On Thursday, July 12, at noon EST the U.S. Department of Agriculture released its monthly World Agricultural Supply and Demand Estimates report.
Each month, the report tends to stoke volatility in the agricultural markets as the USDA comments on crop progress and projects the future for inventories and demand. The July report comes during the heart of the growing season for many crops in the United States and the northern hemisphere. While the weather is the primary driver of prices at this time of the year and a change in the forecast for coming days and weeks can cause dramatic price volatility, this year an exogenous factor has been moving the markets that feed and clothe the world.
The United States has a long history as an agricultural nation. As the leading producer exporter of corn and soybeans, and a significant exporter of wheat the U.S. has long been the supermarket to a hungry world. Demographics when it comes to population and wealth growth around the world have increased demand for the crops that grow on U.S. soil. In 2000 six billion people inhabited our planet, and today that number stands at over 7.485 billion, a 24.75% increase in less than two decades. More people, with more money around the world, are competing for finite supplies of food each year. However, this year the U.S. has taken a firm stand on international trade with President Trump seeking more “reciprocity and fairness” with partners around the world. The President has singled out China, the world’s most populous nation as the most significant offender when it comes to trade. Over past months, the increasing tit-for-tat tariffs and retaliatory measures between the U.S. and China have hit the U.S. right in the farm belt, and prices have plunged. The July WASDE report came under the backdrop of the tariffs issue, and the weather and monthly report are taking a backseat to the news cycle on the trade issues.
I reached out to my friend Sal Gilberte, the founder of the Teucrium Family of grain and sugar ETF funds. Sal’s reaction to the July WASDE was as follows:
There is an opportunity in grain markets now that has been created by geopolitical hype and fear because the fundamentals of supply and demand are definitely not bearish, and fundamentals will eventually overtake the emotion-driven pricing regime now in place in grains and oilseeds. Here you go:
By including adjustments for the predicted effects of the implementation of new tariffs on agricultural products, the July 12th 2018 WASDE report reduced some of the geopolitical haze in the grain markets and clarified for investors the basic fundamentals that still remain: total global grain stocks will decline for the second consecutive year and total use (demand) will rise.
In global oilseeds, which include soybeans, production will rise year-on-year by nearly 3.3% and use will rise by almost 2.9%, net ending stocks (inventories) will actually fall by a tiny fraction.
It would seem that rising demand for both grains and oilseeds will not abate even in the face of the relentless political rhetoric, trade wars and tariffs that seem to have caused an unusually early seasonal and dramatic drop in grain and oilseed prices. Fundamentals will overtake the rhetoric over time; even with steady/rising output the current below breakeven price of grains is unlikely to remain in place given rising demand and declining inventories. Investors and end users would be wise to look closely at the opportunities now presenting themselves in the major agricultural markets.
I agree with Sal’s analysis, but these markets continue to be falling knives, so I would only approach them from the long side leaving plenty of room to add to positions on further price weakness.
Right now, the most bullish event for the grain and agricultural sector would not be a weather event; it would be a resolution to the trade issues.
Soybeans continue to make new and lower lows
As the daily chart highlights, November soybean futures fell to a new low at $8.2675 per bushel on Friday, July 13. Open interest has been gently rising which is a sign that trend-following shorts have joined then bearish party and are pushing the price of the oilseed lower. While price momentum remains bearish, it has declined into oversold territory. The USDA told the market:
This month’s U.S. soybean supply and use projections for 2018/19 include lower supplies, lower exports, higher crush, and higher ending stocks. Beginning stocks are reduced on increased exports and crush for 2017/18. Soybean production for 2018/19 is projected at 4.310 billion bushels, up 30 million on increased harvested area. Harvested area, forecast at 88.9 million WASDE-579-3 acres in the Acreage report, is up 0.7 million from last month. The soybean yield forecast is unchanged at 48.5 bushels per acre. Soybean crush for 2018/19 is raised 45 million bushels to 2.045 billion reflecting an increase in projected soybean meal domestic disappearance and exports. Domestic soybean meal disappearance is raised on lower soybean meal prices and increased livestock production. Soybean and product trade changes reflect the impact of China’s recently imposed soybean import duties in addition to other global oilseed supply and demand changes this month. U.S. soybean meal exports are raised to offset reduced meal exports from South America where higher soybean exports displace crush. Soybean exports are reduced 250 million bushels to 2.040 billion reflecting the impact of China’s import duties. Despite losing market share in China, soybean exports are supported in other markets as lower U.S. prices increase demand and market share. Soybean ending stocks for 2018/19 are projected at 580 million bushels, up 195 million from last month. The U.S. season-average soybean price is forecast at $8.00 