US­ING CHARTS AND FUN­DA­MEN­TAL ANAL­Y­SIS

DE­CLIN­ING GLOBAL GRAIN STOCKS IM­PROVE GRAIN FUN­DA­MEN­TALS.

Successful Farming - - YOUR PROFIT - By Al Kluis

Col­lege classes in fu­tures trad­ing were very dif­fer­ent in the 1970s than they are to­day. Back then, the classes I took were fo­cused on un­der­stand­ing farm pol­icy, the cur­rent farm pro­gram, and the dif­fer­ent acreage se­ta­side poli­cies. We also stud­ied U.S. grain fun­da­men­tals and re­viewed dif­fer­ent sup­ply-and-de­mand al­ter­na­tives. We would then look at dif­fer­ent sce­nar­ios and the im­pact dif­fer­ent yields would have on end­ing stocks and the re­sult­ing price.

In my first year out of col­lege, I met a vet­eran com­mod­ity bro­ker who helped me open my first trad­ing ac­count. Then he changed my life: He in­tro­duced me to chart­ing. Be­cause of my col­lege train­ing, I was ini­tially skep­ti­cal. How­ever, within 30 days, I was hooked. I read ev­ery­thing I could about chart­ing and worked with this vet­eran bro­ker for the next decade. I started keep­ing hand­drawn daily charts for all of the grain mar­kets. Now, I have a spe­cial cab­i­net to store all of the charts I built over the last 44 years.

The charts I use and the long-term cy­cles I watch sug­gest to me that corn and soy­bean prices will move higher posthar­vest 2018, while wheat prices are more likely to move lower as I look ahead to 2019.

I use a com­bi­na­tion of fun­da­men­tal and tech­ni­cal anal­y­sis when mak­ing my long-term price pro­jec­tions and when build­ing my master mar­ket­ing plan. This is a mar­ket­ing plan that I cre­ate for my cus­tomers.

A re­view of longterm global fun­da­men­tals

The monthly re­ports show the in­ven­to­ries of global grains were very tight when the grain mar­kets put in the ma­jor highs in the third quar­ter of 2012. Then, for four years through the third quar­ter of 2016, the pro­jected end­ing stocks of corn and soy­beans be­came larger and larger. It is not sur­pris­ing that from the third quar­ter of 2012 to the third quar­ter of 2016 global grain mar­kets went lower. Prices did not go straight down, but rather, they ground lower for four years. By the time prices bot­tomed out, grain prices were down by over 50%. The $8 corn dropped to less than $3, soy­beans went from $17 to less than $8, and wheat prices went from $12 to $5 per bushel.

In 2015 and 2016, I started to no­tice a new pat­tern. Even as global sup­plies were in­creas­ing, global end­ing stocks were about un­changed or were mov­ing lower. This sig­naled im­prov­ing de­mand. The in­creased de­mand was be­cause of the lower prices and in­creased eco­nomic growth. That was the first fun­da­men­tal sig­nal to me that grain prices could be mak­ing a ma­jor low and get­ting ready to turn around. When I look at global in­ven­to­ries, the num­bers are hard to com­pre­hend. Global end­ing stocks of wheat reached 8.8 bil­lion bushels. Corn is over 8.2 bil­lion bushels; soy­beans are at 2.8 bil­lion bushels.

A bet­ter way to an­a­lyze these num­bers is to look at the stocks-to-use (SUR) ra­tio. The SUR ra­tio shows how much you have leftover com­pared with what you are us­ing. The smaller the ra­tio, the more pos­i­tive it is for price. The larger

the ra­tio, the worse for price, be­cause it shows too much in­ven­tory.

In 2015 and 2016, the SUR for corn was 26%, soy­beans were 22%, and wheat was 33%. The charts that I have built show global corn stocks are mov­ing lower. The most re­cent USDA re­ports show a SUR of just 14% for corn. For global soy­beans, the num­ber is very large with a pro­jected SUR of 16%. Wheat has had a dra­matic shift, but still there is a large global SUR for wheat.

what it means for prices

It means it is very easy to be bullish on corn for the next two years. Any pro­duc­tion prob­lems any­where in the world will send prices higher, pos­si­bly sharply higher.

For soy­beans, the trade and tar­iff dis­agree­ment with China has cre­ated some huge U.S. car­ry­over pro­jec­tions. How­ever, when I look at the global num­bers for soy­beans, they are still pos­i­tive. I am longer-term op­ti­mistic for soy­bean prices.

Wheat prices had a huge rally in 2018. That will buy a lot of wheat acres all over the world in 2019. I have a lot of my 2018 wheat sold and will con­sider get­ting more 2019 wheat hedged on any rally into Novem­ber. I may even con­sider some 2020 hedges. I am bear­ish on U.S. and world wheat prices as I look ahead over the next two years.

How should this im­pact your 2018 mar­ket­ing plans? Even with im­prov­ing global fun­da­men­tals, ex­pect sea­sonal highs and lows to de­velop in the grain mar­kets. That is based on crop de­vel­op­ment in the south­ern hemi­sphere

this win­ter and in the U.S. in the spring and sum­mer of 2019. I have 40% of my 2018 corn and soy­beans sold ahead with hedges and an­other 20% to 40% of the crop pro­tected with puts. I plan to store the re­main­ing in­ven­tory into the March through July sea­sonal rally.

My ini­tial price tar­get for July 2019 corn is at $4.40. For soy­beans, my ini­tial tar­get is at $10.20. For wheat, I used the Au­gust rally to get up to 80% of my 2018 wheat sold and have hedges in place on 30% of the 2019 wheat. If the wheat rally con­tin­ues into Novem­ber, then I will have all of my 2018 wheat sold and up to 60% of the 2019 hedged ahead with the bal­ance pro­tected with puts.

I am op­ti­mistic over the long term, but I also see the need to have a re­al­is­tic price plan with spe­cific tar­gets in place.

If you would like to learn more about USDA re­ports, go to kluis­com­modi­ties. com/us­dare­port/ to reg­is­ter for my on­line class, How to Un­der­stand USDA Re­ports.

This chart shows the last three years of global corn pro­duc­tion, us­age, and the pro­jected end­ing stocks. The last USDA Sup­ply and De­mand Re­port shows an­other 1-bil­lion-bushel drop in global corn end­ing stocks down to 6.2 bil­lion bushels. The global stocks-to-use ra­tio for corn is down to 14%, the small­est in the last decade.

This chart shows the last three years of global wheat pro­duc­tion, us­age, and the pro­jected end­ing stocks. The last USDA Sup­ply and De­mand Re­port shows end­ing stocks about un­changed from last month but down nearly 500 mil­lion bushels from last year. The global stocks-to-use ra­tio for wheat is still quite high at 35%.

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