I enjoy speaking at the Sioux Falls Farm Show each year and last week’s trip was no different. Held in late January, it is always a challenge to find enough information about grain markets to make a talk interesting. On the other hand, the quieter time of year gives us a good opportunity to review any lessons from 2017 and check my valuation model for 2018.
For any readers new to this space, the valuation model is based on a historical relationship of December corn futures prices and USDA’s cost of production estimates for corn, excluding land expense. In 2017, for example, USDA estimated $632.65 an acre of production costs, which included $159.67 an acre of land expense (USDA Commodity Costs and Returns data found here).
After we deduct land expense, corn’s variable production cost is $472.98 an acre, divided by the 2017 yield of 176.6 bushels an acre, to come up with a net cost of $2.68 a bushel. Looking back at the history of December corn futures prices, we see that in normal years when markets were not afflicted by unusual events, such as drought, prices typically traded between the previous year’s cost of production and a 50% premium to that cost.
Based on 2017 costs explained above, December corn futures in 2018 are expected to trade between $2.68 and $4.02 a bushel. For a simple method that can be calculated in January, long before we even know how many acres will be planted or anything useful about how the year will go, the model has been remarkably helpful, especially the past few years while corn supplies have stayed in surplus.
In 2015, the model anticipated a high of $4.47, which was reached in early July. In 2016, the model’s estimated high of $4.44 was just 5 cents below the actual top. In 2017, the model’s anticipated high of $4.24 was 7 cents too optimistic as December corn reached a high of $4.17.
The model’s price estimates on the lower end of the range have been out of reach the past three years. I credit that to a good demand environment for corn as livestock production has increased and ethanol production has been running high. This year’s low estimate of $2.68 a bushel may also be out of reach, but bearish concerns in 2018 include uncertainty about NAFTA and corn’s remarkable yield achievement in 2017.
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Corn’s competitive cousin, wheat, had a better year of pricing opportunity in 2017, but still has not been to the upper end of the model’s estimated range since 2014. According to USDA’s cost estimates, 2016 was the least profitable year in several decades for U.S. wheat producers as December Chicago wheat prices fell 32% below wheat’s landless production cost at one point.
For 2017, the model estimated a low and high of $3.68 to $6.44 in December Chicago wheat. Actual prices stayed inside that range, at $4.05 to $5.92, and were helped on the high end by drought in the northwestern U.S. Plains and western Canadian Prairie. Wheat’s higher prices didn’t stay long, though, as they continue to struggle with plentiful world supplies.
For 2018, the model’s parameters of 20% below cost to 40% above cost project December Chicago wheat prices from $4.10 to $7.18. With so much world wheat available, the $7.18 estimate on the high end seems a dollar or more too high. In recent years, the lower end of the model’s guesses have been more reliable and $4.10 is reasonable in this market environment.
Of the three crops, soybean prices have been the most difficult market situation to predict, but the model has done a decent job of providing high estimates in four out of the past five years. In 2016, the model anticipated a high in January soybeans of $11.68, just 14 cents below the actual high of $11.82 on June 13.
Last year, January soybean prices only reached a high of $10.54 1/4, 21 cents short of the model’s estimated high of $10.75 as the market anticipated record soybean acres early in the year and late-summer rains with milder temperatures helped out when crops needed it most.
The model’s low estimate for January soybean prices came close in 2015, but has not been reached since 2004 as world soybean demand has continued to grow at an aggressive pace. That may be true again in 2018, but we can’t overlook the bearish risk of increasing trade tensions with China.
Based on a 20% and 80% premium to USDA’s landless production costs for soybeans, the model projects a 2018 low of $7.49 per bushel in January soybeans and a high of $11.23. As of Monday, January soybeans were $10.13 3/4, just inside the upper one-third of the expected range.
Of course, there are no guarantees that something extraordinary won’t happen in 2018 and, if it does, these historical range estimates can quickly become obsolete. On the other hand, if 2018 turns out to be another uneventful year of good or good enough weather and outside events don’t disrupt our grain prices, the estimates above are apt to be good guidelines of what to expect.
Todd Hultman can be reached at email@example.com
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