to $10.50 per bushel, down $0.75 at the midpoint. Soybean meal prices are forecast at $315 to $355 per short ton, down $15.00 at the midpoint. The soybean oil price forecast at 28 to 32 cents per pound, down 1.5 cents at the midpoint. The 2018/19 global soybean supply and demand forecasts include higher production and lower trade and crush compared to last month. The tariff that China recently imposed on U.S. soybeans is expected to cause higher prices for soybeans in China and slower protein meal consumption growth. Lower demand and a year-over-year drawdown in stocks for China are forecast to result in reduced crush and an 8-million-ton decline for imports to 95 million. Parallel to this change is a 6.8-million-ton decline for U.S. exports that is partly offset by a 2.1-million-ton increase for Brazil. Planted area for Brazil for 2018/19 is expected to expand with higher prices resulting from increased trade with China, leading to a 2.5-million-ton increase in production to 120.5 million. With lower soybean crush and reduced soybean oil production, China is expected to increase imports of other vegetable oils, including soybean, palm, and rapeseed. Total global 2018/19 oilseed production is down 1.4 million tons to 592.6 million with a 4.3-million-ton increase for soybean production offset by lower rapeseed and sunflower. Rapeseed production is reduced 2.6 million tons with lower production for the EU, Australia, Ukraine, and Russia. In the EU, rapeseed production is lowered for Germany and the UK on persistent dryness while production is lowered for France on pest pressure. Sunflowerseed production is down 2.9 million tons mainly for Russia and Ukraine on lower yields from dry conditions.
The USDA reduced its price projections for soybeans and soybean products because of the tariffs issues facing markets.
Corn bounces after the report
As the daily chart highlights, December corn futures fell to a new low at $3.5025 per bushel on July 12, but they bounced to over the $3.60 level in the aftermath of Thursday’s report and were trading at the $3.55 level last Friday. Corn has declined into oversold territory on the daily chart. The USDA told the market:
This month’s 2018/19 U.S. corn outlook is for larger supplies, greater feed and residual use, increased exports, and lower ending stocks. Corn beginning stocks are lowered 75 million bushels as higher forecast exports and food, seed, and industrial (FSI) use more than offset lower feed and residual use in 2017/18. Increased 2017/18 exports are based on record-high shipments during the month of May and export inspection data for June. Current outstanding export sales are also record high. FSI use is raised as a projected 25-million-bushel increase in the amount of corn used for ethanol, based on reported use to date, is partially offset by a decline in the amount of corn used for glucose and dextrose. Feed and residual use is lower based on indicated disappearance during the first three quarters of the marketing year in the June 29 Grain Stocks report. WASDE-579-2 For 2018/19, corn production is forecast 190 million bushels higher based on increased planted and harvested areas from the June 29 Acreage report. The national average corn yield is unchanged at 174.0 bushels per acre. During June, harvested-area weighted precipitation for the major corn producing states was above normal. While silking, as reported in the Crop Progress report, is ahead of the recent historical average, for much of the crop, the critical pollination period will be during middle and late July. Projected feed and residual use for 2018/19 is raised 75 million bushels, mostly reflecting a larger crop and a forecast reduction in the amount of corn used to produce ethanol. FSI use is lowered 60 million bushels based on a 50-million-bushel reduction in the forecast amount of corn used to produce ethanol, and a 10-million-bushel decline in amount of corn used for glucose and dextrose. Exports are raised 125 million bushels based on expectations of reduced competition from Argentina, Brazil, and Russia. Small revisions are made to historical trade and utilization estimates based on the 13th month trade data revisions from the Census Bureau. With use rising more than supply, stocks are lowered 25 million bushels to 1.552 billion. The season-average corn price received by producers is lowered 10 cents at the midpoint for a range of $3.30 to $4.30 per bushel. Oat production is virtually unchanged and barley production is up 8 million bushels reflecting area adjustments in the Acreage report and higher barley and lower oat yields in today’s Crop Production report. Sorghum production is raised based on the higher area reported in the Acreage report. This month’s 2018/19 foreign coarse grain outlook is for lower production, trade, and stocks relative to last month. Russia corn production is lowered, reflecting reductions to both area and yield. Extreme heat and dryness in the Southern and North Caucasus districts during the month of June is expected to reduce yield prospects. Corn production is raised for the EU but lowered for Canada. Barley production is reduced for Russia, Australia, and the EU, but raised for Canada. For 2017/18, Brazil corn production is reduced based on the latest government statistics. Major global trade changes for 2018/19 include lower corn exports for Russia, more than offset by increased exports for the United States. Corn imports are raised for South Korea and Saudi Arabia but lowered for Japan and Mexico. Sorghum imports are lowered for China, but partially offset by increases for Mexico and Japan. For 2017/18, corn exports are lowered for Argentina and Brazil. Foreign corn ending stocks are lowered from last month, with the largest declines for China, the EU, and Mexico.
