- Corn, soybeans, and wheat prices remain weak.
- The US-China problem comes back.
- COVID-19 is a problem for the grain belt.
- A potential for problems with the supply chain.
- It’s all about the weather for the coming weeks - JJG is a grain ETN product.
- Looking for more stock ideas like this one? Get them exclusively at Hecht Commodity Report. Get started today »
On June 11, the USDA will publish its June World Agricultural Supply and Demand Estimates report. I will post my usual pre-WASDE piece on Seeking Alpha sometime next week before the monthly data release.
We are now moving into the growing season across the fertile plains of the United States. The most significant factor when it comes to the path of least resistance for the products that feed the world is the weather. Any prolonged hot and dry period could cause yields to decline and prices to rise. Each year, the crops face the same uncertainty when it comes to Mother Nature. The last time the US had a significant drought was in 2012. During that year, corn and soybeans rose to record highs, and wheat moved to over $9 per bushel. As we move into the growing season, grain futures prices are at far lower levels than eight years ago. 2020 has been anything but an ordinary year. Meanwhile, the population of the world continues to grow by around twenty million people each quarter or eighty million per year, according to the US Census Bureau. In the grain markets, each year is a new adventure in the supply side of the fundamental equation, but the demand side is continuously growing. Technology and the weather have cooperated with producers over the past eight years as crops have satisfied rising demand.
Meanwhile, corn, soybean, and wheat futures prices on the CBOT division of the CME are not running away on the upside at the beginning of June 2020.
The iPath Series B Bloomberg Grains Subindex Total Return ETN (NYSEARCA:JJG) holds futures contracts in the leading grain markets.
Corn, soybeans, and wheat prices remain weak
There are no guarantees that the 2020 crop in the US will be sufficient to meet the requirements of people all over our planet. The United States is the leading producer and exporter of corn and soybeans, and an influential exporter of wheat to people worldwide. The price levels of the grains and oilseed futures do not reflect any concerns over supplies this year.
The weekly chart highlights at just under $8.50 per bushel on June 2, soybeans futures were a bit below the lower end of the band from June 2019 when the oilseed traded in a range from $8.4825 to $9.2150.
The price of nearby corn futures at $3.2350 on June 2 is significantly below the range seen for the grain in June 2019. Last year, corn futures traded between $4.07 and $4.6425 during June.
The weekly chart of CBOT soft red winter wheat at around the $5.1125 per bushel level is inside last year's range in June, from $4.8775 to $5.58 per bushel.
The 2019 crop year produced enough of the three grains to feed the world, build inventories, and keep prices stable. One of the problems facing the grain markets during the growing season in 2019 disappeared for a while. However, it is back with a vengeance at the beginning of June 2020.
The US-China problem comes back
Last year, at this time, the grain markets reflected concerns over the escalating trade war between the US and China. The Chinese historically purchased one-quarter of the US annual soybean crop to feed its 1.4 billion people. Tariffs and retaliatory measures caused US farmers to lose a significant addressable market.
In late 2019, the US and China agreed to a "phase one" trade deal that representatives from each nation signed in Washington on January 15. The agreement was supposed to lead to a comprehensive trade protocol and compromise between the two countries with the world's leading GDPs.
Before the ink was dry on the "phase one" deal, coronavirus was claiming victims in China and spreading around the world. At first, the novel virus appeared contained within Wuhan province. While China restricted domestic travel, they allowed journeys to foreign destinations. The virus spread like wildfire, and anger at China's less than forthcoming information in January has grown. US-China relations are now more strained in June 2020 than they were in June 2019 at the height of the trade war. The Chinese are supposed to purchase significant quantities of US soybeans and other agricultural products under the terms of the "phase one." In the current environment, it does not appear that they intend to meet that obligation, which is not a supportive factor for the corn, soybean, and wheat futures markets.
COVID-19 is a problem for the grain belt
Coronavirus may have turned the corner in the US, allowing businesses to reopen slowly, but people are still getting sick. As of June 1, there were almost 2.9 million confirmed cases with over 104,000 deaths. While the brunt of the virus has come in the most densely populated states, the US grain belt has suffered more than its fair share of cases. On June 1, the USDA rolled out a coronavirus assistance program for farmers suffering losses from the pandemic.
Meanwhile, farming is a labor-intensive business. In an example of the impact of the virus on some farmers, and the potential for others, in Tennessee, one farm that tested its workers for COVID-19 received a 100% infection rate with almost 200 positive tests. Grain crops mostly rely on machinery instead of labor, but there have been hot spots in farm belt states in April and May. Grain prices as we head into June and the summer months are taking a leap of faith that supplies will be plentiful during the fall harvest season.
A potential for problems with the supply chain
One of the issues that have confronted agricultural markets as it spread across the United States is price dislocations in markets. Animal protein prices on the futures market fell to the lowest levels in years in April. Lean hog futures declined to the lowest price since 2002, and live cattle prices fell to over a decade low. Low prices in the futures market rained financial turmoil on those who raise cattle and hogs. However, limited supplies in supermarkets caused limits on purchases and rising prices.
Bottlenecks at processing plants caused the dislocation in prices between what producers receive and consumers pay for meat. Social distancing guidelines and plant shutdowns across the US presented a unique situation for the animal protein markets. In April, when prices fell to multiyear lows, the futures market typically move higher as the summer grilling season approaches. In 2020, the markets suffered the worst declines in years because of problems with the supply chain. What occurred in the meat markets could also impact grains over the coming months. A resurgence of cases in the fall and winter months could cause similar bottlenecks at grain delivery points. Food manufacturers may experience shutdowns or a decline in processing activities.
Corn, soybeans, and wheat prices are at low levels going into the peak growing season in 2020. While coronavirus could impact farming, logistics, or processing, the most significant threat over the coming weeks remains the weather conditions across the fertile plains of the United States.
It's all about the weather for the coming weeks - JJG is a grain ETN product
Each year, the grain markets tend to experience at least one rally based on weather concerns. Since 2015, the price of corn tended to peak from May through July. Soybean and wheat futures have also exhibited price strength during the early weeks of the growing season, while crops are still vulnerable to drought conditions.
The bottom line is that we are at a time of the year when the path of least resistance of grain prices is more likely to be higher than lower. A dry period could ignite a significant rally, and a prolonged drought could be explosive for prices.
The window for weather-related rallies will likely last from this month through the end of July. The most direct route for a risk position in the grain markets is via the futures and futures options that trade on the CME. The iPath Series B Bloomberg Grains Subindex Total Return ETN (JJG) is a product that tends to move higher and lower with grain prices. The fund summary for JJG states:
Source: Yahoo Finance
JJG is a small ETN product with $14.74 million in net assets and an average daily trading volume of 3,818 shares. The size of the product can make the bid-offer spread wide at times.
Over the past year, JJG has made lower highs and lower lows. Aside from weak grain prices, the ETN also suffers from the impact of contango or the deferred premium for futures contracts. Each time the hedges roll to future months, it results in a cost for the holders of the product. JJG fell to a low of $39.05 in mid-May and was trading at the $39.84 level on June 2. A bounce in the corn, soybean, and wheat markets would take the price of the JJG ETN higher at some point over the coming eight weeks. I would only use JJG as a medium-term vehicle and would take profits when prices move higher. I would look for a 2:1 reward versus risk ratio on JJG.
There are many risks in the agricultural markets as the crops are now moving towards a time of the year when they will be in full bloom. I favor the long side at the beginning of June but would use both a price and a time stop on any long positions as the markets watch Mother Nature like hawks over the coming weeks.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.
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