Agricultural Commodities Post WASDE

Summary

• The USDA finally speaks.
• Soybeans sit above $9.
• Corn edges lower.
• Wheat steady but KCBT-CBOT is a warning.
• Cotton does not move much, and meats continue their price trends.
• Looking for more? I update all of my investing ideas and strategies to members of Hecht Commodity Report. Get started today »

On Friday, February 8, the USDA released its first World Agricultural Supply and Demand Estimates report for 2019. The January report was a casualty of the government shutdown.

The agricultural markets greeted the report that outlines the latest supply and demand fundamentals with little more than a yawn. The February report comes at a time when farmers in the United States are making plans for the 2019 crop. The supply and demand information supplied by the USDA is the gold standard when it comes to market fundamentals in many agricultural markets. Meanwhile, farmers are watching the ups and downs of trade negotiations between the US and China these days which will impact supply and demand for their products over the coming months, and perhaps years. The trade dispute that began last year and resulted in a series of tariffs and retaliatory measures weighed on the prices of many US agricultural products. China is the world’s most populous nation and is a significant percentage of the addressable market for US crops each year. While the WASDE report has taken many of the markets out of the dark when it comes to the fundamental data, uncertainty over trade will continue to guide the path of least resistance of prices in many of the agricultural commodities over the coming days, weeks, and beyond.

The Invesco DB Agriculture ETF product (NYSEARCA:DBA) holds futures contracts in many of the commodities that are the subjects of the monthly WASDE report.

The USDA finally speaks

The market finally heard from the USDA on Friday, February 8, and the agency started the monthly WASDE report with the following message:

NOTE: Due to the lapse in Federal funding, the World Agricultural Supply and Demand Estimates report for January 2019 will not be published.”

The February WASDE report gave an updated view of the many agricultural markets, but the news did not differ much from the market’s expectations, so prices did not experience too much volatility following its release at the end of last week.

Soybeans sit above $9

The price of March soybean futures did not change much in the aftermath of last Friday’s release, but they declined on Monday, February 11.

Source: CQG

As the daily chart highlights, March beans were at the $9.04 per bushel after the USDA told the oilseed market:

U.S. oilseed production for 2018/19 is estimated at 134.0 million tons, down 1.5 million from the previous report. Smaller soybean, canola, peanut, and cottonseed crops are partly offset by an increase for sunflower seed. Soybean production is estimated at 4,544 million bushels, down 56 million. Harvested area is estimated at 88.1 million acres, down fractionally WASDE-585-3 from the previous report. Yield is estimated at 51.6 bushels per acre, down 0.5 bushels, led by reductions for North Dakota, South Dakota, and Nebraska. The soybean crush forecast is raised 10 million bushels to 2,090 million. Soybean meal production is unchanged as the higher crush is offset by a lower extraction rate. Lower supplies and increased crush are partly offset with a 25-million-bushel reduction in exports. Ending stocks are projected at 910 million bushels, down 45 million from the previous forecast. The 2018/19 U.S. season-average farm price forecast for soybeans is projected at $8.10 to $9.10 per bushel, unchanged at the midpoint. The soybean meal price is forecast at $295 to $335 per short ton, up $5.00 at the midpoint. The soybean oil price forecast of 28.5 to 31.5 cents per pound is unchanged at the midpoint. The 2018/19 global soybean outlook includes lower production, exports, crush, and stocks. Global soybean production is lowered 8.2 million tons to 361.0 million with lower crops for Brazil, Argentina, Paraguay, Uruguay, and South Africa. Production for Brazil is lowered 5 million tons to 117 million due to dryness in parts of the South and Center-West regions. Production for Argentina is lowered 0.5 million tons to 55 million due to a reduction in harvested area that is partly offset by increased yields. Global soybean exports are reduced 1.7 million tons to 154.4 million. Lower exports for Brazil, Uruguay, and Paraguay are partly offset by higher exports for Argentina. Global imports are also reduced mainly on a 2-million-ton reduction for China due to lower crush demand. Global 2018/19 soybean marketing-year ending stocks are lowered 8.6 million tons this month to 106.7 million, which is an 8.6-million-ton increase over the 2017/18 estimate. In addition to crop related changes, this month’s lower global ending stocks forecast reflects historical balance sheet revisions for Argentina (back to 2009/10) and Brazil (back to 1999/00). The revisions were motivated by supply and demand conditions indicating that beginning stock levels for the 2017/18 local year should be higher in Brazil and lower in Argentina than previously estimated. Additionally, these revisions are more in line with historical stocks revisions made in late 2018 by Argentina’s Ministry of Agriculture and Brazil’s Association of Vegetable Oil Industries (ABIOVE). With Argentina’s 2018 crop falling 30 percent below initial projections due to the drought, soybean stocks are assumed to be lower than prior estimates. The post-drought stocks-to-use ratio had been projected at 38 percent for the 2017/18 local year (April 2018-March 2019). The USDA’s estimates are guided by Argentina’s official crush, trade, and production data. Projected stocks are reduced with upward revisions to residuals, which take into account supplies needed for reported use, statistical errors, and possible unreported demand during the past decade. While stocks are reduced for Argentina, Brazil’s stocks are revised higher starting in 1999/00. Record exports during October 2018-January 2019, the end of Brazil’s 2017/18 local year (February 2018-January 2019), motivated the revisions. Record late-season exports made it apparent that, in addition to a record crop, beginning stocks were higher than previously estimated. Brazil’s ending stocks were revised over several years to increase supplies in order to meet reported use through 2017/18. For more information, read the USDA Foreign Agricultural Service’s Oilseeds: World Markets and Trade and the Economic Research Service’s Oil Crops Outlook February reports.”