The USDA lowered its projection for the midpoint of its price range for corn, but both U.S. and global inventory projections moved lower in the July WASDE report.
Wheat is the strongest of the primary grains
The U.S. is the world’s leading producer and exporter of corn and soybeans, so the trade issues are weighing heavily on prices. When it comes to wheat, while the U.S. is a significant producer, it is only one of many exporters in the world. The trade issues have less impact on the price of wheat. However, since mid-June, the price of CBOT wheat futures has been dropping in sympathy with soybeans and corn.
As the daily chart highlights, September CBOT wheat futures fell to a low at $4.7125 per bushel on July 11 before the release of the report. However, they bounced in the aftermath and were back over the $4.90 level last Friday. Price momentum in wheat futures was in neutral territory on the daily chart. The USDA told the market:
Projected U.S. 2018/19 wheat supplies are raised 74 million bushels on increased beginning stocks and higher production. Forecast 2018/19 U.S. wheat production is raised 54 million bushels to 1,881 million. The NASS July Crop Production report provides survey-based production forecasts for all wheat classes for the first time in the 2018/19 crop year. The production forecast for durum and other spring wheat are up from last year’s low level due to improved yields and higher spring wheat area. Winter wheat production is down slightly from the June forecast. Ending stocks for 2018/19 are raised 39 million bushels this month but are 11 percent below last year’s revised stocks. The 2018/19 season-average farm price is lowered $0.10 per bushel at the midpoint to a projected range of $4.50 to $5.50. Foreign 2018/19 wheat supplies are decreased 9.3 million tons primarily on lower production, which is the smallest in three years. The production declines are led by a 4.4-million-ton reduction for the EU reflecting continued dryness especially in the north. Australia, Russia, and Ukraine are lowered 2.0 million, 1.5 million, and 1.0 million tons, respectively, and also reflect continued dryness. China production is reduced 1.0 million tons on lower harvested area as reported by the Ministry of Agriculture. Global 2018/19 exports are lowered 1.9 million tons on decreased supplies. EU exports are reduced 1.5 million tons and Australia and Russia are both lowered 1.0 million tons. These export reductions are partially offset by a 1.0-million-ton increase for Canada and a 0.7-million-ton increase for the United States. Total foreign consumption for 2018/19 is lowered 2.3 million tons on both lower food and feed and residual use. With global supplies declining more than projected use, world ending stocks are reduced 5.3 million tons to 260.9 million.
The USDA lowered their price projection for wheat, and they increased their expectations for the U.S. crop this year. However, with global demand declined less than global supplies, so the USDA lowered global ending stocks to 260.90 million tons.
Cotton moved appreciably higher
As the daily chart highlights, December ICE cotton futures has corrected from highs of 94.82 cents per pound on the December contract, and 96.50 on the continuous futures contract since June 8. After reaching a low of 81.75 on the December futures on July 6, cotton futures moved higher and continued to post gains in the aftermath of the USDA’s report last Thursday. Active month cotton futures were trading at just under the 88 cents per pound level last Friday. Price momentum in cotton futures was rising toward overbought territory on the daily chart:
The U.S. 2018/19 cotton projections show lower production, exports, and stocks compared with last month. The 1.0-million-bale decrease in the crop projection is due to higher expected abandonment based on current conditions. Beginning stocks are 200,000 bales lower due to an increase in 2017/18 exports. 2018/19 exports are reduced 500,000 bales based on lower supplies and increased foreign competition. With no change in domestic consumption, 2018/19 ending stocks are projected at 4.0 million bales, down 700,000 bales from the June estimate and unchanged from the revised 2017/18 level. The midpoint of the projected range of the marketing year average price is raised 5 cents from last month to 75 cents per pound. Historical revisions to China’s consumption back to 2014/15 account for most of a 3.3-million-bale decline in 2018/19 world beginning stocks. World 2018/19 consumption is 1.6 million bales higher than in June, as the revisions to China’s consumption estimates carry through into the 2018/19 projection year with a 1.0-million-bale increase. Consumption forecasts are also higher for Bangladesh, Pakistan, Brazil, and Vietnam. World production is projected 290,000 bales lower than in June, as reduced U.S. and Australian production more than offsets increases for Brazil, India, and Mexico. World trade is projected 165,000 bales higher this month as lower U.S. exports are more than offset by increases by Brazil and China. Ending stocks are 5.2 million bales lower than in June, with the largest declines in China (4.6 million) and the United States. India’s and Brazil’s ending stocks are forecast higher.
