Agricultural Markets Pre-WASDE
Summary
- A delayed USDA report, but trade Is the key.
- Soybeans sit at over $9.00 per bushel.
- Corn trades around $3.80.
- Wheat held back on weak KCBT prices.
- Cotton and meats look for direction.
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The partial government shutdown caused a cancelation of the January World Agricultural Supply and Demand Estimates report. Each month the WASDE report from the US Department of Agriculture releases the gold standard for fundamental data in the markets that feed the world.
With the end of the winter season on the horizon, farmers in the US are now making their plans for the 2019 crop year. The planting season will commence in early spring, and during the first months of the year, farmers make decisions on how best to utilize their acreage. Since December, the grain and other agricultural markets had been operating in the dark given the lack of the USDA's fundamental guidance. Futures markets have been moving on weather reports from South America, news on the trade dispute, and private estimates on supply and demand in the absence of January's monthly WASDE report.
The USDA is back up and running and this Friday, on February 8, the agency will release its first report for 2019. Given the potential for another shutdown, it is still up in the air if the USDA will be operational at the time of the March report. Therefore, the February WASDE has a special significance this week, and the markets are anxiously waiting for the fundamentals that will guide the agricultural sector and the path of least resistance for prices over the coming weeks and perhaps months.
The Invesco DB Agriculture ETF product (NYSEARCA:DBA) contains many of the commodities that will be the subjects of the February 8 WASDE report.
A delayed USDA report, but trade is the key
After the recent blast of the coldest temperatures in a generation across the fertile plains of the US, temperatures have warmed, the groundhog told us the spring would arrive sooner than later this year, and farmers are hard at work figuring out how to best utilize their acreage when it comes to the 2019 crop. The WASDE will help, but the new crop corn-bean relationship now suggests that we will see more corn planting in 2019 than in 2018 at the expense of soybeans. 
Source: CQG
The price of November soybean futures divided by December corn futures shows that there is currently just a shade over 2.4 bushels of corn value in each bushel of soybean value. 
Source: CQG
The monthly chart highlights that the current level is around the long-term median for the price relationship. At the same time, at this time of the year in 2018, it stood at over 2.75:1 which led to more soybean planting last year. The lower level suggests that farmers will plant more corn and fewer beans in 2019 than they did in 2018.
The fundamentals supply and demand data from the USA will assist farmers as they make planting decisions, but it will be trade between the US and China that ultimately dictates the path of least resistance for agricultural commodities prices. 2018 was a rough year for farmers as the Chinese all but disappeared from the market for US products. With 1.4 billion mouths to feed, China represents a massive chunk of the addressable market for grains and an agreement between Presidents Trump and XI would go a long way to support prices. On the other hand, disappointment and a continuation of the protectionist environment would likely weigh on prices in 2019.
Soybeans sit at over $9.00 per bushel
Last week, news that China would purchase five million tons of soybeans from the US per day as a good faith gesture caused the price of the oilseed to remain above the $9 per bushel level as we go into the February WASDE report. 
Source: CQG
As the daily chart shows, March soybean futures are trading near the top end of their trading range and have been making higher lows since September. Technical metrics are in neutral territory, and open interest is edging higher with historical volatility below 7% which is a low level for the oilseed futures. Last year at this time, the price of nearby soybean futures was on its way to $10.71in late February which gave many farmers the ability to lock in much more attractive prices for the 2018 crop year. 
Source: CQG
As the weekly chart of the synthetic soybean crush spread shows, at $0.9850 most recently, it is well below last year's level at $1.25 per bushel in early February. The margin for crushing soybeans into meal and oil is a sign that demand for US bean products remains weak which is likely to weigh on the price of the oilseed.
While WASDE will answer some necessary supply and demand questions, it will be trade negotiations that determine the path of least resistance for the price of the oilseed futures.
Corn trades around $3.80
Since June, the pivot point in the March corn futures contract has been around the $3.80 per bushel level, and the price was trading at $3.78 going into Friday's WASDE report on Thursday, February 7. 
Source: CQG
Technical metrics in corn futures are in neutral territory when it comes to price momentum and relative strength. Open interest has been slowly rising, and daily historical price variance at 11.19% is low. The price of corn has been making lower highs and higher lows since October as the market volatility continues to shrink. More corn planting on the horizon for 2019 and questions surrounding Chinese demand for US corn are keeping a lid on prices. However, China is likely to see its need for ethanol rise which is supportive of the price of agricultural commodities like corn in the US and sugar in Brazil. Therefore, a trade deal would be welcome news for the corn market and a continuation of tariffs and retaliatory measures would likely weigh on corn futures prices.