Source: USDA

The USDA lowered 2018/2019 US production and global stocks. Argentina’s crop results for 2018 moved lower while Brazil’s increased. The most significant issue facing the beans is the trade issue over the coming weeks.

Corn edges lower

The price of March corn fell following the February WASDE report and was trading at $3.7225 per bushel on Monday, the lowest closing price since January 15.

Source: CQG

As the daily chart illustrates, the next level of technical support for the corn market is the 2019 low at $3.71 per bushel.

The USDA told the corn market:

This month’s 2018/19 U.S. corn outlook is for lower imports, production, food, seed, and industrial use (FSI), feed and residual use, and stocks. Corn production is estimated at 14.420 billion bushels, down 206 million on reduction in yield to 176.4 bushels per acre. Harvested area is down fractionally. Total corn use is down 165 million bushels to 14.865 billion. FSI use is lowered 40 million bushels, reflecting reductions to corn used for ethanol and other industrial use. For ethanol, the reduction is based on the most recent data from the Grain Crushings and Co-Products Production report and weekly ethanol production data as reported by the Energy Information Administration for the months of December and January. Other FSI use is lowered 15 million bushels with lower projections for high fructose corn syrup and glucose and dextrose. Feed and residual use is lowered 125 million bushels to 5.375 billion based on a smaller crop and indicated disappearance during September-November as reflected by the December 1 stocks. With supply falling more than use, corn stocks are lowered 46 million bushels. The season-average corn price received by producers is unchanged at a midpoint of $3.60 per bushel. WASDE-585-2 Sorghum production for 2018/19 is estimated slightly higher at 365 million bushels, as an increase in yield to 72.1 bushels per acre more than offsets a decline in harvested area. Grain sorghum prices are forecast at $3.35 per bushel, down 5 cents at the midpoint. Global coarse grain production for 2018/19 is forecast 1.5 million tons lower to 1,372.1 million. This month’s foreign coarse grain outlook is for increased production and consumption, and marginally lower trade. Foreign corn production is forecast higher with increases for Argentina, China, and Ukraine more than offsetting reductions for South Africa and Mexico. Argentina’s corn production is up based on higher expected area and yield, with abundant rainfall and benign temperatures over the past two months boosting yield prospects. China and Ukraine are higher based on the latest official statistics. South Africa is lowered as heat and dryness during the month of January, particularly in the western producing areas, reduces yield prospects. Major global trade changes for 2018/19 include increased corn exports for Argentina and Ukraine, partially offset by reductions for South Africa and Mexico. For 2017/18, Argentina’s exports are reduced with a partially offsetting increase for Brazil based on observed shipments to date for the local marketing years that both started in March 2018. Imports are raised for South Africa for the marketing years that both started in May 2018. For 2018/19, imports are raised for Chile but lowered for Venezuela. China’s barley imports are reduced, while barley exports are lowered for Australia. Foreign corn ending stocks are higher, mostly reflecting increases for Argentina and China. Global corn stocks, at 309.8 million, are up 1.0 million.”

