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Todd's Take
Wednesday, June 20, 2018 8:59AM CDT
By Todd Hultman
DTN Analyst

After watching December corn drop over 40 cents and November soybeans fall more than $1.20 in the past three weeks, I understand why many readers won't want to hear what I have to say next. However, I wouldn't be much of a grain analyst if I didn't point out that the bearish elephant in the room is likely to become even more bearish as the year goes on -- the U.S. dollar index is rising.

I suspect most grain producers understand a rising U.S. dollar is bearish for grain prices, but the effects will be different for each market, something we'll explain in a bit. First, let's look at the context of these changes, starting with the Todd's Take of Nov. 7, 2017. (https://www.dtnpf.com/…) "Corn's Diminishing Hangover" showed how corn prices had a history of falling lower when world GDP growth fell below 3%.

Back in November, one of the few bullish factors for corn prices was that after five consecutive years of global growth below 3%, the International Monetary Fund was expecting higher rates of world GDP growth in 2017 and beyond. To go along with that, DTN's Economic Influence Index posted its highest close in more than a year on Nov. 3, 2017, its first indication of an uptrend in eight years. In case you don't recall, that index is a mix of gold and crude oil prices, which has a high correlation to grain prices (explained in the Todd's Take from Sep. 5, 2017, https://www.dtnpf.com/…).

With 10-year Treasury yields at 2.4% at the time, the combination of low interest rates and rising economic growth offered commodity prices a bullish economic environment for increased demand just as row crop prices were under pressure from large fall harvests. Three rate hikes later -- the latest of which arrived Wednesday -- the federal funds target is now 1 3/4% to 2% and the 10-year Treasury yield is 2.92%, just below the 2013 high of 3.04%.

Meanwhile, other major economies have mostly held pat on their interest rates and are not likely to announce increases anytime soon. On Wednesday, the Federal Reserve said it expects real GDP growth of 2.8% in 2018, a forecast that adds weight to the case for a higher U.S. dollar. There is a risk that U.S. trade disputes with its neighbors and China could dim the sunny economic forecast, but so far, it is difficult to find any indication of a slowdown in the U.S.

DTN's Economic Influence Index fell 9.88 points last week to 610.47 and is down from a new three-year high made roughly a month ago. The weekly stochastic has turned bearish, but the 2018 low of 588.06 has not yet been broken. In gold, the weekly trend is already down, punctuated by a new 2018 low on Friday. In crude oil, the August contract fell to $64.85 Friday and would need a close below $64.00 to turn the trend lower.

As I mentioned above, these major changes for grain and oilseed prices are bearish, but there are at least two reasons not to panic just yet. First, as the trade war with China heats up and NAFTA negotiations are not showing progress, it is still possible that U.S. GDP growth will underperform expectations in 2018. Second, each grain has a different story this year and will likely respond in a different way to a higher U.S. dollar, should it happen.

In the case of corn, Argentina's drought in early 2018 and Brazil's dry second crop both minimize competition for U.S. corn exports. The same also applies to USDA's lower crop estimate for the former Soviet Union in the June World Agricultural Supply and Demand Estimates (WASDE) report. USDA expects the world corn market to post another significant production deficit in 2018-19, meaning demand for U.S. corn should stay active in spite of a higher U.S. dollar.

For soybeans, I hate to say it, but current market conditions are so bearish that a higher U.S. dollar probably won't make prices go any lower than where they are already headed. This is due to the U.S. government's adversarial relationship with the world's largest buyer of soybeans. Adverse weather is currently the only bullish hope for soybean prices in 2018 and weather's potential far outweighs any bearish risk from a higher U.S. dollar.

Wheat is the one grain, most vulnerable to international competition, that would suffer the most from a more expensive U.S. dollar, should it happen. Consider how U.S. wheat exports only totaled 900 million bushels (mb) in 2017-18 when the global ending wheat stocks-to-use ratio was at its highest level in over two decades. Two years earlier, U.S. exports were even lower at 775 mb when the U.S. dollar index traded between 94 and 100 in 2015-16, roughly where the dollar seems headed in late 2018.

The outlook for grain and oilseed prices is currently bearish for the new-crop season, due largely to an early start of good growing weather and misguided enthusiasm of bullish speculators. Weather remains the most important influence on grain prices in 2018, but we also have to note the rising U.S. dollar and the potential bearish impact that it will have on commodities, grain and oilseed prices in particular.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman


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