WASDE Result And The Russian Wheat Connection

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Includes: ADM, ADZ, AGA, AGF, AGU, BAL, BG, CAFE, CANE, CF, CHOC, CORN, COW, CTNN, DAG, DBA, DE, DIRT, FUD, GRU, GRWN, JJA, JJG, JJS, JO, LSTK, MON, MOS, NIB, POT, RJA, SGAR, SGG, SOYB, TAGS, UAG, UBC, USAG, WEAT, WEET
by: Andrew Hecht

Summary

We're seeing a massive soybean crop and big bump in inventories.

There is a huge corn crop but record demand.

We're seeing a big wheat crop but total supplies declining more than use.

Russia understands the political nature of wheat and has become No. 1.

The demand for grains continues to rise; demographics make bumper crops a necessity.

The October World Agricultural Supply and Demand Estimates report is often the final report card for a crop year because it comes out during the heart of the harvest season. Each year is a new adventure in grains as it is impossible to predict whether Mother Nature or crop diseases will intercede and create conditions that support crops or inhibit them.

The USDA released its October WASDE report on October 12 and confirmed what everyone already knew. 2016 was the fourth straight year of bumper grain crops in the United States. The U.S. is the world's number one producer and exporter of soybeans and corn. In the wheat market, the U.S. is a major producer and at times the leading exporter. Therefore, the final numbers from the October WASDE are likely to determine the path of least resistance for the agricultural commodities and in the wake of the report; prices moved lower, and corn, soybeans, and wheat made bearish key reversal trading patterns on their daily charts.

WASDE- Soybeans

November, active month soybeans closed on Wednesday at $9.4550 per bushel in the aftermath of the WASDE report. Click to enlarge Source: CQG

As the daily chart highlights, November beans traded to a higher price on Wednesday than on the previous day and then closed below the prior sessions low which could set up a test of support for at $9.34 per bushel, the September 27 lows. The USDA told the market that the average yield per acre for the 2016 crop year is around 51.4 bushels, versus markets expectations of 51.5. Total production came in at 4.269 billion bushels just slightly below analyst estimates of 4.277 billion. New crop carryover rose by 30 million bushels from the September report to 395 million, but that number was below market expectations which called for 415 million. However, total world stocks were increased to 77.4 million metric tons up significantly from 72.2 million in September; analysts expected only 72.9 million which is a bearish factor for the market. On the demand side, China committed to almost 29% more of new crop soybeans so far this year compared to last. Demand for beans continues to move higher.

WASDE- Corn

December corn closed yesterday at $3.37 per bushel, and like soybeans, corn put in a bearish key reversal trading pattern on the daily chart. Click to enlarge Source: CQG

As the daily chart illustrates, support is currently at the August 31 lows of $3.1475 per bushel. On October 12, the USDA reported the average yield estimate for corn was equal to analyst estimates at 173.4 bushels per acre. Total U.S. production came in at 15.057 billion bushels just above pre-WASDE estimates of 15.04 billion. The USDA projected total ending stocks at 2.32 billion bushels, below market estimates of 2.362 billion. Total world ending stocks were lowered to 216.80 million metric tons in the October WASDE from 219.5 million in September. As with beans, corn demand continues to rise and is off the charts when compared to previous years.

WASDE- Wheat

Active month CBOT December wheat futures moved lower and closed yesterday at $3.9675 per bushel in the wake of the October WASDE report. Click to enlarge Source: CQG

As the daily chart of CBOT wheat highlights, just like the other primary grains wheat also posted a bearish key reversal trading pattern on the daily chart after the release of the WASDE. The yield per acre for U.S. wheat production was unchanged from the September WASDE at 52.6 bushels. Total production was lowered by 11 million bushels to 2.31 billion from the September report, and carryover was at 1.138 billion bushels, lower than market analyst's expectations at 1.151 billion. The WASDE told us that world carryover would be at 248.4 million metric tons, just below September projections at 249.1 tons.

Russia making a move in wheat

Russia is a major producer of commodities, and the nation has always been a significant player in the international wheat market. So it should come as little surprise that the Russians topped the U.S. in wheat exports for the first time in decades last season and are likely to ship more than the world's largest exporter, the European Union this year.

Egypt is the world's number one importer of wheat, and Russian wheat is replacing U.S. and European wheat in the North African nation as well as making inroads in Nigeria, Bangladesh, and Indonesia. Over the last decade, Russia has the highest growth rate of production in the world. The wheat boom in Russia has the dominant grain trading companies flocking to the nation with investment in silos, export terminals and other wheat related infrastructure. Russia has limited storage capacity at this time, so wheat is often sold quickly after harvest forcing prices lower.

The fertile soil of Russia is supporting the nation's emergence as a dominant player in what I believe is the world's most political commodity. Wheat is the primary ingredient in bread which is a staple all over the world. Russia is already a leading world producer of the other most political commodity, crude oil. The bottom line is that the strategy of Russia and the Putin government is to expand its span of influence around the globe and there may be no better way to accomplish this than to dominate the global wheat market.

The price of wheat is depressed, recently trading at the lowest price in over a decade. However, each year in grain markets is a new adventure as the weather is the ultimate arbiter of price. Meanwhile, the one silver lining in a WASDE report that pointed to significant production, record crops, and huge carryover inventories was that demand continues to skyrocket.

WASDE- Demand

Sal Gilbertie, the founder of the Teucrium family of Agriculture ETF products, told me that one thing sticks out like a sore thumb in the October WASDE. The USDA said "with total wheat supplies declining more than use" for the second straight month which tells us that demand continues to rise to all-time highs for the grain. Exponential population growth around the world has been the one consistent theme of the USDA reports for years. While supply is a function of growing conditions each year and will be variable over time, demand continues to grow. Each year the people of the world become more dependent on bumper crops.

The droughts of 2007-2008 and 2012 took prices of wheat, corn, and soybeans to all-time highs. The next time we experience a yield that is less than at record levels grain prices will move a lot higher. The fourth straight year of oversupply in the grain markets could be one of the last times we see prices as low as current levels. Just look at what happened to the soybean price in the late spring of 2016. A poor South American bean harvest drove prices from under $9 to over $12 in a matter of weeks. Russia is ramping up wheat production because they know that power will come from the ability to feed people all over the world, particularly during periods of supply deficits.

It is highly likely that the prices of corn, soybeans, and wheat will move to the downside after the October WASDE. At the very least they will consolidate around the current low price levels. It may be a good time to start looking at Teucrium's corn, soybean, and wheat ETF products. The symbols are CORN, SOYB, and WEAT and they are trading at or close to multiyear lows. The time to buy commodity related products is often when they look the worst. The large crops of 2016 have created an environment where previous droughts have washed from the memories of traders in a tsunami of supplies. Over coming weeks could be the perfect time to begin a scale down buying program in the grains. The Russians are building their wheat business, and there are economic and political reasons why this is a very smart and efficient strategy to raise their position as a world power in the years to come.

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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.