Agricultural Commodities Pre-August WASDE Report

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About: Invesco DB Agriculture ETF (DBA), Includes: ADZ, AGA, AGF, BALB, CORN, COW, DAG, FUD, JJA, RJA, SOYB, TAGS, UAG, UBC, WEAT
by: Andrew Hecht
Summary

One of the most significant reports of the year.

Soybeans suffer from trade.

Corn is holding over $4 per bushel.

CBOT wheat straddles $5 while the spread against KCBT remains historically weak.

Cotton at the lows and meats head into the offseason.

On Monday, August 12, at noon EST, the US Department of Agriculture will release its August World Agricultural Supply and Demand Estimates report. Since the release of the July 11 report, the prices of all three of the leading grain futures market have declined. Nearby cattle and hog prices have moved to the downside, and the price of cotton tanked to the lowest level since 2016.

Over the past month, the dollar index has increased. The trade dispute between the US and China escalated into a trade and currency war. The two factors create a bearish storm for the prices of agricultural commodities.

Meanwhile, the one constant for all of these products is that each day, more consumers on our planet require food and clothing. Each quarter the global population grows by approximately twenty million people. The supply side of the fundamental equation for agricultural commodities changes with the weather, policies on trade, and movements in the foreign currency markets. However, the demand side is only increasing as more people, with more money compete for finite resources each day.

The monthly WASDE report is a guidepost that supplies the market with fundamental data each month, and it always has the potential to move prices. The Invesco DB Agriculture Fund (DBA) holds a diverse portfolio of commodities futures contracts included in the USDA's monthly report.

One of the most significant reports of the year

The August WASDE report comes at a time when the annual crops have matured to a point where projections about supplies have more validity than in earlier reports. Therefore, the supply side of the fundamental equation for agricultural commodities for the coming year is more of an observation rather than a guesstimate.

However, this year's August WASDE will come out in an environment where the US and China are involved in a trade and currency war with significant ramifications on the agricultural sector in the United States. At the same time, the US dollar is not far below its most recent high, which makes US exports less competitive on global markets. While the supply side of the agricultural markets will become clear in the August 12 report, drastic changes in the demand side are possible in the weeks and months ahead. If the US and China can agree on a trade deal or make progress that leads to purchases, prices could soar given the flooding at the start of the 2019 planting season. However, a continuation of the trade war would likely weigh on prices of the products.

Soybeans suffer from trade

China typically purchased one-quarter of the US annual soybean crop each year, until the trade problems emerged. As retaliation for US tariffs, China canceled purchases in 2018, and more recently the Chinese reneged on a promise to purchase the oilseed. Soybeans are going into the August report at a lower price than the highs from the aftermath of the release of the July WASDE.

Source: CQG

As the daily chart of new-crop November soybean futures on the CBOT highlights, the price of the oilseed rose to a high at $9.3650 per bushel in the wake of the July WASDE report. The escalation of the trade dispute led to a decline to $8.545 on August 5, and beans are going into the August 12 report at just over the $8.90 level, close to the midpoint of the range. Open interest has dropped from 687,073 on July 11 to 627,095 contracts at the end of last week. Both price momentum and relative strength were sitting around neutral territory. Daily historical volatility at 17.89% was a little above the level on the day of the last WASDE report.

The USDA is likely to say that the delay in spring planting has reduced the overall crop for 2019. However, the lack of Chinese buying continues to weigh on the price of the oilseed.

Corn is holding over $4 per bushel

The price of corn went into the July report at around the $4.40 per bushel level.

Source: CQG

The daily chart of new-crop December corn futures illustrates that the grain rose to a high at $4.6475 in the aftermath of the July WASDE. However, trade and a rising dollar pushed the price of corn to a low at $3.9725 before recovering to the $4.1725 per bushel level late last week. Open interest moved gently higher from 1.784 million contracts on July 11 to 1.798 million at the end of last week, an increase of 14,000 contracts. Price momentum is rising in neutral territory while relative strength is steady at just below a neutral reading. Daily historical volatility at 21.86% last Friday declined from 34.68% on the day of last month's WASDE report.

Like in the soybean market, the USDA is likely to report that the spring flooding will lower the crop yields this year.

If 2019 was a year of business as usual between the US and China, the prices of both corn and soybeans would likely be significantly higher at this time of the year given the prospects for the 2019 crop.

CBOT wheat straddles $5 while the spread against KCBT remains historically weak

The price of CBOT soft red winter wheat futures is also going into the August report at a lower level than the peak that followed the July WASDE. The CBOT contract best reflects the price of world wheat supplies.

Source: CQG

The chart of CBOT wheat shows that wheat was trading at around the $5 level going into last months report, rallied to a high at $5.315 per bushel on July 15, and was at just below $5 at the end of last week. Open interest has increased from 364,161 contracts on July 11 to 380,996 contracts at the end of last week, an increase of 16,835 contracts or 4.6% over the period. Price momentum is rising towards the upper area of neutral territory while the relative strength index was neutral. Daily historical price volatility at 25.75% was lower than the reading on July 11 at 34.01%.

