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Agricultural Commodities In The Aftermath Of The January WASDE Report

by: Andrew Hecht
Andrew Hecht
Commodities, long/short equity, medium-term horizon, long-term horizon

A word from Sal Gilberte.

Soybeans and corn close near the highs on Friday.

Wheat rallies and the KCBT-CBOT spread improves.

Cotton continues to move to the upside.

Meats mixed.

On Friday, January 10, after an exhausting week of volatility in many markets on the back of the Middle East, the USDA released its first World Agricultural Supply and Demand Estimates report of 2020. The January report has often been a significant occasion that has moved agricultural prices in the past.

The markets closed soon after the US Department of Agriculture made the WASDE public, and most agricultural commodities wound up near the highs of the session on the final day of last week. The Invesco DB Agriculture Fund (DBA) holds futures contracts in many of the markets that the USDA covers in its monthly report. Each year is a new adventure in commodities that provide nutrition and cloth the world. While supplies vary from year-to-year, demand has been a consistently supportive factor for the agricultural asset class. In 2018 and 2019, the trade war between the US and China weighed on prices. Tariffs and retaliatory protectionist measures tend to distort prices by creating gluts in one area of the world and shortages in others. As we head into 2020, the US and China will sign the "phase one" trade deal this week, on January 15 in Washington, D.C.

A word from Sal Gilberte

I reached out to Sal Gilberte, the founder of the Teucrium family of agricultural ETFs, including the CORN, SOYB, and WEAT ETFs. Sal's take on the January WASDE was:

The January WASDE report, traditionally one of the more impactful reports of the year, was fairly benign. Post-release of the January WASDE data, markets seemed to find some support at current price levels, probably due to anticipation of the commencement of the Phase-One US/China trade agreement. In addition, the USDA has reaffirmed the tightening of global coarse grain supplies for the second year in a row as well as the tightening of global corn supplies for the third year in a row. This is primarily because demand for corn this year will again outpace supply; the same is true for soybeans. It is worth noting that global corn demand will rise to an annual record pace this year for the seventh consecutive time in as many years. It is also important to note that the USDA will not estimate any potential impacts from the trade agreement until it is officially executed. However, any actual commitment by the Chinese to buy U.S. agricultural products could potentially cause a stir in the grain markets due to the tightening balance sheets of soybeans and corn. The USDA's announcement that it will re-survey the corn and soybean harvest in five states is adding to market uncertainty of how much more tightening there might be.

Prices of agricultural commodities were steady near recent highs in the aftermath of the release of the January 10 WASDE report.

Soybeans and corn close near the highs on Friday

The USDA told the soybean market:

U.S. oilseed production for 2019/20 is estimated at 107.4 million tons, down 0.2 million from last month. Smaller canola, sunflowerseed, peanut, and cottonseed crops are partly offset by a larger soybean crop. Soybean production is estimated at 3.56 billion bushels, up 8 million on a higher yield. Harvested area is estimated at 75.0 million acres, down 0.6 million from the previous forecast, with the largest reductions for North Dakota and South Dakota. Yield is estimated at 47.4 bushels per acre, up 0.5 bushels led by increases for Illinois and Indiana. Soybean supplies are relatively unchanged as lower beginning stocks and imports offset higher production. With crush and export forecasts unchanged, ending stocks are projected at 475 million bushels. The U.S. season-average soybean price for 2019/20 is forecast at $9.00 per bushel, up 15 cents in part reflecting stronger soybean oil prices. The soybean oil price forecast is raised 3 cents to 34.0 cents per pound. The soybean meal price forecast is reduced $5.00 to $305.00 per short ton. Foreign oilseed 2019/20 production is up 0.2 million tons to 467.2 million, with higher sunflowerseed production partly offset by lower cottonseed, rapeseed, and palm kernel. Sunflowerseed production is increased for Russia on higher yields. Palm kernel and palm oil production are lowered for Malaysia due to dry weather conditions over the past year. Lower global vegetable oil production paired with increasing demand results in a 9 percent year-over-year decline in vegetable oil stocks. Other notable oilseed changes include a 0.5-million-ton increase to Chinese soybean crush due to a higher-than-expected pace to date.

Source: USDA

Soybean supplies were close to unchanged from the December report, but the USDA increased its forecast for the average price by 15 cents per bushel.

Source: CQG

The daily chart highlights that March futures were at just below $9.42 per bushel on Monday, January 13, following the release of the report.

