Agricultural Commodities Post-April WASDE

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About: Invesco DB Agriculture ETF (DBA), Includes: ADZ, AGA, AGF, BALB, CAFE, CANE, CHOC, CORN, COW, CROP, CTNN, DAG, DIRT, FTAG, FUD, GRU, GRWN, JJA, JJGTF, JJS, JO, LSTK, MOO, NIB, PAGG, RJA, SGAR, SGG, SOYB, TAGS, UAG, UBC, USAG, VEGI, WEAT, WEET
by: Andrew Hecht
Summary

The April report does not move markets much - a comment from the founder of Teucrium ETF products.

Soybeans - lower supplies as the market had expected.

Corn - in line with expectations.

Wheat - another record high in global inventories.

Cotton and meats - some degree of support.

On Tuesday, April 10 the United States Department of Agriculture released its monthly World Agricultural Supply and Demand Estimates report or WASDE. Each month the report can cause high levels of volatility in grain and other agricultural futures markets when the data from the USDA deviates from market expectations.

The April report comes at the very beginning of the 2018 planting season in the northern hemisphere, but it comes towards the end of harvest in nations in the southern part of the world.

The markets did not move much after the USDA issued their report on Tuesday, but the markets went into and came out of the report with a bullish tone. The uncertainty of the 2018 crop year in the U.S. and other producing nations after a drought in Argentina have consumers concerned that while the world has become addicted to bumper crops, this year may not be the sixth straight year of ample supplies to feed the world.

The April report does not move markets much - a comment from the founder of Teucrium ETF products

I reached out to my friend Sal Gilberte for a reaction to the WASDE report and he told me:

The market reaction to the April 10th WASDE report was muted because it's results were largely expected and there were few significant changes from last month's report other than large declines in Argentine soy production. However, the significant takeaway from the April report should not be so much its changes versus the March report, but the projected changes in the global grains balance sheet from last year. Investors would do well to realize that total global grain output is projected to decline over 1.4% year-on-year (see page image below from today's report) while total grain use is projected to rise by just over a tenth of a percent. These don't sound like big numbers, but the simple truth is that grain output is declining while grain usage is rising. This tightening of the global grain balance sheet is likely why grain prices seem to have finally bottomed from their 5-year bear market slump.

Source: USDA

Sal makes a great point in his comments about last week's report. Please keep in mind that the USDA tends to look at the grain markets with rose-colored glasses, always assuming that weather conditions will cooperate, and output will be at a maximum level. Moreover, population growth continues to provide support to the demand side of the fundamental equation for all agricultural commodities. In Q-1 alone there were 19 million more mouths to feed in the world, and more people with more money are competing for finite grains and other agricultural commodities each day.

Now that the planting season is under way, it will be the weather across fertile growing regions in the United States and around the world that will determine the path of least resistance for prices. Given the uncertainty of the weather over coming weeks and months, and the current environment when it comes to trade, we should expect lots of volatility in the futures markets for all agricultural commodities.

Soybeans - lower supplies as the market had expected

The April WASDE report validated the loss of supplies because of drought conditions in Argentina and surrounding countries since March. The USDA told markets:

U.S. soybean supply and use changes for 2017/18 include increased crush, lower seed and residual use, and lower ending stocks. Soybean crush is projected at a record 1,970 million bushels, up 10 million reflecting higher soybean meal prices which are supporting crush margins. Seed use is reduced in line with the WASDE-576-3 plantings indicated in the March 29 Prospective Plantings report. With exports unchanged, soybean ending stocks are projected at 550 million bushels, down 5 million. Soybean oil changes include increased production, exports, and ending stocks. Soybean oil used for biodiesel is reduced this month reflecting lower-than-expected use through the first four months of the marketing year. The season-average soybean price is forecast at $9.10 to $9.50, unchanged at the midpoint. The soybean oil price is projected at 30.5 to 32.5 cents per pound, also unchanged at the midpoint. Soybean meal prices are projected at $340 to $360 per short ton, up $10.00 at the midpoint. The 2017/18 global oilseed supply and demand forecasts include lower production, exports, crush, and ending stocks compared to last month. Global oilseed production is lowered 5.7 million tons to 568.8 million, with a 6.1-million-ton reduction for soybean production and slightly higher projections for rapeseed, sunflowerseed, copra, and palm kernel. Lower soybean production for Argentina, India, and Uruguay is partly offset by higher production for Brazil. Soybean production for Brazil is forecast at a record 115.0 million tons, up 2.0 million on higher projected yields for Mato Grosso, Mato Grosso do Sul, and Parana due to beneficial rainfall during the growing season. For Argentina, production is lowered 7.0 million tons to 40.0 million on reduced harvested area and yield, reflecting dry conditions during January through March. With reduced production, soybean crush for Argentina is lowered 1.8 million tons to 41.2 million, resulting in lower soybean meal and oil supplies traded globally. Other oilseed production changes include reduced sunflower and peanut production for Argentina, higher sunflowerseed production for the European Union, and increased rapeseed production for Belarus. Global oilseed trade for 2017/18 is projected at 174.1 million tons, down 0.6 million on lower soybean, peanut, and rapeseed shipments. Soybean exports are reduced 0.2 million tons as higher exports for Brazil, Russia, and Ukraine are offset by lower exports for Argentina and Uruguay. Peanut and rapeseed exports are lowered for Senegal and the European Union, respectively. Global soybean ending stocks are lowered 3.6 million tons to 90.8 million with reductions mainly for Argentina, Brazil, and the EU.