While the US is the world's leading producer and exporter of corn and soybeans, it is one of many exporters of wheat. The USDA projected that Russia would be the most significant exporter of wheat to the world this year. The reading on production from Europe and the Russians will dictate the path of least resistance of wheat prices over the coming weeks.

Meanwhile, the KCBT hard red winter wheat futures were trading at an 82.5 cents discount to CBOT futures, which is a new low for KCBT versus CBOT wheat. The spread in September is at a significant differential considering the long-term norm has been a 20-30 cents premium for the CBOT soft red winter wheat. The spread is trading at over $1 below the long-term norm. The differential tells us that US consumers are purchasing wheat on a hand-to-mouth basis and are not hedging requirements. Most bread manufacturers in the US price their consumption from the KCBT benchmark price. The KCBT-CBOT is a bearish sign for the wheat futures market as the price of the grain tends to rally when KCBT moves higher compared to the price of CBOT futures.

Cotton at the lows and meats head into the offseason

The price of cotton is limping into the August WASDE report at its lowest price since 2016 when it reached a bottom at 55.66 cents per pound. The escalation of the trade dispute has weighed on the price of the fiber.

Source: CQG

The daily chart shows that the price of December cotton was at 63.11 cents per pound on July 11, rose to a high at 64.68 cents on July 25, and was at 58.84 cents at the end of last week. Cotton had dropped to a low at 57.26, just 1.6 cents above the 2016 low. Price momentum and relative strength indicators were both in oversold territory at the end of last week. Open interest moved higher from 189,635 contracts on July 11 to 211,839 contracts at the end of last week, an increase of 22,204 or 11.7%. Rising open interest while the price is moving to the downside tends to be a validation of a bearish trend in a futures market. However, the price of cotton could be near the bottom of its pricing cycle. Daily historical volatility moved from 23.02% on July 11 to 27.45% at the end of last week. The USDA is likely to concentrate on the trade issues that impact the demand side of the fundamental equation. However, the 2019 hurricane season still poses a threat to this year's crop.

In the meat markets, the prices of cattle and hog futures moved lower since the July WASDE report. In cattle, the US signed a trade protocol with Europe that will increase exports of beef to the continent. In China, the outbreak of African swine fever decimated the hog population. The lower number of hogs is also weighing on global soybean prices as demand for animal feed has declined. Soybean meal is the primary ingredient in animal feed.

Source: CQG

The chart of October live cattle futures shows that the price dropped from $1.0945 on July 11 to the $1.0690 level at the end of last week. The open interest metric dropped from 332,258 on July 11 to 313,380 contracts as of August 8. The drop of 5.7%, while the price edged lower, is not a technical validation of a bearish trend in the beef market. Price momentum is at the upper region of oversold territory along with relative strength. Daily price variance at 11.15% is a bit lower than the 13.07% on the day of the July report.

Source: CQG

The cash-settled feeder cattle futures contract in October declined from $1.43425 on July 11 to $1.38250 at the end of last week. Open interest moved just under 1400 contracts lower over the period. Both price momentum and relative strength are below neutral territory. Price volatility moved from 17.63% on the day of the July WASDE report to 15.80% as of the end of last week.

While the world's hog population continues to suffer the impact of African swine fever in China and neighboring countries, the prices of lean hog futures moved appreciably lower since the July WASDE report. Both cattle and hog prices are moving lower for seasonal reasons as the end of the peak season of the demand is in early September.

Source: CQG

The daily chart of October lean hog futures shows that the price was at 71.65 cents per pound on July 11. Concerns over global supplies pushed the price to a high at 81.975 on July 24, but they dropped like a stone to a low at 61.50 cents on August 5. October futures were at 66.925 cents per pound at the end of last week. Open interest moved from 282,079 on July 11 to 269,774 contracts at the end of last week. Price momentum was in oversold territory, while relative strength was in the lower region of a neutral condition. Daily historical price volatility at 50.84% was higher than the July 11 level at 46.03%.

Agricultural commodities are going into the August WASDE report at lower prices across the board. Trade and the stronger dollar are the leading reasons for the decline in prices. The Invesco DB Agriculture Fund holds futures contracts in many of the products that the USDA will cover on August 12. The most recent top holdings include:

Source: Yahoo Finance

DBA has net assets of $393.61 million and trades an average of 330,682 shares each day. The product charges an expense ratio of 0.85%. DBA moved lower since July 11.

Source: Barchart

DBA moved from $16.66 on July 11 to $15.73 at the end of last week, a decrease of 5.6%. DBA reflects the price action in the agricultural sector.

The USDA report could cause an increase in price variance in agricultural commodities futures markets next week. After the release of the July report, most prices rallied, but the escalation of the trade dispute stopped any price appreciation dead in its tracks. I will return in the coming days with a synopsis of the August WASDE report, which is the gold standard when it comes to the fundamentals of the agricultural markets in the US and around the world.

The latest expectations for corn and soybean production at the end of last week were:

The latest expectations for wheat production at the end of last week was:

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.