Grains Going Into The November WASDE

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Includes: ADZ, AGA, AGF, BALB, CAFE, CANE, CHOC, CORN, COW, CTNN, DAG, DBA, DIRT, FUD, GRU, GRWN, GSG, JJA, JJGTF, JJS, JO, LSTK, MOO, NIB, RJA, SGAR, SGG, SOYB, TAGS, UAG, UBC, USAG, WEAT, WEET
by: Andrew Hecht
Summary

Always a potential for surprises.

Soybeans.

Corn.

Wheat.

Cotton and Meats.

On Thursday, November 9 at noon EST, the United States Department of Agriculture will release its monthly World Agricultural Supply and Demand Estimates report. With the 2017 harvest season wrapping up, we all know that this year's crop has been the fifth straight year of enough agricultural commodities to satisfy demand around the world. However, that demand has been moving higher by leaps and bounds because of global population and wealth growth. While there are surpluses in most agricultural markets and inventories in some of the staple markets are close to or at record levels, demand is also at a record high and increasing.

The October report told us about record stocks of wheat and plenty of corn. While soybean prices moved higher in the wake of the October missive, the price action has been tame. Cotton moved lower on a big U.S. crop, and meat prices moved to highs in October on export demand for animal proteins. The markets will pause and hold their collective breath on Thursday, and it may be the data on the demand side of the market that has the most potential to move prices.

The exciting thing about the agricultural markets is that even after five straight years of massive crop yields, prices on the long-term charts continue to make higher lows. While a supply-based rally in commodities markets typically result in short-term spikes to the upside when it comes to prices, a demand-based rally tends to be a slow and steady process. Each year it is Mother Nature who determines the weather and growing conditions for agricultural commodities around the world. Over the past half-decade, she has created an environment where crops flourished. The next time we feel her wrath during a growing season, expect demand to take prices to dizzying heights based upon the demand-based support that underpins markets and has created the higher lows.

Always a potential for surprises

There is always the potential for surprises when the USDA issues its monthly WASDE report, and there is price action ahead of the missive and then following its release. Before the report, many traders and speculators close long and short positions because of the potential for wide price variance in the minutes following release. Others enter positions based up their expectations. At noon EST on Thursday, the markets in many agricultural commodities will move based on whether the data varies from market expectations. During some months the moves are bigger than others, and one never knows when the USDA data will contain a shocker that changes the fundamentals of one or more of the markets covered by the report.

Soybeans

Beans are going into the report at just under the $10 per bushel level on the active month January futures contract. Source: CQG

As the daily chart of January soybean futures highlights, the oilseed has been making higher lows and higher highs since the August 16 low at $9.2925 per bushel. The trend is higher in the bean market. Market expectations are for a lower soybean yield when compared to the October WASDE, and the market will move higher or lower depending on the USDA data. Technical support for beans is at the August 16 low with resistance at $10.13; the October 13 high that followed the most recent WASDE report. Soybean open interest has dropped from just over 770,000 contracts on October 25 to its current level of around the 687,000 level.

Corn

Despite strong gasoline prices and the recent rise in ethanol prices, December corn has been under pressure from another year of bumper crops and rising stocks. Corn is the primary input in ethanol production in the United States, and it is likely that the rally in oil and oil product markets has provided a level of support for the price of corn. Source: CQG

December corn futures have been drifting, making lower highs since the last WASDE report. Technical indicators are slightly bearish, but open interest has been skyrocketing moving from 1.315 million contracts at the end of August to its current level at 1.626 million. The rise in open interest could be the result of increasing speculative interest in corn which is trading close to recent lows. Expectations are for a rise of 0.6 bushels per acre to 172.4 according to a Reuter's poll. Corn was trading at $3.4825 per bushel on Wednesday, November 9. Support is at $3.4250 the October 12 low with resistance at $3.62 the September 6 high for December corn.

Wheat

In the October WASDE, the USDA told markets that wheat inventories were at a record high after another year of bumper crops. Source: CQG

December wheat futures were trading at $4.2675 per bushel on Wednesday, November 8. Support is at the October 31 low of $4.1625 per bushel with technical resistance at $4.43 the October 25 high. USDA data has recently pointed to an improvement of 3%, to 55% in when it comes to the rating of "good" or "excellent" for the U.S. crop. Open interest has been rising steadily since early October.

Cotton and Meats

Cotton is a highly volatile commodity and in October larger than expected production for the 2017 U.S. crop caused the price of the fiber to fall. Source: CQG

As the daily chart shows, cotton has been trading in a range from just under 67 cents to just over 70 cents since the October WASDE report where support and resistance currently stand. December cotton futures closed on November 8 at the 68.63 level. Technical indicators are neutral and Tuesday's spike in volume on a day where the price of cotton fell sharply could be a sign of liquidation ahead of the WASDE on Thursday. Open interest has been stable and technical indicators are in neutral territory going into the report. The path of least resistance for the price of cotton is likely to be a result of export demand for the fiber. The dollar has rebounded over the path month which could impede export demand.

When it comes to the meats, both live cattle and hog futures fell to multi-year lows in October 2016 when they traded down to around 94 cents and 40.7 cents per pound respectively. This year, the price went the other way and rose to highs in the off-season month. In the October WASDE, concerns about beef supplies supported prices, but ample supplies of pork did little to thwart the rally that followed the release of the report. Source: CQG

As the chart of live cattle futures shows, the price has been rising alongside open interest which typically provides validation of the bullish trend. However, live cattle reached a high of $1.27875 per pound on November 2, and a correction appears to be underway. Resistance is at the most recent high with support down at the October 18 low at $1.14025 per pound. A continuation of the recent trend higher will likely need more positive data about supplies and export demand for beef. Live cattle futures in December closed on November 8 at the $1.22925 per pound level. Source: CQG

Lean hogs followed a similar path to the cattle market as December futures rallied to a high of 68.175 cents per pound on October 31. Since then, lean hogs turned lower closing on November 8 at 63.550 cents per pound. Open interest moved higher with price throughout October, but the trend on the daily chart has shifted lower as the price of pork has turned lower since its most recent high. In the October WASDE, the USDA told markets that there is a surplus of pork supplies. However, the path of least resistance for the price of lean hog futures will be the result of the USDA's report on the demand side of the market which could explain the rally to recent highs.

The November WASDE is likely to contain at least a few surprises, and markets are likely to readjust in the aftermath of the release on Thursday. The one thing to remember is that the demand for agricultural commodities is rising alongside population and wealth growth which means that each year the world depends on bumper crops. When Mother Nature causes lower crop yields in future whether it is in 2018 or the years that follow, the prices of these and other crops are likely to rally sharply. All eyes are now on the weather conditions in South America where the planting season will give way to the growing season in a matter of weeks. I will return early next week with an analysis of the USDA's November WASDE report.

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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.