Source: CQG

After an initial rally following the WADE report, May soybeans closed last week at the $10.5425 per bushel level. Beans have been making higher lows since January and open interest has been rising, which is typically a bullish sign for a futures market.

Corn - in line with expectations

The April WASDE told us:

This month's 2017/18 U.S. corn outlook is for reduced feed and residual use, slightly lower food, seed, and industrial (NYSEMKT:FSI) use, and increased ending stocks. FSI is lowered 5 million bushels, as a 10-million-bushel reduction in the amount of corn used for glucose and dextrose is partially offset by a 5-million-bushel increase in corn used for starch. Projected feed and residual use is lowered 50 million bushels to 5,500 million bushels based on indicated disappearance during the first half of the marketing year in the March 29 Grain Stocks report. With supply unchanged and total use declining, ending stocks are raised 55 million bushels. The projected range for the WASDE-576-2 season-average corn price received by producers is unchanged at the midpoint with the range narrowed to $3.20 to $3.50 per bushel. Global coarse grain production for 2017/18 is forecast 7.0 million tons lower than last month to 1,315.0 million. This month's foreign coarse grain outlook is for lower production, consumption, trade, and stocks relative to last month. Argentina corn production is down based on reductions to both harvested area and yield. Yield results have been below expectations, while dry conditions are expected to increase the amount of corn harvested for forage or grazed. Brazil corn production is reduced reflecting expectations of lower second-crop corn area. If realized, the combined corn production of Argentina and Brazil for 2017/18 would be 14.5 million tons below the record reached in 2016/17. Other coarse grain production changes of note for 2017/18 include lower barley production for Belarus and reduced corn production for Paraguay, with corn production increases for Mexico and South Africa. Major global trade changes for 2017/18 include lower projected corn exports for Brazil and Argentina, with reduced export competition from these countries expected to impact the first half of the 2018/19 marketing year in the United States. Corn imports are lowered for Iran, Malaysia, Taiwan, Mexico, and Chile, with partially offsetting increases for Bangladesh and Turkey. Foreign corn ending stocks are lowered 2.8 million tons from last month, with the largest declines for Argentina, Paraguay, and Brazil.

The WADSE report provided a positive tone when it comes to the path of least resistance for the price of corn.

Source: CQG

The price of corn remained steady in the wake of the April USDA report, but it has been making higher lows and open interest has been rising just like in the soybean market. Moreover, the current level of the new-crop corn-soybean ratio was at the 2.56:1 level last Friday, above the long-term average at 2.4:1. When the ratio is higher during the planting season, farmers tend to plant more soybeans than corn which could provide support for the price of corn in the coming months. Moreover, the ascent of gasoline and crude oil is likely to support the price of ethanol which is another reason that corn could be particularly susceptible to an upside move if the weather is not cooperative over coming months.

Wheat - another record high in global inventories

On Tuesday, the USDA told markets:

