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Agriculture commodity traders see a good 2017, despite possible demand risks

Non-GMO corn is harvested with a John Deere 9670 STS combine harvester in this aerial photograph taken above Malden, Illinois.
Daniel Acker | Bloomberg | Getty Images
Non-GMO corn is harvested with a John Deere 9670 STS combine harvester in this aerial photograph taken above Malden, Illinois.

Key agricultural commodities hit multiyear lows last year after several years of strong harvests, but some experts have a mildly optimistic outlook for 2017.

The case for the better outlook comes despite challenges that include a global glut of major ag commodities; bird flu problems outside the U.S. that could hamper feed demand; and the possibility of President-elect Donald Trump changing policy on ethanol, given that a sizable share of the nation's corn and soybean supplies are used to produce biofuels.

"In general, I think the commodity complex is poised to move higher," said Robert Chesler, vice president of the foods group at INTL FCStone, a Chicago-based commodity-risk management company. He sees "more piling into commodities again as an asset class," and also noted that many commodities are generally at "relatively low prices on a multiyear basis."

Some traders remain cautiously upbeat on the ag commodity outlook despite last month's U.S. Department of Agriculture crop production report showing that a global bumper crop is expected of corn, wheat and soybeans; a possible shift in acreage from corn to soybeans this year by American farmers could present additional downward price pressures if soy demand isn't met.

China's appetite for American soybeans was exceptionally strong last year and U.S. exports set a record. China uses some of the soybeans for feeding livestock, including for its growing hog production.

"We're definitely optimistic on grains and oilseeds," said James Cordier, president and head trader of OptionSellers.com, an investment firm in Tampa, Florida. That said, he doesn't expect agriculture to be the big star in the commodity space but is still upbeat on the prospects for corn and soybeans to have a "20 to 25 percent rally this year."

While Chicago-traded corn was down almost 2 percent in calendar 2016, the March contract was up just over 1 percent at $3.5575 a bushel Tuesday, its third session in a row of gains. Meanwhile, the soybeans March contract on Tuesday was off just under 1 percent at $9.9625 a bushel for the forth downbeat session in a row.

"The very beginning of the year is a telltale sign of where investors think the markets have the most value," said Cordier. "They usually do a good projecting where demand is going to be [later in the year]."

Another determinant of crop prices will be the weather. As always, it can lead to volatile prices during the growing season.

"It's really going to be a weather-dependent market in corn going forward," said Ted Seifried, vice president and chief market strategist with Zaner Ag Hedge in Chicago. "We do have good demand, but supplies are plentiful after three years of record or near-record crops."

"Whether China opens the stock floodgates or not will be a major price driver in cotton and sugar — and potentially also in corn, soybean or vegetable oil — markets in 2017." -Rabobank agriculture outlook report

During 2016, floods in Argentina resulted in supply estimates getting slashed due to the rains hitting during the start of the soybean harvest — which led to a soybean rally in May and June. And Brazil had drought problems last year that impacted its so-called safrinha corn crop and led to shortages and a corn rally in the early part of the summer.

Nevertheless, global grain and soybean stockpiles remain high, particularly in China, according to the USDA. China holds around half of the world's stock of corn and relies mostly on South America for new supplies; similarly, the communist nation holds about 40 percent of the global stocks of wheat and approximately 20 percent of the soybeans.

Moreover, China is contributing to the worldwide glut of cotton given it holds an estimated 60 percent of the supplies. China also has large stockpiles of the world's sugar.

"Whether China opens the stock floodgates or not will be a major price driver in cotton and sugar — and potentially also in corn, soybean or vegetable oil — markets in 2017," Rabobank said in its recent agriculture outlook.

The Rabobank report noted that managed funds were especially active last year in commodities like sugar, coffee, cotton and soybeans. "This is unlikely to change in 2017, as interest rates are expected to rise only very slowly, keeping investors looking for higher returns," the bank said.

"With a large increase to corn ending stocks in 2016, which hit the highest level since the 1980s, there is a need to lower production in 2017 in order to improve grain prices to more profitable levels for producers," said Rabobank.

In this Monday, Dec. 26, 2016, photo, health officials wearing protective suits carry a sack containing killed chickens after they were slaughtered at a chicken farm where a suspected case of bird flu was reported in Incheon, South Korea.
Yun Tae-hyun | Yonhap | AP
In this Monday, Dec. 26, 2016, photo, health officials wearing protective suits carry a sack containing killed chickens after they were slaughtered at a chicken farm where a suspected case of bird flu was reported in Incheon, South Korea.

Elsewhere, South Korea is grappling with both a deadly bird flu outbreak and a political crisis. Other strains of the highly contagious virus have been found elsewhere in Asia, including China and Japan. All told, the outbreaks and growing number of culled birds could reduce demand for poultry feed ingredients such as corn and soymeal.

"We don't expect the [corn] demand to improve globally anytime over the short or medium term due to the bird flu outbreaks outside the United States," said Terry Reilly, a senior commodity analyst at Chicago brokerage Futures International. "South Korea has already seen the blunt of it with more than a quarter of their bird flock culled."

The bird flu problems are also a worry in Western Europe, including France — the EU's largest poultry producer — where authorities on Monday confirmed more infections. The Netherlands and Germany also have reported cases of the bird flu.

Reilly believes corn could stay higher in the first quarter but then might start turning lower. He's much more bullish on the prospects for wheat futures.

"The wheat price has the best chance for appreciation out of the major [ag] commodities given that they hit multi-year lows recently," Reilly said. The analyst adds that recent dryness in the Great Plains region could trigger impacts, including a chance the USDA may report winter wheat seeding down slightly compared with a year ago.

Then again, some point out the key ag commodities such as corn, soybean and wheat as well as dairy and meat products remain vulnerable to the strong dollar because it makes the American ag products less competitive in the global marketplace. In wheat, for example, Ukraine has made major inroads as an exporter to India.

As for corn, it could be influenced by how crude oil performs in 2017 — and the uncertainty surrounding the ethanol mandate in a Trump administration.

Around 40 percent of the country's corn supply was used for biofuels in late 2016, according to the USDA. The portion of soybeans going to biofuels isn't as large but still represents just over 20 percent of the supply.

Trump's selection of former Texas Gov. Rick Perry as Energy Secretary and Oklahoma Attorney General Scott Pruitt to be the head of the U.S. Environmental Protection Agency is seen by some analysts as a threat to alternative transportation fuels like ethanol and biodiesel since both of them are viewed as pro-oil. In 2008, Perry called the ethanol mandate "the biggest scam that's ever come along."

The EPA could reduce its ethanol volume requirements under the Renewable Fuel Standard.

One thing some industry analysts don't appear worried about now is President-elect Trump causing trade war that would hurt American ag exports to China.

"China's appetite for soybeans is so strong I don't think they can completely cut the U.S. out of the import plan," said Seifried.

He said the export situation with China from a corn perspective "doesn't really get much worse because we're not really exporting much corn to China." On the other hand, if trade relations get better with China he believes there could be a "significant upside potential for corn."