Source: USDA

While corn production, imports, food, seed, industrial use and stocks in the US were marginally down for 2018/2019, the USDA slightly increased global stocks. Additionally, expectations that farmers will plant more corn in 2019 than they did in 2018 weighed on the price of the grain in the aftermath of last week’s report.

Wheat steady but KCBT-CBOT is a warning

The price of CBOT wheat did not change much following the WASDE report. March futures were trading at $5.1325 per bushel on February 11.

Source: CQG

As the daily chart of March CBOT wheat futures shows, the price remains in a trading range with technical support at just over the $5 per bushel level.

The USDA told the wheat market:

Projected 2018/19 wheat ending stocks are raised 36 million bushels on reduced feed and residual use and lower seed use. Feed and residual use is lowered 30 million bushels on larger than expected second-quarter stocks reported in today’s NASS Grain Stocks report. Seed use is down 6 million bushels reflecting 2019/20 winter wheat planted area released today in the NASS Winter Wheat and Canola Seedings report. Winter wheat planted area is lower than expected on excessive precipitation and cool temperatures during the planting window. Ending stocks are now projected at 1,010 million bushels. The season-average farm price is unchanged based on NASS prices reported to date and price expectations for the remainder of the marketing year. World production for the 2018/19 market year is raised 1.3 million tons, led by a 1.6-million-ton increase for Russia, a 0.6-million-ton increase for Brazil, and a 0.5-million-ton increase for Paraguay. These changes are partly offset by a 1.1 million ton decrease for China and a 0.3- million-ton decrease for Argentina. All these production changes reflect updated government statistics and harvest results. Global exports are raised 1.3 million tons led by a 0.7-million-ton increase for Pakistan on reports of new export subsidies. Russian exports are raised 0.5 million tons and Paraguay is raised 0.4 million tons, both on larger exportable supplies. In contrast, Australia’s exports are lowered 0.5 million tons on a slow pace to date, and Argentina exports are down 0.2 million tons reflecting the smaller crop. Global use for 2018/19 is raised 2.0 million tons, primarily on a 2.0-million-ton increase in China feed and residual use. With global use rising more than supplies, world ending stocks are lowered 0.6 million tons to 267.5 million.”

Source: USDA

US wheat stocks rose, but global wheat stocks dropped on rising global demand which kept the price of wheat steady in the wake of the release. One factor weighing on the price of wheat is the KCBT-CBOT March wheat spread which dropped to a 24.25 cents discount for the KCBT hard red winter wheat. The norm for the spread is a 20-30 cents premium for KCBT over CBOT so the differential remains a bearish factor for the price of the grain.

Cotton does not move much, and meats continue their price trends

The price of cotton moved lower following the WASDE report but remained above the 70 cents per pound support level, so far.

