While grains have been one of the sectors of the commodities markets in the crosshairs of the trade dispute between the US and China, it turned out to be the best-performing sector of the commodities market in Q2. After falling to lows in the aftermath of the escalation of the dispute in mid-May, prices took off to the upside as the weather took center stage. Floods in vast areas of the US farm belt caused delays in planting, which resulted in significant rallies.
Trade between the US and China will remain a significant factor for the grain sector over the coming weeks and months. A weaker dollar and the weather could trump even a negative outcome when it comes to the summit between Presidents Trump and Xi at the end of Q2.
A composite of the grain sector was down by 2.89% in 2016. The overall sector dropped by 14.48% in 2015 after falling 12.18% in 2014. In 2017, the sector posted a 6.03% gain despite bumper crops. In 2018, the overall grain sector moved 3.63% higher. In Q1, grains were only 1.71% lower at the end of March with losses in wheat and corn. In Q2, the sector moved 8.08% higher and is 5.96% higher over the first six months of 2019.
There were abundant supplies of agricultural commodities in 2018 to feed the world, and while trade issues weighed on prices, almost all of the grain markets posted gains last year. This year, the one guaranty is that there will be more people to feed around the world. In Q1, the global population rose by 18-20 million. The weather is always the most critical factor when it comes to the path of least resistance for grain prices at this time of the year. However, the sector continues to face an unusual dynamic when it comes to international trade.
The United States is the world’s leading producer and exporter of corn and soybeans, and a significant exporter of wheat to areas all over the globe. Throughout the second half of 2018 and into 2019, international trade had become the most significant issue facing agricultural markets. On the campaign trail, President Trump pledged to level the playing field and renegotiate trade agreements to create more reciprocity and fairness. The President prefers bilateral to multilateral trade agreements, and he began the process of renegotiating trade deals with partners around the world in 2018.
When it comes to the Chinese, the President slapped protectionist measures on China, and they retaliated with tariffs on U.S. goods. Soybeans, corn, and other agricultural products were in the crosshairs of China when it comes to the trade issue. China typically purchases one-quarter of the U.S. soybean crop each year. Tariffs caused those purchases to cease as China turned to Brazil and other producing nations. In early December 2018, a meeting between Presidents Trump and Xi created some optimism that the two sides could agree in the future when it comes to trade. In Q2, President Trump became frustrated with the pace of negotiations and Chinese backtracking, and on May 10 he slapped new tariffs on Chinese goods. China retaliated on May 13, leading many grain prices to fall to lows. However, the excessive moisture that led to planting delays turned markets around, and the sector posted impressive gains for the second quarter of this year.
As we head into Q3, the focus will remain on trade issues, but the growing season in the US is underway. The weather will determine the size of the 2019 crops over the coming weeks. As floods caused the delay in planting, immature plants could be particularly sensitive to any hot and dry spells. Drought conditions would likely cause a disaster when it comes to the 2019 harvest season.
The grain sector moved 3.63% higher in 2018, even though the dollar index rose by 4.26% last year. In Q1, the dollar index was 1.16% higher, and the composite of grains moved 1.7% to the downside. In Q2, the sector was 8.08% higher while the dollar index posted a 1.22% loss. The lower greenback makes U.S. exports more competitive in global markets. The growth of the demand side of the fundamental equation for grains and the late planting supported prices.
Corn and CBOT wheat prices posted double-digit percentage gains. All of the other members of the sector posted gains except for MGE wheat and soybean oil. Even though US farmers planted more corn than wheat in 2019 because of price differentials, the Trump administration lifted the summer ban on E15, and late planting sent the price of corn sharply higher compared to its closing level at the end of Q1.
The Invesco DB Agriculture ETF (NYSEARCA:DBA) has an almost 20% exposure to the three primary grains that trade on the CBOT, including corn, soybeans, and wheat, as well as KCBT wheat futures. Since these commodities are all in contango, meaning that deferred prices are higher than nearby prices, when the market does not move, the ETF loses value as it rolls nearby futures to the next active month.
