Agricultural Commodities Pre-WASDE

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

Trade issues and a November meeting could impact grains.

Soybeans rally into WASDE.

Corn leans higher.

Wheat is stable.

Cotton moves toward 80 cents and animal proteins back off highs.

It is now November, and that means that the U.S. Department of Agriculture is preparing to release its monthly World Agricultural Supply and Demand Estimates report that includes the latest updates and data on the crops and supplies that feed and clothe the world.

The USDA will publish its report on Thursday, November 8, at noon EST. The anticipation before the report tends to cause an increase in the volatility of futures markets in grains, meats, and cotton. In the aftermath of the report, when analyst expectations differ from the USDA data on inventories and other fundamental data, prices can move dramatically.

The November report comes after the 2018 crop year in the northern hemisphere and before the growing season in the area of the world that is south of the equator. While crops in 2018 are sufficient to meet global requirements, it has been the trade dispute between the U.S. and China that has dominated price action in many of the agricultural commodities over the past months.

It seems that those trade issues could be coming to a head in November.

The Invesco DB Agriculture ETF product (DBA) is a diversified product that holds many of the commodities that move in the lead up to and the aftermath of the monthly WASDE report.

Trade issues and a November meeting could impact grains

Earlier this year, while the 2018 growing season was getting underway across the fertile plains of the United States, the price of soybeans fell to their lowest level in a decade.

While farmers planted more soybeans than corn during the 2018 crop year because of the prices of the grains, the oilseed found itself in the crosshairs of an escalating trade dispute between the United States and China. The Trump administration began slapping tariffs on Chinese goods flowing into the U.S. and China retaliated. As part of their protectionist answer to the U.S. policy to rework trade between the two nations, China canceled all of its soybean purchases for 2018 and 2019. In the past years, China bought one-quarter of all U.S. soybeans, so the trade dispute that led to the cancelation stung and sent the price of the oilseed to lows. The price of corn followed soybeans lower as the U.S. is also the world's leading producer and exporter of corn.

Now that the 2018 crop year has ended, and production was sufficient to fulfill global requirements, the attention will turn to South American where the 2018/2019 crop year is just beginning. However, the spotlight in the grain markets and some of the other agricultural products remain on the ongoing saga of U.S.-Chinese trade.

Later this month, the trade dispute will reach an inflection point as U.S. President Donald Trump will meet with President Xi of China at the G-20 meeting in Argentina. Trade is likely to be the primary issue on the agenda when the two leaders meet and break bread at the gathering of world leaders. Argentina is an appropriate place for a meeting on trade as the nation is a significant producer of agricultural commodities. With the current trade issues impacting China's ability to secure supplies of soybeans and corn, Argentina and neighboring Brazil are coming into the season that will determine their ability to provide China with enough crops to fulfill their ever-growing demand and meet the void created by the trade issues with the United States.

A positive outcome at the meeting in Argentina would likely lift soybean and corn prices as it could create an environment where business returns to normal. However, the new President of Brazil has stated his dismay over China's aggressive stand when it comes to making investments in the largest country in South America. Jair Bolsonaro has said that "China isn't buying in Brazil. China is buying Brazil." The nationalist leader is likely to take the same stance towards the Chinese as U.S. President Trump over the coming months and years.

The election of Bolsonaro has caused the price of soybeans to move to the upside over recent sessions as the oilseed is now preparing for the release of the November WASDE report.

Soybeans rally into WASDE

November soybean futures rolled to January which is a contract that tends to focus on the weather in Brazil and other South American countries as the growing season for the oilseed is in full swing during the month. The uncertainty of the weather in South America and the stance of the incoming President of Brazil have combined to lift the price of the oilseed as we go into the November WASDE report this Thursday.

Source: CQG

As the daily chart of January CBOT soybean futures highlights, the oilseed has moved from $8.445 on October 31 to a high of $9.0075 on November 2. Open interest, the total number of open long and short positions in the futures market declined from over 860,000 contracts in mid-October to 749,701 contracts as of November 6. The decline in the metric came as the new crop November contract rolled to January, and many producers and consumers exited hedges at the end of October. On the daily chart, price momentum crossed higher in oversold territory, and it is moving higher on the weekly chart. The monthly and quarterly pictorials both display downtrends in the price of the oilseed.

Technical support is at $8.4450 and at the mid-September low of $8.2625 on the January futures contract. Resistance stands at the November 2 high at just over $9 per bushel and $9.0625, the mid-October high. The January CBOT soybean futures contract was trading at just under the $8.80 per bushel level on Monday, November 5.

Corn leans higher

The price of corn has also been leaning higher going into the USDA report on Thursday.

Source: CQG

As the daily chart of December corn futures illustrates, the price of the grain was trading at the $3.725 per bushel level on November 7. Price momentum crossed to the upside in the corn market as the price has been making higher lows since mid-September. The recent move by the Trump administration to lift the ban on E-15 or gasoline with 15% ethanol compared to the usual 10% blend has been supportive of the price of corn. Open interest has moved higher from 1.6225 million contracts in mid-October to 1.711 million as of November 6. Technical support stands at $3.605, $3.545, and $3.425 on the December futures contract. Resistance is at the mid-October peak at $3.7850 and at the July high at $3.8850 per bushel.

