Agricultural Commodities Pre-June WASDE
- Prices steady, but low as the growing season begins.
- Soybeans break higher.
- Corn holds $3 per bushel and moves to the top end of its trading range on the back of gains in energy.
- Wheat remains within striking distance of $5 per bushel.
- Strength in cotton- Animal proteins remain under pressure during the peak season of demand.
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On Thursday, June 11, the United States Department of Agriculture will release its June World Agricultural Supply and Demand Estimates report. The monthly WASDE is the gold standard when it comes to fundamental data for the agricultural futures markets. Volatility in the futures arena tends to pick up going into the report and in its aftermath.
We are now in the growing season for the 2020 crop. Each year is a new adventure for the grain markets and other products from the fertile soil around the globe. The demand side of the equation is always growing. According to the US Census Bureau, the world’s population increases by approximately twenty million, or eighty people million each year. Therefore, the pressure is always on producers to grow more crops to satisfy the rising demand. The summer months are a critical time as the weather conditions determine supply levels. A prolonged period of hot and dry weather could devastate crops. Mother Nature will be the most significant factor over the coming months.
The Invesco DB Agriculture Fund (NYSEARCA:DBA) holds futures contracts in many of the products covered by the monthly WASDE report.
Prices steady, but low as the growing season begins
Market participants have had a lot on their minds over the past month. The US economy is starting to reopen slowly. The coronavirus continues to claim lives and infect victims across the US and around the world. Unemployment in the US has skyrocketed with over forty million people filing for first-time benefits since March. Over the past weeks, civil unrest caused problems in cities across the nation. The stock market continued to rise, as low interest rates and the bullish trend since March caused capital to flow into equities. The unprecedented level of stimulus has begun to weigh on the value of the US dollar.
As of June 8, the dollar index posted a loss over the past nine of ten sessions. A lower dollar tends to be bullish for commodity prices. Many of the leading agricultural commodities have posted gains over recent sessions. Since the previous WASDE report on May 12, cattle, hog, and wheat prices have moved lower, but cotton, corn, and soybeans prices posted gains as of June 8. We could see some volatility in the agricultural markets over the coming sessions as market participants position for the WASDE report.
Soybeans break higher
On May 12, July soybean futures settled at the $8.5225 per bushel level.
As the daily chart shows, the oilseed futures were at the $8.64 level on June 8. Price momentum and relative strength indices were rising towards overbought territory, while daily historical volatility at 10.68% fell from 17.5% on May 12.
The total number of open long and short positions in the soybean futures market moved from 849,557 contracts on May 12 to 885,480 contracts at the end of last week. The increase was likely because of an increase in hedging activity. Soybeans rose above the first level of short-term technical resistance at the May 11 high at $8.6125. The next levels to watch on the upside is at the March 25 high at $8.98 and the March 5 peak at $9.205 per bushel. Support is at the May 22 low of $8.2850 and the April 21 bottom at $8.1850.
Meanwhile, the July soybean crush spread, which measures the economics of processing the raw oilseed into soybean oil and meal, fell marginally since the May WASDE report.
The chart shows that the crush spread moved from 79.50 cents on May 12 to 78.75 cents at the end of last week, a decline of 0.75 cents.
As soybeans go into the June WASDE report, the market was leaning higher.
Corn holds $3 per bushel and moves to the top end of its trading range on the back of gains in energy
Corn is also trending higher going into the June WASDE report.
Corn was trading at just below the $3.33 per bushel level on the July futures contract on June 8 after trading at $3.2225 on May 12. Price momentum and relative strength were rising towards overbought readings. Daily historical volatility declined from 15.34% on May 12 to 13.69% at the end of last week. As hedging activity rose going into the 2020 growing season, open interest rose from 1.421 to 1.542 million contracts from May 12 to the end of last week.
Since corn is the primary ingredient in ethanol, the rise in gasoline and the biofuel provided support for the coarse grain since May 12.
The price of July ethanol futures rose from $1.111 on May 12 to $1.245 per gallon on June 8, supporting gains in the corn futures market.
Wheat remains within striking distance of $5 per bushel
The price of CBOT soft red winter wheat edged lower since the day of the previous WASDE report.
July wheat drifted lower from $5.1425 on May 12 to $5.1175 at the end of last week. Price momentum and relative strength were just below neutral territory. Daily historical volatility rose from 17.97% on May 12 to 22.50% on June 8. The open interest metric increased from 356,391 to 388,783 contracts over the same period.
At the end of last week, the spread between CBOT soft red winter wheat and KCBT hard red winter wheat was trading at a 51.00 cents premium for the CBOT wheat. On May 12, the differential stood at a 45.25 cents premium for CBOT futures. The move in the spread is not typically a bullish sign for the wheat market, The price of the more liquid CBOT contract posted a gain over the period.
Strength in cotton- Animal proteins remain under pressure during the peak season of demand
July cotton futures have been trending higher since April 1 when they fell to the lowest level since 2009 at 48.15 cents per pound.
The daily chart highlights that since May 12, the price rose from 58.37 to 60.69 cents on June 8. Price momentum and relative strength indicators were sitting well above neutral territory. Daily historical volatility at 34.93% early this week was slightly higher than the 32.63% level on May 12. Open interest moved higher from 174,731 to 184,552 contracts over the period. Cotton rose above the 60 cents per pound level on June 1, and traded to a high of 62.32 cents on June 5.
Animal protein futures moved lower since the May WASDE report, even though the grilling season, the peak time of the year for demand, began in late May.
August live cattle futures moved from $1.0170 on May 12 to 96.450 cents on June 8. Price momentum and relative strength were falling towards oversold territory. Open interest moved higher from 260,608 to 267,420 contracts over the period. Daily historical volatility dropped to 16.38% on June 8 from 42.5% on May 12.
August feeder cattle futures edged lower from $1.3575 to $1.33075, with the momentum and strength indicators on either side of neutral readings. Daily volatility fell from 35.59% to 22.48%, and open interest edged higher from 30,072 to 32,216 contracts over the period. Lean hogs also moved to the downside since the May report from the USDA.
On May 12, July lean hogs settled at 61.50 cents per pound and were trading at 54.050 cents on June 8. Momentum and strength metrics were in oversold territory, and historical volatility hardly moved from 53.43% to 38.9% over the period. The total number of open long and short positions rose from 204,494 to 218,049 contracts over the period.
The short-term trends in corn, beans, and cotton have been higher, while animal protein futures remain under pressure. Ranchers have been left holding supplies because of slowdowns and closures at processing plants. At the supermarket butcher counters, scarce availabilities have caused higher prices for consumers.
We are likely to see an increase in price variance in all of the agricultural markets in the days leading up to the June 11 report and its aftermath.
The Invesco DB Agriculture Fund (DBA) holds futures contracts in most of the agricultural products covered in the monthly WASDE report. The fund summary and top holdings of DBA include:
Source: Yahoo Finance
DBA has net assets of $314.02 million, trades an average of 377,212 shares each day, and charges an 0.85% expense ratio.
The DBA product moved from $13.76 on May 12 to $13.84 per share at the end of last week, a marginal rise of 0.58%.
I will report back on the price action in the aftermath of the June WASDE report as we head into the heat of the growing season. Regardless of what the USDA tells markets, it is all about the weather at this time of the year.
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