Corn
Corn was down just 0.36% in 2017. Corn dropped 9.63% in 2015 and 1.88% in 2016 and has been in a bear market since it traded to its all-time high at $8.4375 per bushel in 2012. Corn moved 6.91% higher in 2018. In Q1, corn dropped 4.93% with a significant drop in prices on March 29 following the latest planting report. In Q2, the price of corn fell to a lower low and then exploded to the upside posting a 17.88% gain for the quarter and was 12.07% higher over the first six months of this year compared to the closing price at the end of 2018. 
Source: CQG
As the daily chart highlights, nearby July corn futures settled on June 28 at $4.2025 per bushel. Corn traded in a range of $3.33550 to $4.6425 over the first six months of this year. On the daily chart, price momentum in the corn market was falling in neutral territory at the end of Q2 after selling during the final session of the quarter.
In 2013, the corn crop created a surplus, and from 2014 through 2018, we have seen more of the same. The jury is still out for 2019 as Mother Nature will determine if the weather will create another year of bumper crops.
Technical resistance for nearby corn futures is at the $5.195 per bushel level, which was the high from 2014, with support at $3.3350 on the weekly chart which was the mid-May 2019 low before the corn futures market took off on the upside. Since the U.S. is the world’s largest producer of corn, the grain is the primary ingredient in U.S. ethanol, and the price of the biofuel can influence demand for corn. After posting a gain of 14.71% in 2016, ethanol moved 17.81% lower in 2017 giving up all of the 2016 gain and more. Ethanol moved 4.24% lower in 2018. In Q1, the biofuel recovered by 6.41% on the back of the prospects for E15.
The path of least resistance for the price of corn during the height of the 2019 growing season will depend on the weather as increasing population means the world depends on more output each year. Trade considerations could cause some price volatility, but the increase in demand for E15 is a supportive factor for the price of corn over the coming months. Moreover, if drought conditions develop in the US, we could see an explosive corn market when it comes to the price of the grain. Corn is going into Q3 in bullish mode as the price is a lot closer to the recent high than the lows during Q2. Technically, the bullish reversal on a quarterly basis sets the stage for much higher prices if the weather does not allow for a bumper crop this year.
Soybeans
Soybeans moved higher by 14.54% in 2016, but were 14.64% lower in 2015. In 2014, soybeans fell 20.94%. In 2017, the price of soybean futures fell 4.49%. In 2018, they moved 7.28% lower for the year. Soybeans traded in a range of $7.8050 to $9.5925 per bushel over the first six months of 2019 with the low coming in Q2. In Q1, beans moved only 0.20% higher, but in Q2 they gained 1.75% and were 1.95% higher through the first half of 2019. Nearby soybean futures settled on June 28, 2019, at $8.9975 per bushel.
Source: CQG
As the daily chart shows, nearby July soybean futures staged an impressive recovery from the mid-May low which was the lowest price in a decade.
Meanwhile, any trade deal between the US and China would probably send the price of beans significantly higher as it was the commodity that suffered the most under the weight of the Chinese cancelation of their 2018 and 2019 purchases from the US. The US is the world's largest producer and exporter of soybeans. China purchases around one-quarter of the annual crop from the US, which is why tariffs had been bearish for the price of soybean futures in 2018 and in May when the trade dispute escalated. The floods across the Midwest bailed out the soybean futures market which came within pennies of the 2008 low in mid-May before they turned higher with other grain prices.
Trade and the weather are the issues that continue to face the soybean market as we move forward into Q3 2019.
Wheat
The wheat complex was the best-performing members of the grain sector in 2108 with CBOT and KCBT wheat posting over 20% gains on a year-on-year basis. In Q1 2019, both of these markets experienced the most significant losses in the sector. In Q2, CBOT wheat posted a double-digit percentage gain, but KCBT wheat did not keep pace, and MGE wheat posted a decline over the past three months.