Source: CQG

The daily chart of March ICE cotton futures illustrates that the fiber was trading at 70.39 cents per pound on February 11 after the USDA told the market:

This month’s 2018/19 U.S. cotton forecasts include slightly lower production, mill use, and ending stocks. Production is reduced 200,000 bales due to small declines outside the Southeast. Ending stocks and mill use are reduced 100,000 bales each, while exports are unchanged. The forecast for the marketing-year average price received by producers is reduced 2 cents per pound, to a midpoint of 72 cents. The world 2018/19 cotton supply and demand estimates include lower production and mill use but higher trade and stocks. Production is reduced nearly 300,000 bales, as smaller crops in Turkey, India, Burkina Faso and the United States offset increases in China, Brazil, Pakistan, and Australia. World trade is increased 600,000 bales as higher imports by China, Turkey, and Pakistan more than offset declines in Vietnam and Bangladesh. Exports rose for Brazil, Benin, and India, but fell for Turkey and Burkina Faso. Lower 2017/18 India mill use is largely responsible for a 600,000-bale increase in world 2018/19 beginning stocks. Projected 2018/19 consumption in India is reduced 500,000 bales since December and is reduced 1 million bales for China. Global use is reduced 2 million bales, with smaller declines in Vietnam, Turkey, and the United States. World 2018/19 ending stocks are now 2.3 million bales above their previous estimate, with a 2.0-million-bale increase for China.”

Source: USDA

US cotton production moved a bit lower along with ending stocks in the month’s report, but global stocks rose which weighed on the price of cotton. Cotton is another commodity that is in the crosshairs of the trade dispute as both the US and China are significant producers, and China is a leading consumer along with India.

The trend in meat prices continued following the February report with gains in feeder cattle and losses in lean hog futures.

Source: CQG

The live cattle futures in April have been making higher lows and higher highs and were trading at the $1.28125 per pound level on February 11 not far off its most recent peak at $1.29475.

Source: CQG

Meanwhile, lean hog futures fell to a new low following the report and were trading at the 58 cents per pound on the April futures contract. The USDA told the meat markets:

Total red meat and poultry production for 2018 is lowered from December as beef and broiler production more than offsets slightly higher pork production. Beef production is reduced on lower cattle slaughter and lighter carcass weights through late December. Pork production is raised as heavier carcass weights through late December more than offset lower-than-expected fourth-quarter hog slaughter. For 2019, the total red meat and poultry production forecast is lowered from December on lower expected beef, pork, and broiler production. The 2019 beef production forecast is reduced on lower projected slaughter as smaller anticipated placements in late 2018 and early 2019 are expected to result in lower fed cattle marketings and slaughter in the first half of the year. The pork production forecast for 2019 is lowered from December on lower expected hog slaughter and slightly lighter carcass weights in the first half of the year. USDA’s Quarterly Hogs and Pigs report estimated the September-November pig crop was 2 percent above 2017 and the report also indicated producers expect to expand farrowings about 2 percent in the first half of 2019. Forecast broiler production is lowered for 2019 on slower expected production growth in the second half of the year. For 2018 and 2019, beef import and export forecasts are lowered from December on trade data to date. Pork export forecasts for 2018 and 2019 are reduced on the lowered forecast of production and slower expected pork shipments to key trading partners.”

Source: USDA

The WADSE report was bullish for live cattle prices and bearish for lean hog prices in the near term. In the longer term for 2019, the trade dispute with China will impact the price of both meats, particularly the lean hog market as China is the world’s leading consumer of pork.

The February WASDE confirmed the market’s consensus in most of the agricultural products when it comes to supply and demand factors. Trade will continue to be the most significant issue over the coming weeks. With the potential of another government shutdown on the horizon, time will tell if the USDA will be in a position to release its March WASDE report which is due out on March 8, 2019.

The Invesco DB Agriculture ETF product holds most of the agricultural commodities that are the subject of the WASDE report. The latest holdings of the ETF include:

Source: Yahoo Finance

DBA remains a lot closer to its low since 2006 than its high.

Source: Barchart

DBA was trading at the $16.75 per share level on February 11 which reflects the lack of volatility in agricultural markets following the USDA’s February report. The range in DBA since 2006 has been from $16.72 to $43.50, so at $16.75 it is at the lowest level in at least a dozen years.

It will be all about trade in the ag markets over the coming weeks, but the market will keep its collective eyes on the weather in South America as well as the trade negotiations between the US and China.

Analyst’s 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.

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.