It’s March Madness time.
Sure, there’s a basketball tournament, but we’re talking markets here. It’s time to fill out the brackets of your marketing plan for 2017 crops, to map out the promises and perils of an uncertain year.
Every year is filled with uncertainty. That’s just agriculture. But the risks and rewards of this growing season seem amplified by the new Trump administration, which promised to shake things up and appears to be doing just that. From trade and global politics to markets and weather, key factors could boost your bottom line, or push it into the red.
Here’s cheat sheet on what to watch for — from the first tip-off of the growing season, right through the big dance at harvest.
Once source of madness for markets in March is as sure as the NCAA tournament for basketball: USDA’s March 31 reports. The agency’s first official estimate of 2017 planting intentions and March 1 grain stocks should set the stage for spring markets.
Our January survey found farmers readying to plant a record 90.5 million acres of soybeans, slightly more than corn, one of several crops losing ground due to low profits. Farmers haven’t planted more soybeans than corn since 1983, when a government program idled acreage.
Confirmation of a huge shift in acreage could derail the soybean market, or possibly trigger a rally in corn to persuade growers to plant more. Both markets can have a tendency to top out in the days before or after the reports.
The grain stocks data could also generate surprises, especially for soybeans. USDA estimates that vary significantly from traders’ guesses could be a sign the 2016 crop was bigger or smaller than previous estimates.
Some growers will already be putting in corn by the time the USDA reports come out. Initial planting dates for crop insurance start to fall in key states quickly in April, when USDA resumes weekly crop reports.
Weather is always the biggest market mover — and the biggest unknown for farmers. This year that may be even more true than normal. Thank the El Niño–La Niña cycle for that.
The weak La Niña cooling of the equatorial Pacific underway during the fall and winter is officially over. While La Niña is associated with some of the big droughts in the U.S., these transitions sometimes cause trouble, too. And some forecasters believe the El Niño warming phase of this cycle could return by winter, which could pose a threat to crops from Australia to Malaysia and Indonesia.
Forecasting weather months in advance is always problematic. So far, long-range models are mixed. Some suggest heat and dry conditions may be limited to the Southern Plains and Delta. Parts of the eastern Corn Belt could be dry, but temperatures for the Midwest don’t look threatening. Other models call for a somewhat warmer-than-normal summer, but normal rainfall.
Corn and soybean yields came in above normal in each of the past four years. Over the past 40 years, soybean yields never were better than average five years in a row. Corn did manage the feat once, posting six good years in a row from 1996 to 2001. In fact, in the decade from 1996 to 2005, below-normal yields occurred only once.
The Trump administration set off alarms with U.S. farm groups in January by suggesting that a tariff on goods from Mexico could pay to build a wall between the two countries. That may just be an opening statement as the president tries to renegotiate NAFTA. But it has a potential impact akin to the infamous Russian grain embargo imposed by Jimmy Carter should Mexico retaliate.
Mexico edged out Japan as the largest buyer of U.S. corn the last three years, accounting for a quarter of total exports. It’s also close to becoming the largest wheat importer, and ranks second behind China in soybeans, sorghum and dried distillers grain with solubles (DDGS).
NAFTA and proximity give U.S. growers an advantage, but there are plenty of other sources for these commodities. Ocean freight rates are cheap, and Mexico has already turned to nontraditional suppliers for wheat, including Russia, Ukraine and even France.
Still, it’s far from clear how this Mexican standoff will play out. And it could even have a positive short-term benefit, if Mexican buyers get nervous and decide to push purchases forward, just in case.
War and peace
China could be front and center for trade disputes, too. President Donald Trump gave new voices to those in the U.S. who long complained about the country’s economic policies. If China is officially labeled a currency manipulator, Beijing may up the ante.
U.S. farmers know what that feels like. U.S. corn exports to China are all but nil, as the government deals with a massive surplus. It’s already expanded this action to DDGS, accusing the U.S. of dumping. The latest victim could be ethanol, as China tries to beat down imports to protect its domestic industry — and get rid of some of its corn stockpile.
Soybeans are probably safe from restrictions, simply because China can’t get all it needs from South America. But it would be easy enough to make a few threats, which would probably let Chinese buyers pick up a few bargains, too.
Geopolitical risks could also surface. Trump’s overtures toward Taiwan frayed regional relations, which were already strained when China built artificial islands in the South China Sea. Those could be a prelude to military bases or territorial claims in key shipping lanes.
Then there’s Russia. From Ukraine to the Baltic states, Europeans are nervous about Vladimir Putin. Trump’s early embrace of the Russian president, along with ties of key administration officials to the country, could lead to peace, or perhaps increased international tensions.
British voters’ decision to leave the European Union rocked markets in June, just one in a series of election surprises around the world. Nine months later, Prime Minister Theresa May is expected to being negotiations by the end of March to put Brexit into effect. The divorce could get ugly, perhaps bleeding over to populist movements in other countries. France holds presidential elections April 23, and National Front candidate Marie Le Pen could make it to a runoff May 7. Her victory would be a surprise bigger than Trump’s, likely unsettling markets.
