Newsom on the Market

By Darin Newsom
DTN Senior Analyst

How many of you are old enough to remember Roger Miller's silly song this column was titled after? OK, I see a few hands go up. The rest of you likely have no idea how seemingly nonsensical the different verses were; including such things as swimming in a baseball pool, showering in a parakeet cage, and driving around with a tiger in your car. But each crazy verse ended with a line we should remember this day after Thanksgiving, a line we should carry with us as we continue to face difficult markets heading toward the end of another year: "But you can be happy if you've a mind to."

Now, as you read the new verses I've written for the grain markets, read the appropriate lines in the rhythm of the original song. Again, those of you who have no idea how it goes, it's a quick internet search away. Just make sure you look for Miller's version. So, here we go:

"You can't buy wheat with the greenback going up (repeat two more times)." In ascending order, grains are usually affected by moves in the U.S. dollar index (USDX) with corn the least, soybeans more than corn, and wheat the most of all. Why is that? First, the U.S. remains the Big Kahuna in the corn market. In its November WASDE report, USDA estimated U.S. corn exports accounting for 39% of the world's total exports. By comparison, U.S. soybeans were pegged at roughly 40% with wheat bringing up the rear at 15%.

Aye, there's the rub (to quote another great wordsmith). As you look down the list of major wheat exporters in the WASDE report, you see the U.S. is competing against Australia, Canada and the European Union when it comes to total metric tons. The former Soviet Union exports roughly double what the U.S. does, a factor that won't likely change any time soon, so will be set aside for now.

The key is the USDX itself: an index of the U.S. dollar's value against key foreign currencies, including the euro and the Canadian dollar. Think of it this way: As the USDX goes higher, like it has since the U.S. presidential election, wheat of key competitors (EU, Canada) gets cheaper on the global export market. And with the USDX expected to rally to the 107.00 to 108.00 range over the next year (see my Technically Speaking blog from November 16), well..."You can be happy if you've a mind to."

"You can't sell beans on bearish ending stocks (repeat two more times for emphasis)." Let's return to the November USDA Supply and Demand and WASDE reports. On that day after the election, with sleepless eyes, I had to double and triple check what I thought I saw. Sure enough, U.S. soybean ending stocks were pegged at 480 million bushels, the largest figure since USDA made its original guess of 500 mb for the 2015-2016 crop back in May 2015. And if that weren't enough, the WASDE report contained a global ending stocks figure of 81.53 million metric tons, easily surpassing the previous all-time high of 78.6 mmt from the 2014-2015 marketing year.

The January futures contract closed that day at $9.91 with the DTN National Soybean Index (NSI.X, national average cash price) calculated at $9.15 3/4. As of this writing, Jan futures have stretched to a high of $10.33 3/4 while the NSI.X jumped to $9.57.

The question is, why? First, export demand remains strong. As of a week ago, Thursday's weekly Export Sales and Shipment report (for the week ending Thursday, Nov. 10), U.S. soybean total sales (combined outstanding sales and total shipments) were running 25% ahead of the previous marketing year's pace. Now compare that to USDA's November projected total export demand year-to-year increase of 6%. History shows that, for whatever reason, USDA systematically underestimates demand for U.S. soybeans. Perhaps the market has evolved to realize that as well. Using history as a guide, it could be argued next September's Quarterly Stocks report could show soybeans around 170 mb.

But many things will happen between now and then, including the little problem of a possible trade war with China following the next presidential inauguration in late January. "But you can be happy if you've a mind to."

"You can't wake corn no matter what you do (again, repeat two more times)." Maybe it's good, maybe it's bad; but corn has once again become the sleepy market we all knew so well prior to the eruption of the demand-driven days back in the fall of 2006. But yet what happens in the corn market has a ripple effect on the entire ag industry (recall my talk of corn's domino effect from the annual DTN/The Progressive Farmer Ag Summit circa 2013). For that reason, we can now call King Corn the Comatose King.

After posting a low of near $2.80 in October 2014, the DTN National Corn Index (NCI.X, national average cash price) initially rallied to a high of near $4.05 by July 2015. Though looking like a major (long-term) uptrend in cash corn had set in, it was not to be. The NCI.X eroded back to consistently lower monthly lows between $3.30 and $3.20 through March 2016, before popping again to $4.00 this past June. Since then, well, we know what's happened as cash corn ground down to a new low of $2.73 during August. But, even the Comatose King can roll over, and it appears he has with the NCI.X back above $3.10 this week. But 40 cents isn't much in the grand scheme of things, not when we're dealing with record production pegged by USDA in November at 15.2 billion bushels and ending stocks at a whopping 2.4 bb. It's a lot of corn that needs to see increased demand, at a time when trade deals with a key buyer (Mexico) are being threatened.

"But you can be happy if you've a mind to."

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Editor's note: This week we share Darin Newsom's thoughts with all our readers. DTN subscribers regularly see Newsom on the Market columns each Friday. Information on becoming a subscriber can be found under the DTN Sites & Products tab at DTNPF.com

Darin Newsom can be reached at darin.newsom@dtn.com

Follow Darin Newsom on Twitter @DarinNewsom

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