U.S. Grains Mixed On Uncertainties Surrounding U.S.-China Trade Deal; Stormy, Cooler Weather Could Stall Early Season Planting

Includes: CORN, SOYB, WEAT
by: Andrei Evbuoma

U.S. grains finished Monday mixed with soybean, corn up, and wheat down amid uncertainties of potential U.S.-China trade deal.

Soil moisture and drought outlook supports upcoming planting season.

Active (stormy) and cooler than average weather pattern could delay early season planting across key crop production centers of the central and southern U.S.

Investment Thesis

U.S. grain markets saw a mixed reaction on Monday on reports of a possible trade deal between the U.S. and China, though uncertainties loom. Despite adequate soil moisture, lingering cold and stormy conditions over the central U.S. is an item to watch in the coming days. Investors and farmers alike need to continue to keep watch on the ongoing trade negotiations as well as temperature and precipitation trends.

U.S.-China trade uncertainties keep investors wary; tepid grain moves

After climbing up to more than 200 points in the morning session, the Dow Jones Industrial Average (DJI) fell 206.67 points, or 0.79 percent, to 25,819.65, the S&P 500 (SP500) lost 10.88 points, or 0.39 percent, to 2,792.81 and the Nasdaq Composite (COMP) dropped 17.79 points, or 0.23 percent, to 7,577.57. The SPDR S&P 500 Trust ETF (SPY), which is a large cap ETF that tracks the S&P 500 index, finished down 0.36% or down to $279.40.

The huge decline in the broader market was centered around a disappointing weak construction spending data from December and uncertainties regarding the U.S.-China trade negotiations despite optimism for a potential trade deal later this month.

U.S. grains (wheat, corn, and soybean) closed mixed on increased expectations for a U.S.-China trade deal as early as March 27.

Figure 1 is a depiction of the Corn May Contract price trend for March 4, 2019.

Source: Investing.com

The Teucrium Wheat (WEAT), Corn (CORN), and Soybean (SOYB) Funds provide investors unleveraged direct exposure to wheat, corn, and soybean, respectively without the need for a futures account. These ETFs reflect the price action of their respective futures markets that trade on the CBOT.

The soybean May contract finished up 0.59% to 916.38, while the Teucrium Soybean Fund (SOYB) closed up 0.86% to $16.39. The corn May contract finished up 0.50% to $374.84, while the Teucrium Corn Fund (CORN) closed up 0.70% to $15.87. The wheat May contract finished down 0.35% to $455.38, while the Teucrium Wheat Fund (WEAT) closed down 0.56% to $5.31. Overall, it was a choppy day for the grains, especially CORN and WEAT.

Figure 2 is a depiction of the Wheat May Contract price trend for March 4, 2019.

Source: Investing.com

Trade negotiations are said to be in the “final stages” as the two largest economies prepare for a possible summit at Mar-a-Lago at the end of March. If a deal is reached, a rollback on tariffs of at least $200 billion in U.S. and Chinese goods would take place including agricultural goods. Amongst items that are being discussed include enforcement mechanisms on intellectual property theft and related matters, and efforts by the Chinese to curb cybertheft and subsidies.

Uncertainties center around the fact that the Trump Administration may not get as strong of a deal as anticipated including a not tough enough enforcement mechanism which would leave uncertainty on the possibility of tariffs being retained and rounds of additional negotiations.

The back and forth trade talks between the U.S. and China have impacted the financial markets over the past 8 months keeping investors on edge. U.S. grains have had a hard time rising due to the uncertainty in the trade talks.

Active weather pattern and cooler conditions could delay early planting season

Aside from the trade talks, the weather is an area of focus for the upcoming planting season. The past three months have yielded adequate rainfall across the central and eastern U.S. including the major agriculture centers for wheat, soybean, and corn.

Looking over the next 2 weeks, the weather pattern will be active with multiple storm systems tracking across the central and eastern U.S. Precipitation will run wetter than average over the Mississippi Delta and the western corn/soybean belts over the next 7 days with drier than normal conditions expected across the Southeast, Northeast, and Northwest U.S.

In the 8 to 14-day time frame, wetter than normal conditions are expected across the southern U.S. Snow will still be in play across the northwestern corn/soybean belts (Dakotas, eastern Nebraska, Iowa, Minnesota, and Wisconsin). Rain and severe thunderstorms will be the story across Kansas and the southern U.S. over the next 2 weeks.

Figure 3 is a Day 1 to 7 (March 4 to 11) accumulated precipitation anomaly map from the 12z GEFS depicting areas of wetter than normal conditions (in green) and drier than normal conditions (in yellow).

Source: Tropical Tidbits

Figure 4 is a map showing a storm system that's forecast to impact the central U.S. around March 10th with snow in blue and rain/thunderstorms in green.

Source: Tropical Tidbits

Below normal temperatures will look to remain in place for the greater part of the next 2 weeks over the central U.S., particularly winter wheat country and western corn/soybean belt areas. No threat of any Arctic air will be expected in the 6 to 14-day range.

Figure 5 is a map from the 12z ECMWF EPS model depicting 850 mb temperature anomalies averaged out in the 10 to 15 day time frame (March 14 to 19) with areas in blue being cooler than normal and areas in orange/red being warmer than normal.

Source: WeatherBell

The active weather pattern combined with cooler than normal conditions across the central U.S. will likely delay early season planting through mid-March.

As for wheat, the hard red winter wheat has already been planted last Fall and is dormant right now. Soil moisture over the major production center of winter wheat (Kansas) is adequate and precipitation over the next two weeks will not be an issue. The very cold temperatures early this week over Kansas as well as a large part of the winter wheat belt is of concern.

Cooler than average temperatures will try to linger through mid-March across the central U.S. especially the western half of the central U.S. that includes Kansas. The good news here is that much of the cooler weather once past this week will not be in the form of Arctic air that we have currently, but rather will be a by-product of storm systems on the backend that will be tracking across central U.S. over the next couple of weeks, particularly in the 6 to 14-day time frame.

With regards to the wheat market, the Kansas City Board of Trade hard red winter wheat futures contract (KCBT) reflects the price of U.S. consumers while the Chicago Board of Trade soft red winter wheat contract (CBOT) reflects the price of the world wheat.

The KCBT-CBOT spread is a great way to gain insight into consumer behavior and market sentiment. The KCBT wheat typically outperforms the CBOT wheat when the price of wheat is moving higher, while the CBOT wheat outperforms the KCBT wheat when the price of wheat is in decline or steady. When the wheat commodity is in decline or steady, it suggests that consumers are willing to purchase supplies on an at-needed basis (a bearish sentiment in the market).

A drought or another severe weather event that can have an impact on the commodities' supply will send prices higher, and that's the time consumers will frantically buy and place price hedges (a bullish sentiment in the market). Currently, the CBOT wheat is at an 11-cent premium compared to the KCBT wheat (456 vs. 445).

This is a decrease from last week's 23-cent CBOT premium compared to the KCBT wheat (470 vs. 447). This report is still bearish but the decrease in the KCBT-CBOT spread is an indicator of some possible concerns over supplies possibly driven by the anomalously cold weather this week.

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.