Germany holds elections Sept. 24, and Chancellor Angela Merkel faces her own challenges. Immigration is an even bigger issue in a country that opened its
doors to Syrian refugees, creating a backlash and an anti-immigrant party that’s done surprisingly well in some local elections.
Financial problems among other members of the European Union are still playing out as well. Troubles in Greece, Spain, Italy and Portugal have been on the back burner but could grab headlines just about any time.
Despite these concerns, growth in the Eurozone is picking along with inflation. That could persuade the European Central Bank to begin winding down its program of financial stimulus, perhaps strengthening the common currency against the dollar.
Breaking the buck
The U.S. dollar is a symbol of American strength. But the greenback’s value is often at the center of storms in financial markets around the world. Trouble is, one day a strong dollar can be good for grain markets, while the next day it’s negative for prices.
Trump wants to increase U.S. exports and curb imports. One tool in the battle is the dollar. A weaker dollar encourages exports of U.S. manufactured goods that have fixed prices, though it has little proven impact on grain exports, according to our research.
Trump accuses U.S. trading partners — from Germany to China — of manipulating their currencies to boost exports. So attempts to hold down the dollar could trigger disputes with those countries, unnerving financial markets that can spill over into the grain trade.
A weaker dollar could increase U.S. grain prices, because they’re denominated in dollars. It could also impact countries that compete with U.S. farmers for exports. A stronger real, for example, could lower returns for Brazilian farmers, whose soybeans are often priced in dollars. That could lower incentives for them to expand.
Still, it’s hard to see how the currency wars play out. Limiting trade could weaken the dollar. But if the U.S. trade deficit grows a lot smaller, it would tend to add strength to the greenback. Higher interest rates also can increase the value of a currency, which could come under pressure if tax cuts and infrastructure spending increase budget deficits. It’s little wonder volatility in currency markets is on the rise, doubling over the past two years.
Interest rate hikes
The Federal Reserve in December signaled potential for three small interest rate hikes this year. The first could come as soon as the central bank’s next meeting, which ends March 15. Barring news of explosive economic growth (or decline), the Fed generally makes any changes once a quarter, when economic projections of meeting participants are also released and Chairwoman Janet Yellen holds a press conference. If a bump doesn’t come in March, the pressure will be on for an increase at the conclusion of the June 13-14 meeting.
Once upon a time, this third interest rate hike since the Great Recession would have been seen as a bearish sign — the so-called “three steps and a stumble” rule that foresaw falling stock prices. That type of sell-off could easily spill over into the grain market. But an interest rate increase could also be seen as a positive sign that the economy is getting back to normal.
Key indicators, especially into the June meeting, could tip the Fed’s hand: Inflation around 2%, unemployment closing in on 4.5% and GDP growth above 2% could pave the way for a hike.
Wall Street blues
Everybody loves a party. Both stocks and commodities rallied after the election, with Wall Street making new records into February. Hopes for faster economic growth caused investors to buy both. Money managers held a record amount of crude oil futures contracts this winter. Big speculators bought crops and livestock, too. Institutional investors like pension funds turned to commodity indexes, pushing their holdings in agriculture to the highest level in more than two years.
Farmers have been to this dance before. Parties are great fun at first, providing opportunities to sell for profitable prices. But when the mood turns sour, prices often fall much, much faster than they rise.
There are hopes this latest rally could have legs, but the road ahead is filled with potholes. Springtime could be perilous. “Sell in May and go away” is one of the commonly cited patterns in the stock market. Investors often book profits before summer, and then head to the Hamptons. If corn and soybean planting goes well, this can exacerbate selling into the Memorial Day weekend and early June.
OPEC and company
The decision by the energy cartel and its allies, including Russia, to cut production sent crude oil futures to two-year highs earlier this year. Whether this bull has legs could depend on the consortium’s often unfriendly members sticking to their pledges.
That issue could come to a head in the days leading up the next big OPEC meeting May 25 in Vienna. Look for a series of headline-making events as oil ministers bicker about who’s cheating on the deal, and whether further reductions are needed to support prices.
The collapse in crude oil prices to 13-year lows early in 2016 came because Saudi Arabia abandoned OPEC limits to pump flat out, trying to drive North American producers out of business and regain market share lost to the oil sands of Canada and shale fields of the U.S. That tactic worked, but the new OPEC cuts raised prices high enough to lure U.S. producers back into business.
Global supplies of oil are expected to slowly fall for the first half of the year, when U.S. production begins refilling the pipeline. Prices also have a tendency to peak in anticipation of the prime summer driving season, making May a crucial time for the market.
Oil is produced in a lot of places where bullets are more common than ballots, and the Middle East remains a powder keg. A crude market that blows up could take the grain market along for the ride, or cause a financial panic that has the opposite effect.