Cotton moved higher as the USDA lowered production, exports, and stock levels from the June report. The WASDE also projected increased 2018/2019 consumption and reduced ending stocks compared to their June report causing the price to move to the upside in the aftermath of the report.
Animal proteins recover in post-WASDE trading
As the daily chart of August lean hog futures shows, the price fell to a low of 68.525 cents per pound on July 11 but recovered to over 70 cents in the wake of the July WASDE report. Price momentum is attempting to cross higher in oversold territory.
August live cattle futures rallied a bit in the aftermath of Thursday’s report. Live cattle futures have been making higher lows and higher highs since April 4 when the price dropped to lows of 97.625 cents per pound. On Friday, July 13 the August futures contract was trading at over the $1.04 per pound level.
When it comes to the meats, the USDA told the markets:
The forecasts for 2018 red meat and poultry production are raised from last month. The beef production forecast is raised on higher expected cow slaughter in the third quarter. USDA will release the Cattle report on July 20th, providing a mid-year estimate of the U.S. cattle inventory as well as producer intentions regarding retention of heifers for beef cow replacement. Forecast pork production is raised from last month as higher expected second-half hog slaughter more than offsets lower second-quarter slaughter. A more rapid pace of hog slaughter is expected in the third quarter and USDA’s Quarterly Hogs and Pigs report estimated the March-May pig crop was 4 percent above 2017 which will result in higher fourth-quarter hog slaughter.
For 2019, the red meat and poultry production forecast is raised as increases in pork and broiler production more than offsets expected declines in beef production. Forecast beef production is reduced from the previous month on lower expected steer and heifer slaughter the first half of the year. The pork production forecast is raised; the Quarterly Hogs and Pigs report indicated that producers intend to farrow 2 percent more hogs over the next two quarters, which coupled with expected growth in pigs per litter will push first-half hog slaughter higher. The beef import forecast is unchanged for 2018, but the export forecast is raised from the previous month on recent trade data and continued strong exports to Asia. The 2019 beef export forecast is also raised from last month. Pork trade forecasts for 2018 and 2019 are unchanged from the previous month. Lower pork product prices are expected to help offset increased competition in key markets in 2019. The cattle price forecast for 2018 is lowered slightly from last month, reflecting June price data. Forecast 2019 cattle prices are unchanged from the previous month. The hog price forecast is raised for 2018 as recent price strength and expected higher prices in the third quarter more than offset lower prices in the fourth quarter. The hog price forecast for 2019 is lowered on increased supplies of pork.
The USDA increased their forecast for hog prices in 2019 but left cattle prices unchanged. Meats are also likely to be impacted by the trade issues affecting all of the agricultural commodities.
The July 2018 WASDE report was not bearish for most of the agricultural markets. While the weather conditions over coming weeks could cause price volatility, this year the path of least resistance is all about trade. The bottom line is that an escalation of trade disputes leading to a trade war will continue to weigh on prices. However, a resolution to the issue would likely cause significant rebounds in the markets that have been under extreme selling pressure over past weeks.
DBA is the Invesco DB Agriculture product that holds long positions in many of the agricultural commodities covered in this report. With just under $700 million in net assets, DBA trades an average of 561,000 contracts each day as it is a highly liquid product. Since 2006, DBA has traded from lows of $17.25 to highs of $43.50 per share. On Friday, July 13 DBA was trading at the lows at $17.36 per share.
I continue to believe that the trade issues will not result in a devastating trade war which is not in the best interests of producing and consuming nations around the world including the United States and China. Trade deals over coming weeks and months could cause a significant rebound in these markets. I would be a scale-down buyer of DBA or any of the ETF products in the grains such as CORN, SOYB, and WEAT.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.