Wheat held back on weak KCBT prices
March CBOT wheat futures have been rangebound so far in 2019 trading between $5.0125 and $5.3125 per bushel. On Thursday, February 7 as the market prepared for the February WASDE report, CBOT wheat was in the middle of its trading range around the $5.14 per bushel.
Source: CQG
Technical metrics in CBOT wheat are also in neutral territory with the daily volatility measure at just under 16%. Open interest has been gently rising as the market prepares for the 2019 crop year. Unlike corn and beans, the US is not the world's leading wheat producer, but it is a leading exporter of the grain. Therefore, trade may have less of an impact on wheat prices which will concentrate on the weather conditions around the world over the coming weeks and months.
The March KCBT hard red winter wheat futures contract versus the March CBOT soft red winter wheat futures contract was trading at a 16.75 cents discount for the KCBT futures which is well below the historical norm. KCBT futures tend to trade at a 20-30 cents premium to the CBOT wheat, and the discount is a sign of underlying weakness in the wheat futures market. Many bread manufacturers and consumers in the US tend to fill their requirements on contracts tied to the KCBT price. The discount for the hard red winter wheat is a sign that they are buying in the cash market on a hand-to-mouth basis rather than paying contango or forward premiums to hedge or lock in futures requirements. With few exceptions, the consumer strategy has been successful as wheat prices have trended lower since 2012. However, each year is a new adventure in the grain markets and developments in the weather over the coming months could cause prices to rise. Consumers tend to panic during bull markets in wheat and increase their hedging activity when prices are rising.
As we head into the February WASDE report, the level of the KCBT-CBOT wheat spread is a sign of short-term price weakness in the wheat market.
Cotton and meats look for direction
The US and China are leading cotton producers, and China is a significant consumer of the fiber. Therefore, cotton is one of the commodities that is squarely in the crosshairs of the trade dispute. The price of cotton traded to a high at 96.50 last June, but it turned lower and has been trading between 70-75 cents so far in 2019. 
Source: CQG
Cotton is trading in a narrow range after rallying from 55.66 cents in March 2016 to its most recent high at 96.50 cents in June. The midpoint of the two extremes is at just over 76 cents per pound which could be a breakout level for the fiber futures. A move below 70 cents could lead to additional selling. The cotton market will be looking for the latest production, inventory, and demand data in Friday's report which will determine the path of least resistance for the price of the volatile cotton futures market.
When it comes to the meats, pork has been under pressure, while beef futures have been in a gentle bull market. 
Source: CQG
As the daily chart of April live cattle futures illustrates, prices are making higher lows and higher highs since last June with rising open interest which is a technical validation of the bullish trend. In the December WASDE report, the USDA told markets that they expected beef prices to work higher. We will find out Friday if they continue to see even higher levels as we head towards the 2019 peak season of demand which starts in late May. 
Source: CQG
April lean hog prices have gone the other way dropping from over 73 cents to under 60 cents per pound as we head into the February WASDE report. China is the world's leading pork consuming nation, and it is likely that the trade issues have weighed on the price of pork.
Friday's WASDE will answer some questions in the world of agricultural commodities from a fundamental perspective, but it will be the ups and downs of the trade negotiations between the US and China that will continue to highlight price action in the commodities that feed the world over the coming days, weeks, and perhaps months. The Invesco DB Agriculture ETF product is a diversified tool that holds futures contracts in many of the commodities the USDA will address in its February WASDE report. The fund summary for DBA 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 most recent top holdings of DBA include: 
Source: Yahoo Finance
DBA is a liquid market product with net assets of $487.93 million and an average of 436,573 shares trading each day. 
Source: Barchart
Since 2007, DBA has traded in a range from $16.72 to $43.50. At $16.92 on February 7, the ETF is at its low with the uncertainty of the 2019 crop year on the horizon and a complicated picture over the future of trade.
The WASDE is back on Friday, but with the potential of another government shutdown on the horizon in the coming week, this report will provide short-term guidance, and there is no guaranty at this point that we will see another report in March from the USDA.
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