The outlook for higher commodity grain prices is far from rosy, no matter how you go about the analysis. That was the picture that Matt Hines, an analyst and trader with Loewen & Associates, painted for corn, sorghum and wheat growers attending the annual Kansas Commodity Classic in Manhattan on Feb. 8.
What the fundamentals show, he said, is a world awash in grain, as world ending stocks of corn, coarse grains (which include sorghum) and wheat have all climbed steadily over the last three growing seasons.
Wheat, especially, is in oversupply, with the stocks-to-use ratio climbing to 53% for the 2015-2016 crop year.
He added that things can change if there is a disaster somewhere in the world — hopefully, someplace other than the U.S. — that would wipe out some of the expected supplies in the next growing season.
Technical analysis, which takes things like market chaos, funds trading, weather in the U.S. and around the world, disease, science and technology development, and information flow into account, shows a slightly better outlook with an upward trend in prices for corn, sorghum and wheat between last December and March futures prices.
December corn futures are at $4, and it is reasonable to expect that to be the December price for next year's corn crop, he said.
"I don't think $5 corn is very likely," he told farmers in the room. "But I do think that $4 corn is quite possible. And it looks like exports will be the second highest in the last 10 years in spite of the fact that the dollar is very strong. We can credit that to the demand that we have built for U.S. corn."
The hedge fund moves into and out of the market provide liquidity for the market but can also drive prices higher or lower than they should be, based on the fundamentals.
"Information flow is a significant factor," he said. "It used to take me several minutes to place a trace and have it filled. Now it is a matter of seconds as everything is done electronically."
Addressing non-convergence issue
Hines said there continues to be an issue with the Kansas City hard red winter wheat contract and a failure of futures and cash prices to converge — a problem that has been created by an oversupply of wheat and a lot of feed-quality wheat.
To fix the problem, he offered a range of ideas.
One way would be to require that all elevators that would like to participate in the delivery process issue warehouse receipts or delivery certificates when requested to do so.
Another plan would be a tightening of the quality specifications to require milling-quality wheat with higher protein levels.
Adding variable storage rates similar to those for Chicago wheat contract might also be a solution, Hines said.
A final solution would be the addition of more delivery locations, especially locations that could help southwest Kansas and northwest Oklahoma, he said.
Current hard red winter wheat delivery locations include Salina, Wichita, Kansas City and Hutchinson.
Any of the potential fixes, he said, would require action by the Chicago Mercantile Exchange and potentially from the Commodity Futures Trading Commission at the federal level.