Todd's Take

Three and a half months into 2018, grain markets have already encountered several hurdles, including droughts in Argentina and the southwestern U.S. Plains, adverse early planting conditions in the United States, and increasing lists of actual and proposed tariffs between the U.S. and China.

The early drama was mostly unexpected and interrupted bearish speculators from their winter slumber, turning them from net short to confidently net long -- even before the new growing season has had a chance to begin.

As I explained in the Apr. 11 article, "Brazil's Bull Rally in Soybeans," (https://bit.ly/…) this year's early rally in soybean prices has legitimate cause, coming from a combination of strong Chinese demand for Brazil's soybeans and Argentina's drought. For corn and hard red winter wheat, however, this year's early price rally is suspect and it is possible that we have already seen the highs for the year.

Why do I say that? Except for the current trends of both, which are roughly sideways, it is difficult to find a bullish fundamental argument or market clue for either grain.

Starting with the fundamentals, USDA is expecting 2.18 billion bushels (bb) of U.S. ending corn stocks in 2017-18 and, last we heard in February, 2.27 bb of ending stocks in 2018-19. USDA increased its export estimate since February, but it is still not clear if 2.225 bb is attainable in the current season.

USDA's corn planting estimate of 2.2 million fewer acres in 2018 will help limit production and this year's cold, wet start to spring may also help, but it is far too early yet to say anything bullish is happening to the production side of the corn ledger. So far, soil moisture is generally favorable across the Corn Belt. A 15-bb corn crop and 2 bb or more of U.S. ending stocks are still possibilities in 2018-19 -- too much corn to support higher prices.

Turning to HRW wheat, it is simply too early to come up with a good guess of this year's winter wheat harvest. With serious drought in the southwestern U.S. Plains and USDA rating 37% of winter wheat crops either poor or very poor, it is fair to say this year's crop will come in less than last year's 1.27 bb. The rub of course, is that U.S. winter wheat production only accounted for less than 5% of the world's total in 2017-18. It is still early in 2018, but so far no significant problems have been reported in the world's major wheat regions.

Fundamental estimates have their place, but DTN's market analysis also emphasizes the market's own clues. On that front again, it is difficult to make a bullish case for either corn or HRW wheat. March corn is priced 7 3/4 cents above the December contract, a narrower spread than what we saw in January, but still not a sign of strong commercial demand for new-crop corn.

One serious bearish concern is that speculators have become too optimistic about corn prices, holding the largest net long position in corn since the fall of 2011. Here in mid-April, that bullish of a position looks like a wild you-know-what guess without much evidence. And did I mention that DTN's national index of cash corn prices matched the 2017 high of $3.57 in early March and hasn't traded higher since?

In the case of HRW wheat, 71% of speculator positions are on the long side of the market, as they are with corn. Unlike corn, however, 47,753 net longs is a more modest position size, and not as dangerously bearish if prices do turn lower.

From mid-December to early March, DTN's national index of cash HRW wheat prices gained $1.42 a bushel, matching its 2017 high of $4.98. Since Mar. 5 however, prices have dropped 42 cents, even as drought worsened around the Texas Panhandle and western Kansas.

While it is easy to focus on visible drought in the southwestern Plains, it would be a mistake to ignore the less visible demand side of the HRW wheat market. On Monday, September Kansas City wheat closed 20 1/2 cents above the July contract, an extremely bearish reading of commercial demand that is virtually screaming at producers not to deliver wheat against the July contract.

Current weekly charts of DTN's national corn and HRW wheat prices show a possibility of major double tops for both. Unless this year's weather is holding more surprises, current fundamentals and market clues suggest both grains may have already seen their highs for 2018.

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

Follow Todd Hultman on Twitter @ToddHultman1

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