The USDA told the corn market:

This month's 2019/20 U.S. corn outlook is for greater beginning stocks, slightly higher production, reduced food, seed, and industrial use, larger feed and residual use, lower exports, and smaller ending stocks. Beginning stocks are raised 107 million bushels reflecting upward revisions to both on-farm and off-farm stocks as of September 1 as reported in Grain Stocks. Corn production is estimated at 13.692 billion bushels, up 31 million as a higher yield more than offsets a reduction in harvested area. Total corn use is up 155 million bushels to 14.070 billion. Exports are reduced 75 million bushels to 1.775 billion, reflecting the slow pace of shipments through December, and the lowest level of outstanding sales as of early January since the 2012/13 marketing year. FSI use is lowered 20 million bushels, with lower projected corn used for starch, glucose and dextrose, and high fructose corn syrup. Feed and residual use is raised 250 million bushels to 5.525 billion, based on indicated disappearance during the September-November quarter and the 2018/19 marketing year as reflected by the Grain Stocks report. With use rising more than supply, 2019/20 corn stocks are reduced 18 million bushels. The season-average corn price received by producers is unchanged at $3.85 per bushel. Global coarse grain production for 2019/20 is forecast marginally higher to 1,401.8 million tons. This month's foreign coarse grain outlook is for slightly lower production and consumption, and reduced stocks. Foreign corn production is forecast higher with increases for Bangladesh, Russia, and the EU. Other major coarse grain production changes include larger barley production for the EU, with reductions for China and Australia. Major global coarse grain trade changes for 2019/20 include increased corn exports for Ukraine and the EU. For 2018/19, Brazil's exports for the marketing year beginning in March 2019 are raised based on observed shipments to date. Barley exports for 2019/20 are raised for the EU, Argentina, and Ukraine, with a partly offsetting reduction for Australia. Barley imports are raised for Turkey and China. China's corn feed and residual use is raised for both 2018/19 and 2019/20 based on lower barley feeding. Foreign corn ending stocks are lower, mostly reflecting reductions for China and Brazil. Global corn stocks, at 297.8 million tons, are down 2.8 million.

Source: USDA

The US, foreign, and global corn stocks declined according to the USDA in the January WASDE report.

Source: CQG

Corn was trading at $3.8875 per bushel late on January 13, at the highs of the session after the release of the monthly report. The global demand for corn continues to rise, which is a function of demographics.

Wheat rallies and the KCBT-CBOT spread improves

The USDA told the wheat market:

The outlook for 2019/20 U.S. wheat is for stable supplies, increased feed and residual use, and lower stocks. Feed and residual use is raised 10 million bushels on lower-than-expected second-quarter stocks reported in today's NASS Grain Stocks report. Seed use is down 1 million bushels reflecting 2020/21 wheat planted area released today in the NASS Winter Wheat and Canola Seedings report. Ending stocks are now projected at 965 million bushels, down 9 million from the previous report. The season-average farm price is unchanged at $4.55 per bushel. Foreign production for the 2019/20 market year is dropped 1.0 million tons led by a 1.0- million-ton reduction for Russia on updated government production data, and a 0.5- million-ton decrease for Australia reflecting the severe drought conditions in parts of the country. Partly offsetting is a 0.5-million-ton increase for the European Union. Foreign consumption is raised fractionally, and global exports are raised 1.3 million tons. The export increase is led by a 2.0-million-ton increase for the EU on improved price competitiveness and a 0.5-million-ton increase for Ukraine on pace to date. Partly offsetting is a 1.0-million-ton decrease for Russia reflecting lower supplies and higher relative prices. With foreign supplies falling and total use increasing, foreign ending stocks are lowered 1.2 million tons to 261.8 million.

Source: USDA

The US and global wheat stocks declined according to the USDA.

Source: CQG

Wheat was trading around the $5.6175 per bushel level on January 13. CBOT wheat futures have been making higher lows and higher highs since early September, and it reached another new peak on January 10.

On Monday, the nearby KCBT hard red winter wheat versus CBOT soft red winter wheat spread was at 72 cents per bushel premium for CBOT wheat. The long-term norm for the spread is a 20-30 cents per bushel premium for KCBT wheat. The differential recently was at over $1 per bushel favoring CBOT wheat, but the move to 72 cents could be a bullish sign as KCBT historically outperforms CBOT during bull market periods in the wheat futures arena.

