Planting Season Starts On A Bullish Note
- A rally before the first seed goes into the ground.
- Beans move on a rally in meal.
- Corn is watching a ratio.
- Wheat feeds the world.
- Five years of bumper crops do not guaranty a sixth.
The season of uncertainty is getting underway in the grain markets. The harvest season in South America marks the start of the crop year north of the equator. Over coming weeks, farmers in the United States and other countries in the northern hemisphere will plant the seeds that will become the crops that feed the world. In the first quarter of 2018, global population increased by approximately 19.5 million people. In 2000, at the turn of the century, there were 6.145 billion inhabitants of the earth. As of April 1, 2018, that number stood at over 7.464 billion. More people on our planet, with more money, compete for finite natural resources each day which puts pressure on the demand side of the fundamental equation for food products.
Nutrition is essential for people all over the world, and the 2018 crop year will feed the ever-increasing number of hungry mouths. Each year is a new adventure when it comes to crop production as the weather determines the output. The United States is the world’s leading producer of corn and soybeans and a significant exporter of wheat. The world has become addicted to sufficient crops from the U.S. and other producing countries.
A rally before the first seed goes into the ground
In early March, the prices of the primary grains that trade on the Chicago Board of Trade division of the CME futures market moved appreciably higher. A drought in Argentina damaged crops which sent prices soaring.
The price of May soybean futures exploded to a high of $10.825 per bushel on March 2. Gains in soybean meal, a product of the oilseed, took soybeans to the highest price of the year as meal traded north of $400 per ton. After the USDA released its March WASDE report, the price of the beans corrected to a low of $10.0925 on March 23. However, on the final day of March, a rally took the May futures back to over the $10.40 level. Tariffs on China and retaliation caused the price of May soybean futures to plunge to $9.835 April 4, but the price quickly recovered to above the $10.30 level and settled last Friday, April 6 at $10.3375 per bushel even though the trade rhetoric between the U.S. and China ramped up at the end of last week.
As the chart of May corn futures highlights, then grain exploded to highs of $3.9525 on March 13, corrected to a low at $3.6925 on March 23 and moved back to the $3.88 on the final day of trading of the first quarter of this year. On April 6, corn was trading at $3.8850 per bushel.
May CBOT wheat futures rallied in sympathy with corn and beans reaching its peak at $5.1850 per bushel on March 2. A correction took the wheat down to $4.4150 on March 29, and the grain was back up at $4.7225 on April 6.
All of the grains are going into the 2018 planting season on a bullish note.
Beans move on a rally in meal
The dry conditions in Argentina took the price of soybean meal to dizzying heights at the beginning of March.
As the chart of May soybean meal futures shows, the product of soybeans appreciated from $314 in mid-January to highs of $404 per ton on March 2. The meal was trading at $386.30 per ton on April 6 providing support for the price of the raw oilseed.
Soybean meal is a primary ingredient in feed for animal protein. Processors crush the raw oilseed in processing plants to produce both soybean meal and soybean oil. The strength in the meal going into the 2018 crop year in the U.S. is a sign of demand for the oilseed.
Corn is watching a ratio
Corn also rallied on the drought conditions in Argentina. However, farmers in the U.S. are now preparing for the planting season, and the recent price strength could be a reflection of their behavior given the comparative prices of new crop corn and beans.
Over the past four decades, the price of soybeans divided by the price of corn has averaged around 2.4:1 or 2.4 bushels of corn value in each bushel of soybean value. When the ratio is below the 2.4:1 level, corn is typically the more expensive product on a historical basis, and farmers will plant more corn than beans. When it is above the long-term average level for the relationship, farmers tend to plant more soybeans. November soybean futures were trading at the $10.3325 per bushel level at the close of business on April 6. Meanwhile new crop December corn futures settled at $4.1250 per bushel last Friday. The ratio at 2.50:1 tells us that soybeans are historically expensive compared to corn and will offer a better return for farmers. Therefore, the fact that producers will plant more soybeans than corn on their acreage for economic reasons is a supportive factor of the price of corn as we head into the 2018 crop year.
Wheat feeds the world
When you ask most market participants which commodity is the most sensitive to politics, they would probably answer that crude oil is the political hot potato. However, over the course of history, wheat likely caused more political upheaval. Wheat is the primary ingredient in bread which feeds the world. Many revolutions commenced when a government was unable to feed their citizenry because of wheat shortages creating higher prices or a lack of availability. The most recent example is the Arab Spring in 2010 which swept across North Africa and the Middle East, the movement started as bread riots in Tunisia and Egypt because of the high price of wheat and limited availability of bread.
Five years of bumper crops do not guaranty a sixth
As we head into the 2018 planting season in the United States and other agricultural producing nations in the northern hemisphere, consumers have become complacent. Memories of the last year when weather caused shortages in 2012 have faded in the market’s rearview mirror. After five consecutive years of bumper crops and sufficient supplies to feed the world, inventories are at record levels, and consumers are confident in their ability to secure necessary supplies.
However, five years of bumper crops do not guaranty that 2018 will be the sixth, and inventories can decline quickly if this year’s production is not up to snuff. Only Mother Nature knows for sure what the weather conditions across the fertile plains of the U.S. and in Europe, Russia, and other primary production areas will bring this year. Moreover, over the past two decades, even during years of oversupply, the prices of corn, soybeans, and wheat have made higher lows. The demand side of the fundamental equation for food has been highly supportive for prices.
The next time that the weather does not cooperate, the upside in these markets could quickly become explosive. Given the state of the fundamentals for grains, and the uncertainty of the weather over coming weeks and months, the downside prospects for prices could be limited to a higher low, while the upside potential is dizzying. In 2012, corn rose to a high above $8.40, and soybeans rallied to almost $18 per bushel. During that year, the price of wheat peaked at above $9 per bushel which is more than double its current price.
DBA is an agricultural ETF product that reflects the price action in these commodities. With almost $750 million in net assets, over an average 915,000 shares trading each day, and an expense ratio under 1%, DBA could be the perfect tool to position for higher grain prices in coming months. Since 2007, DBA has traded from a low of $18.18 to a high of $43.50. At $18.70 on April 6, DBA is a low-cost instrument that is trading near its lows.
The planting season is getting underway, but uncertainty is likely to increase volatility in the grain futures market. For those who do not dip a toe into the leveraged and volatile world of futures and options markets, the Teucrium family of funds offers products that replicate action in the grain markets. CORN, SOYB, and WEAT are liquid instruments that do an excellent job at following the price paths of corn, soybeans, and the wheat futures markets.
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Andy spent nearly 35 years on Wall Street, including two decades on the trading desk of Phillip Brothers, which became Salomon Brothers and ultimately part of Citigroup.Over the past two decades, he has researched, structured and executed some of the largest trades ever made, involving massive quantities of precious metals and bulk commodities.
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