Todd's Take

At times like these when corn and wheat supplies are abundant, and there seems to be no end to the rising surpluses, I often think of a statistic I once noticed in the crude oil market. Many may remember that spot crude oil prices traded above $140 a barrel in the summer of 2008 and dropped below $30 a barrel in early 2016, but few could guess how small of a market imbalance caused those extreme prices.

It seems hard to believe, but when oil prices started soaring in 2007, world oil production was running just 1% short of demand, and then balanced out in early 2008 as prices peaked.* Last year's low below $30 came after world production exceeded demand by 2% in 2015.** The small trickle of supply differences just doesn't seem like much in the grand scheme of things.

Grain prices aren't wound as tight as the oil market described above, but much like oil, it doesn't take much of an imbalance to get prices moving. The 1985-86 crop year stands as the most bearish corn imbalance in recent history, with world corn production beating demand by 14% that season. Since then, the biggest production surplus for one year has been 5%, achieved back in 1992-93.

As painful as the current bear market of low corn and wheat prices is for producers, with USDA predicting a fourth consecutive year of lower net farm income, the current situation has been more a case of steady water torture than big production surpluses.

In corn, world production exceeded demand by 2.2% in 2013-14 and by 3.6% the following year. 2015-16 was a neutral push and 2016-17 is expected to have a production surplus of less than 1%. Corn's low prices are stimulating demand and are already providing enough incentive to turn the bearish tide, but as usual, the final price outcome will depend on this year's weather.

As much as drought is known for its ability to turn prices bullish, it doesn't always take that drastic of an event to change the direction of prices. Even when current supplies are high as they are for wheat now and were for corn in the mid-1980s, a modest production deficit can lift prices.

And that brings us to the main point. If we are only focused on the size of the ending stocks, it's easy to overlook the importance of shifts in the balance between production and demand. So far, we have seen four consecutive years where corn and wheat supplies were either being added to the market or stayed neutral. It would not take a lot to shift that trend in 2017, and that is what I will be paying attention to as new-crop estimates take shape later this year.

Grain prices aren't as responsive as oil when it comes to changes in the flow of supplies, but for both grains and oil, the lesson is the same: These markets hang in a delicate balance.

* U.S. Energy Information Administration's Short-Term Energy Outlook, July 2008 at: https://www.eia.gov/…

** U.S. Energy Information Administration's Short-Term Energy Outlook, February 2016 at: https://www.eia.gov/…

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

Follow Todd Hultman on Twitter @ToddHultman1

(BAS/AG)

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