Cotton continues to move to the upside

The USDA told the cotton market:

This month's outlook for U.S. cotton in 2019/20 includes lower production and ending stocks compared with last month, while domestic mill use and exports are unchanged. Production is lowered 100,000 bales, mainly due to a decline in Texas which was partially offset in other States. Ending stocks are 100,000 bales lower this month at 5.4 million bales. Upland cotton season-average price received by farmers is projected 2 cents higher than a month ago at 63 cents per pound, based on stronger-than-expected early season prices. The global 2019/20 cotton forecasts include lower production, trade, and ending stocks. Production is forecast 630,000 bales lower, and changes for 2019/20 this month, other than the United States, include decreases for Turkey, Australia, Mali, and Pakistan. World consumption is virtually unchanged as an increase in Uzbekistan's expected use is offset by declines for Bangladesh and Vietnam. World trade in 2019/20 is projected 550,000 bales lower, largely due to a 500,000-bale drop in China's expected imports. Smaller declines for Bangladesh and Vietnam are offset by increases for Turkey and Pakistan. Exports are 200,000 bales lower for India and Uzbekistan, and also lower for Australia and Mali. Global 2019/20 ending stocks are 730,000 bales lower this month. At 79.6 million bales, total ending stocks are projected about unchanged from 2018/19, but stocks outside of China are expected 3.0 million bales above the year before.

Source: USDA

The USDA lowered the US ending stocks, but global stocks were unchanged from the previous month. The cotton market moved higher after the report.

Source: CQG

The daily chart of ICE March cotton futures shows that the price was at the 71.57 cents per pound level on January 13, just below the most recent high of 71.96 cents on the same day. Cotton has moved steadily higher since early December, but the bullish price trend began in late August. The progress on trade between the US and China has been bullish for the price of the fiber futures. We are heading into the time of the year where cotton typically moves to the upside. Cotton seems to be heading for the 80 cents per pound level.

Meats Mixed

The USDA told the cattle and hog markets:

The 2019 total red meat and poultry production estimate is reduced from last month as lower pork and turkey production more than offset higher beef production. The beef production estimate is raised on the pace of late-year slaughter. The pork production estimate is reduced on the slower pace of slaughter in late 2019.

For 2020, the total red meat and poultry production forecast is increased fractionally from last month as higher broiler production more than offsets lower expected beef, pork, and turkey production. The 2020 beef production forecast is reduced on lighter expected carcass weights. However, quarterly beef production was increased in the first half of the year and reduced in the second half of the year due to higher-than-expected cattle placements in late 2019 and a reduced placement forecast for early 2020. USDA will release its semi-annual Cattle report on January 31, providing estimates of heifers held for breeding and an insight into the number of feeder cattle available for placement during 2020. The pork production forecast for 2020 is reduced from the previous month. USDA's Quarterly Hogs and Pigs report estimated the 2019 September-November pig crop 2 percent higher than the prior year which supports a higher first-half 2020 slaughter and production forecast. The report also indicated producers intend to expand farrowings about 1 percent in the first half of 2020, which coupled with adjustments to the rate of growth in pigs per litter, results in reduced hog slaughter forecast for the second half of 2020.

The beef import forecast is increased for 2019 on recent trade data. No change is made to the 2020 import forecast. The 2019 beef export forecast is reduced to reflect a slower export pace late in the year, but no change is made to the 2020 beef export forecast. The pork export forecasts for 2019 and 2020 are unchanged from the previous month.

Livestock and poultry price estimates for 2019 are adjusted to reflect December price data. For 2020, the first-quarter cattle price is raised, reflecting current early-year price strength. First-half hog price forecasts are reduced on current prices and increased production.

Source: USDA

While the USDA adjusted its forecasts based on the price strength in the cattle market, they did not take into account the potential for Chinese demand for US pork on the back of the "phase one" trade agreement that both sides will sign on January 15. A severe pork shortage in China continues in the wake of the 2019 outbreak of African Swine Fever that killed a significant percentage of Chinese pigs.

Source: CQG

February live cattle futures were at the $1.26575 per pound level on January 13, not far below the recent high of $1.2790.

Source: CQG

Meanwhile, February lean hog futures were at 65.575 cents per pound and were approaching technical support at the early December low of 65.40 cents.

Source: RMB

The forward curve in the lean hog futures market shows that prices peak in July at 85.625 cents per pound, which could reflect Chinese demand for US pork exports over the coming months.

The Invesco DB Agriculture Fund holds many of the futures contracts that are the subject of the monthly WASDE report. The most recent top holdings of DBA include:

Source: Yahoo Finance

DBA has net assets of $347.79 million, trades an average of 260,395 shares each day, and charges an expense ratio of 0.85%.

Source: Barchart

DBA moved 2 cents per share higher from $16.35 per share on January 9 to $16.50 on January 13 in the aftermath of the first WASDE report of the 2020s.

Each year is a new adventure in agricultural commodity futures markets. The odds favor lots of price volatility on the horizon for agricultural products as the spring season is right around the corner.

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.