one of the most cumbersome situations that we’ve seen in some time,” he said.
It will put downward pressure on 2015-16 new crop prices. Newsom forecasts an average cash price of $5.60 per bu., which isn’t much better than the corn price.
Wheat prices have been rallying as markets come to grips with this year’s quality problems. Commercial interest in the crop is building and basis levels are nearing the maximum levels of the past five years as futures prices rise.
“There is demand for wheat that is not being accounted for right now,” he said.
Newsom set an initial futures target price of $6.26 for old crop wheat, but the market could climb as high as $7.05.
“If we just take a look at the raw numbers, fundamentally there is no reason for wheat to get that bullish.”
Newsom expects new crop wheat prices will struggle as growers boost acres.
sean.pratt@producer.com.