Projected 2017/18 U.S. wheat ending stocks are raised this month by 30 million bushels to 1,064 million, all on lower feed and residual use. The NASS Grain Stocks report, issued March 29, implied less feed and residual usage for the third quarter (December-February) than previously estimated. This report also showed record U.S. corn stocks on March 1, which are expected to continue displacing wheat for feed use for the remainder of 2017/18. No other supply or use categories are changed this month. Based on NASS prices and marketings reported to date along with price expectations for the rest of 2017/18, the season-average farm price is unchanged at the range of $4.60 to $4.70 per bushel. World 2017/18 wheat supplies increased this month by nearly 3.0 million tons as production is raised to a new record of 759.8 million, mainly on Morocco's higher production estimate as it recovered from a severe drought in 2016/17. Global supplies also increased with a multi-year reduction in Iran's food, seed, and industrial use, which raised carry-in stocks by nearly 2.0 million tons. Projected global 2017/18 trade is virtually unchanged on increased exports from Russia, Kazakhstan, and Argentina nearly offsetting lower exports from the EU and other exporters. Russia's exports are raised 1.0 million tons to 38.5 million, which surpasses last year's record exports by more than 10 million. Russia continues to displace the EU and other exporters in several markets. Imports are lowered for Morocco, Brazil, and Colombia while increased for Algeria, Ethiopia, Japan, Kenya, Turkey, and the Philippines. Projected 2017/18 world consumption is higher, primarily on increases in the EU and Indonesia, which more than offset reductions in Iran, India, and the United States. However, the increase in global supplies still exceeds the additional consumption as 2017/18 global ending stocks are 2.3 million tons higher this month at 271.2 million, a new record.

Wheat stocks are at an all-time high, and the price moved lower over the course of last week following the report.

Source: CQG

CBOT wheat traded to a high of $4.94 on the May futures contract on April 10 but closed last Friday at the $4.725 per bushel level.

Cotton and meats - some degree of support

The ease in the tariffs issue last week likely caused a recovery in the price of cotton as the WASDE report which supportive of the fiber:

The 2017/18 U.S. cotton supply and demand forecasts show higher exports and lower ending stocks relative to last month. Production and domestic mill use are unchanged. The export forecast is raised 200,000 bales, to 15.0 million, based on the pace of recent sales and shipments. Ending stocks are now forecast at 5.3 million bales, equivalent to 29 percent of total disappearance. The marketing year price received by producers is projected to average 68 cents per pound, a reduction of 1 cent from last month. Lower global beginning stocks this month result in lower projected 2017/18 ending stocks despite higher world production and lower consumption. World beginning stocks are 900,000 bales lower this month, largely attributable to historical revisions for Brazil and Australia. World production is about 250,000 bales higher as a larger Brazilian WASDE-576-5 crop more than offsets a decline for Sudan. Consumption is about 400,000 bales lower as lower consumption in India, Indonesia, and some smaller countries more than offsets Vietnam's increase. Ending stocks for 2017/18 are nearly 600,000 bales lower in total this month as reductions for Brazil, Sudan, the United States, and Australia more than offset an increase for Pakistan.

Lower stocks and higher exports were bullish for the price of the cotton.

Source: CQG

May cotton futures settled around the 83.50 cents per pound level last Friday.

When it comes to the animal protein sector of the commodities market, the USDA told us on Tuesday that:

The 2018 forecast for total red meat and poultry production is lowered from last month as forecasts for all major meats are reduced. The beef production forecast is reduced from the previous month on lower first-half slaughter and lighter weights, but this decline is partly offset by higher WASDE-576-4 expected third-quarter slaughter. Pork production is raised for the first quarter based on estimated production data, but lowered for outlying quarters on a slower pace of slaughter and lighter carcass weights. The USDA Quarterly Hogs and Pigs report of March 29, estimated producers farrowed 2 percent more sows during December to February and indicated intentions to farrow about 2 percent more sows in March to May. These hogs will be ready for slaughter in the second half of 2018. Broiler and turkey production is reduced on recent hatchery data. For 2018, beef imports and exports are unchanged from last month. The pork import forecast is unchanged. Pork exports are reduced on weaker expected exports to China although exports to other markets are expected to increase. No change is made to broiler or turkey exports. Cattle and hog price forecasts are reduced from last month as demand for cattle and hogs has softened and supplies are expected to be large in the coming quarters. The broiler price forecast is raised from last month as stronger demand in the first quarter is expected to carry into subsequent quarters.

Meanwhile, tariffs and grain prices continue to hang over the pork and beef markets.

Source: CQG

The price of June live cattle futures which had been falling since late February recovered before the April 10 WASDE report and held gains in the aftermath of the USDA's monthly analysis.

Source: CQG

The price of lean hog futures continued to recover following the April WASDE report.

It is Mother Nature and the weather that will determine the path of least resistance for grain prices over coming weeks and months. Any whiff of a drought across the fertile plains of the U.S. could cause explosive price moves.

Source: Barchart

DBA is an agricultural ETF product that has traded in a range from $18.18 to $43.50 since 2007. At $18.91 per share on Friday, April 13, it is close to the lowest level in over a decade. The uncertainty of the 2018 crop year is a compelling reason to add the DBA to your portfolio as the seeds are now going into the ground. Additionally, the Teucrium family of grain ETF products including CORN, SOYB, and WEAT are vehicles that do an excellent job replicating the price action in the individual grain markets.

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.