Swallowing the frog

Source: By Doug Rich, High Plains Journal • Posted: Wednesday, February 24, 2016

The best statement made about the current market situation for grains at the Kansas Commodity Classic came from Chris Novak, CEO of the National Corn Growers Association. Novak said if you eat a live frog first thing every morning, it can only get better from there. That pretty much sums up the grain market right now—it can only get better from here.

The second best statement came from Darrell Holaday, market analyst with Country Futures, when he said his presentation was for mature audiences only.

“Those of you who were here last year don’t say I didn’t warn you, because I did,” Holaday said.

Holaday said the problem right now is cheap money. Cheap money distorts value. All central banks are caught in the same place with interest rates near zero.

“We are paying for that cheap money now,” Holaday said.

Holaday told producers at the Kansas Commodity Classic to get over the mentality that they are the only ones in the world that can grow corn because they are not. The Black Sea region is poised to become the largest exporter of corn in the world. The United States is not a major player in the world wheat market anymore, controlling less than 10 percent of the market. There is international competition for all of the grain markets.

“The market does not care what your cost of production is, just look at the crude oil industry today,” Holaday said. “Don’t assume that prices can’t for lower. It will go beyond equilibrium. The market will stay irrational longer than you can stay liquid.”

Holaday projects the September-October future low for wheat to be $3.85 to $4 a bushel, the November future low for corn to be $2.85 to $3 a bushel and the futures low for soybeans in October to $7.00 to $7.20 a bushel.

“We have seen this before,” Novak said. “Buckle down, cut costs and work with your banker to restructure debt. The market will come back.”

NCGA has developed a new strategic plan that is looking for ways to build demand in a supply driven market. Increasing ethanol production is one way to build demand for the corn crop.

“We are competing with an old industry that controls the end of the pump,” Novak said. “They control consumer access to the type fuel they put in their vehicles. Without the Renewable Fuels Standard we would never have broken that monopoly the oil industry has over how you are going to run your vehicle.”

The RFS mandate helped establish the ethanol market in this country, and Mike Dwyer, chief economist for the US Grains Council, said that mandates are needed around the world to increase global ethanol market.

“Setting up mandates in other countries is the key,” Dwyer said. “Without mandates there is no ethanol industry. I think the ethanol market outside the United States and Brazil is ripe for the picking.”

Dwyer said we don’t sell a lot of meat or feed grains to India but it has potential as a market for ethanol. The new transportation minister in India wants to take the country to an E-20 blend for ethanol. They are currently stuck at E-3.

“If they set up their policies, then can quickly get to an E-10 blend,” Dwyer said.

“If you develop a demand for ethanol anywhere in the world the most competitive supplier today and in the near future is going to be the United States,” Dwyer said.

Chris Novak said cities in India, China and across Asia are looking for ways to improve their air quality. Ethanol could be part of the solution.

“The market realities are there,” Tim Lust, CEO of the National Sorghum Producers, said. “It is not good right now but it will get better.”

NSP fought hard for a grain sorghum reference price to be included in the 2014 farm bill. Lust said this was not very popular with Kansas producers at the time. The $3.95 reference price for grain sorghum will put $28.5 million into the pockets of Kansas farmers this year based on current projections.

“Those are meaningful dollars to keep you in the game and keep you going,” Lust said.

Looking at sorghum exports the rumor has been that China is totally out of the market. That is not true, according to Lust. China has purchased about 16 percent less than it bought last year but it is 40 million bushels ahead of what grain the Chinese have taken year-to-date to where they were a year ago.

The stocks-to-use ratio for grain sorghum in the U.S. and world is very good.

“The sorghum picture looks pretty good,” Lust said. “It is all the other stuff hanging over the top that makes it a challenge.”

Grain sorghum has a ways to go when it comes to research and investment but Lust did have some good news on this front. Lust announced at the Kansas Commodity Classic that the U.S. Environmental Protection Agency has given its approval for registration of the active ingredient nicosulfuron that will complement the non-GMO DuPont Inzen herbicide trait for sorghum. Nicosulfuron is the active ingredient in Zest herbicide. This will give sorghum producers an over-the-top grass control for the first time ever. This process to develop this technology began 10 years ago in a lab at Kansas State University.

Dalton Henry, director of policy for US Wheat Associates, said there have been three years of back to back record world wheat production. This has contributed to a glut of wheat on the market and reduced prices for wheat. The underlying news is the upward trend of wheat consumption.

“I know it does not help today and it might not help next year, but we are on a good trend of being able to increase wheat consumption around the world,” Henry said. “We have added a 100 million tons of consumption in the last decade and we did that in one highest prices environments we have ever been in. That is new demand that has some staying power.”

Latin America and the Southeast Asia are two quality markets that are potential markets for U.S. wheat. Henry said the U.S. needs policies in place to make this happen. The Trans-Pacific Partnership is such a policy.

Chris Novak said TPP is the largest free trade agreement the U.S. has even been a part of and it will set the standard for trade in that region. Although China is not one of the 12 countries that have signed onto this agreement it will be influenced by TPP.

“This is not just another trade agreement,” Henry said. “It is designed as a platform to add other countries to in the future.”

Doug Rich can be reached at 785-749-5304 or drich@hpj.com.