Corn and beans are leaning higher going into the November WASDE report.

Wheat is stable

While beans and corn are watching trade issues and the energy markets, wheat has been the grain market that has moved higher and lower over recent months based on its supply and demand fundamentals. Over past weeks, the price has been trading around the $5 per bushel pivot point on the December futures contract.

Source: CQG

As the daily chart shows, the price momentum in wheat has been rising from neutral territory as the price recovered over the $5 per bushel level. Weekly, monthly, and quarterly charts are all in neutral territory when it comes to the wheat market. The open interest metric has moved significantly higher over recent weeks, rising from under 460,000 contracts in mid-September to its current level around the 548,000-contract level as of November 6.

Meanwhile, the spread between KCBT hard red winter wheat and CBOT soft red winter wheat declined to an 8 cents discount for the KCBT December futures. The norm for the spread is typically a 20-30 cents premium for the KCBT futures, and the discount is a bearish sign going into the November WASDE report later this week. December CBOT wheat was trading at the $5.11 per bushel level on Wednesday, November 7.

Cotton moves toward 80 cents and animal proteins back off highs

As the U.S. is a producer of cotton and China and India are the world's leading consumers of the fiber, the trade issues have caused price distortions in the ICE cotton futures market. Cotton has been caught in the middle between trade and economic growth which has caused the price of the fiber to trade in a range between 75 and 80 cents per pound since mid-September.

Source: CQG

As the chart displays, price momentum is attempting to cross to the upside in neutral territory. Open interest has been gently rising, and the price recently made it to a new short-term high at 80.14 cents per pound on the December futures contract on October 22 where technical resistance now stands. Above there, the next levels on the upside to watch is the September 10 peak at 83.93 cents and August 1 high at 89.98 cents. On the downside, support is at the October 1 low at 75.37 cents and the February low on the continuous contract at 75.11 cents which is the critical level on the downside. In 2018, cotton traded to a high of 96.50 per pound in mid-June before trade and fundamental factors took the price back to the 75 cents level in a corrective move. Cotton was trading at just under 79 cents on November 7, and at this level, it will go into the November WASDE near the top end of its recent trading range.

Animal protein prices have been strong throughout the first two months of the offseason in 2018. The peak grilling season came to an end at the beginning of September, and the prices of both cattle and hog futures are higher than they were in early September on their respective December futures contracts.

Source: CQG

The daily chart of December live cattle futures shows that the price at $1.15175 per pound remains higher than on September 4 at the $1.14 level. Demand for beef and the lack of an oversupplied condition caused the price of live cattle futures to edge higher. Open interest has been rising over recent months reaching over 353,000 contracts after falling to a low of just over 295,000 in late August. Technical resistance is at the October 1 high at $1.1975 per pound with support at the late August low at the $1.1090 level. December live cattle futures were leaning lower on November 7.

Source: CQG

Hogs had also rallied from early September rising from around 55 cents to 58 cents per pound. Support is at the late October low at 51.275 with resistance at the most recent high on October 31 at 60.20 cents per pound. Open interest has been flatlining at around the 220,000 to 230,000 contract level. December lean hog futures were trading at 55.175 cents on November 7.

During the time of the year when beef and pork prices tend to make seasonal lows, both meat futures market had held up well over the past two months which is a testament to rising global demand for complex proteins.

The grain, cotton, and meat market could all experience increased price volatility going into and in the aftermath of the November WASDE report this Thursday. The Invesco DB Agriculture ETF product (DBA) holds positions in many of the commodities that will be the subject of the USDA's coming report on supply and demand fundamentals. The fund summary states:

The investment seeks to track changes, whether positive or negative, in the level of the DBIQ Diversified Agriculture Index Excess Return™ (the 'index') over time, plus the excess, if any, of the sum of the fund's Treasury Income, Money Market Income and T-Bill ETF Income, over the expenses of the fund. The index, which is comprised of one or more underlying commodities ('index commodities'), is intended to reflect the agricultural sector.

The top holdings of the ETF are:

Source: Yahoo Finance

For those who do not trade in the futures market or specific agricultural ETF or ETN products but wish to participate in the market volatility surrounding the monthly WASDE report, DBA provides an alternative.

Source: Barchart

As the chart highlights, DBA moved lower from a high of $19.68 per share in early March to a low of $16.81 on September 4. Bumper crops and trade issues have weighed on the prices of many of the agricultural commodities that the ETF product holds in its portfolio. At $17.59 on November 7, DBA is closer to recent lows than the March highs. Any surprises in the November USDA WASDE report could move the price of DBA. Moreover, progress on trade from Argentina when Presidents Trump and Xi meet later this month could lift the prices of many of the agricultural commodities and the DBA ETF product. DBA has net assets of $557.59 million and trades an average of over 530,000 shares each day.

The WASDE report is always a time of the month when the participants in the agricultural futures market hold their breath and prepare for the data from the USDA. Volatility around the release of the report tends to be the norm rather than the exception each month.

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.