In 2015 CBOT (soft red winter) wheat declined by 20.31%. It was 13.19% lower in 2016. In 2017 wheat finished the year with a 4.66% gain. In Q1 2019, CBOT wheat posted a 9.04% loss. In Q2, it climbed 15.35% higher. CBOT wheat traded in a range from $4.1625 to $5.58 in over the first six months of 2019 with the low and the high coming in Q2. As with corn and beans, the weaker dollar has made U.S. exports a bit more competitive in global markets.
Source: CQG
As the daily chart of the CBOT July wheat futures contract highlights, the price found a bottom in mid-May. July CBOT wheat futures were crossing lower in overbought territory after the recent recovery, and on June 28, 2019, they were trading at $5.28 per bushel and put in a bearish reversal on the daily chart on the final day of Q2.
July hard red winter wheat futures, traded on the Kansas City Board of Trade (KCBT) closed at $4.5150 per bushel on June 28, 2019, and was 5% higher in Q2, but was 7.62% lower over the first six months of 2019 after rising 14.4% in 2018. KCBT wheat fell 25.22% in 2015 and was down 10.67% in 2016, but it rebounded by 2.09% higher in 2017. KCBT wheat was historically weak compared to CBOT throughout the second quarter.
Hard red spring wheat, traded on the Minneapolis Grain Exchange (MGE), closed at $5.5425 per bushel on the nearby July futures contract and posted a loss of 0.09% in Q2 and was 0.96% lower over the first half of 2019, after dropping by 10.7% in 2018 after a 14.27% gain in 2017. MGE wheat was 9.07% higher in 2016 but declined by 20.7% in 2015.
Demographics when it comes to population growth continues to put upward pressure on demand, and the world will need another year of bumper wheat crops around the globe to keep the price from running away on the upside.
Oat futures rose 1.49% in Q2 and were 0.82 % lower over the first half of 2019 after moving 14.2% higher in 2018. Nearby oat futures closed on June 28 at $2.7300 per bushel. Rice futures rose by 3.92% in Q2 and were 11.69% higher over the first six months of the year after falling 13.57% in 2018. Nearby rough rice futures closed at $11.275 on June 28. Rice tends to trade by appointment in the US futures market as the contracts lack liquidity.
The bottom line: Outlook for Q3 2019
Each year is a new adventure in the grain markets as Mother Nature is the ultimate arbiter of the path of least resistance for prices. We are moving into the critical time of the year in Q3 as the focus has shifted to the growing season in the northern hemisphere. Population growth continues to support higher lows for all agricultural commodities, while trade issues will add additional volatility to markets. Any agreement between the US and China on trade could lift the prices of grain futures, particularly soybeans which suffered the most over the issue in 2018.
The Invesco DB Agriculture product has a 19.67% exposure to the three primary grains that trade on the CBOT and KCBT, including corn, soybeans, and two wheat contracts. 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
The grain sector posted an 8.08% gain in Q2.
Source: Barchart
As the chart of DBA illustrates, it moved from $16.47 at the end of Q1 to $16.57 at the end of Q2, a gain of only 10 cents or 0.61%. While grains moved higher, many of the other agricultural commodities that feed the world fell during Q2 and the cost of rolling futures from one active month to the next in contango markets weighed on the value of the DBA ETF. DBA fell to a new low at $15.42 during Q2 and recovered by 7.46% from the lows. The bottom came on the same day that grain futures hit their bottoms on May 13.
The weather will be the primary factor when it comes to the path of least resistance of grain prices over the coming weeks. However, the trade situation between the US and China could introduce more volatility into the grain sector of the commodities market as protectionist policies distort prices. I believe that the long-term trend in this sector of the raw materials asset class that feeds the world is higher as more people, with more resources in the world will continue to require nutrition to sustain their lives.
A more comprehensive report on the grain sector is available to subscribers to the Hecht Commodity Report.
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