- Grains were the best-performing commodities sector in Q2
- Corn leads the sector with a gain of 17.88%.
- Weak performance in MGE wheat and soybean oil which were the only two losers
- A 15.35% gain in CBOT wheat
- The season of uncertainty peaks at the end of Q2
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.
While 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. In 2000, just eighteen years ago, six billion people inhabited our planet. Today, the number has grown by over 26.3% and continues to rise, making the demand side of the equation for food a continually expanding factor. Grains are essential food for people, and anything short of a bumper harvest around the world creates the potential of food shortages, and that danger rises each year. In 2019, the world will consume more food than it did in 2018, and less than it will require in 2020. Therefore, the demand side of the equation for the grain sector will continue to increase while supplies are a year-to-year affair. 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 product (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 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.
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 that resulted in a bearish reversal on the final trading session in June. Daily historical volatility was at 26.65%.
As the weekly chart illustrates, technical resistance is around the $4.65 per bushel level with support at $4.1225. At the end of Q2, the price of corn turned lower from the top end of the range. Price momentum on the weekly chart was in overbought territory at the end of Q2, but on the monthly chart, it was rising towards an overbought condition.
As the quarterly chart highlights, corn has been making higher lows since July 2000, except for a marginal new low down to $3.01 in early 2016, but price action rejected that low. In Q2, corn put in a bullish key reversal pattern on the quarterly chart on record volume, which is a bullish technical validation of the break to the upside.
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. Open interest in CBOT corn futures was at the 1.714 million contract level at the end of the second quarter, 235,000 contracts lower than it was at the end of Q1. In early June 2018, the metric rose to a new record high at just over 2.0 million contracts. Meanwhile, some analysts are saying that as much as 7.5 million acres of corn production was impacted by the floods, which delayed planting and will reduce the 2019 crop.
Meanwhile, crude oil prices declined in Q2 and gasoline did not move appreciably higher, which is a bearish factor for the price of corn futures given the ethanol mandate in the United States. The administration loosened the rules on E15 or fuel that contains 15% rather than 10% ethanol to support farmers during the trade dispute between the U.S. and China. The EPA lifted the ban on E15 over the summer months, which added support for the price of ethanol. Corn is the primary ingredient in ethanol in the United States, which provides support for the grain. Ethanol recently traded to a high at $1.645 per gallon level wholesale and was bullish for the price of corn.
Corn remains mostly in a steady contango out to July 2020, which indicates ample available supplies of the grain. From July 2020 through December 2022 the forward curve reflects seasonal factors which are strength during the growing season and weakness during the offseason winter month contracts. Corn remains well below levels seen in recent years when the grain moved to over $8.40 per bushel.
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. In Q2, ethanol followed corn higher and posted an 11.9% gain and was 19.07% higher over the first six months of 2019. The price spread between nearby gasoline and ethanol futures closed 2017 at 44.18 cents with gasoline trading at a significant premium to ethanol. At the end of 2018, the spread was at just a 3.81 cents premium for gasoline. In Q1, the spread went the other way and settled on March 29 at 53.75 cents premium for gasoline given the move to the upside in the oil and oil product markets over the first three months of 2019. In Q2, the spread moved lower on gains in ethanol and losses in gasoline and closed on June 28 at 39.16 cents, 14.59 cents lower than at the end of Q1.
Farmers planted more soybeans than corn in 2018 as the corn-soybean ratio was above the long-term average of 2.4:1 coming into the planting season in the spring. More soybeans compared to corn had supported the price of corn, but this year will not be the same as last.
As the chart shows, new crop November 2019 soybean futures divided by new crop December 2019 corn futures highlights, the spread was around the long-term average at 2.4:1 until mid-April. However, the drop to the 2:14 level in June likely led to late season bean planting instead of corn, which supported the price of corn.
The most recent June WASDE report from the USDA indicated that production and stocks fell in the US and on a global basis which provided fundamental support for the price of corn:
“This month’s 2019/20 U.S. corn outlook is for increased beginning stocks and imports, sharply lower production, reduced feed and residual use and exports, and smaller ending stocks. Beginning stocks are up reflecting a 100-million-bushel decline in projected exports for 2018/19 to 2.2 billion bushels, based on current outstanding sales and reduced U.S. price competitiveness. Corn production for 2019/20 is forecast to decline 1.4 billion bushels to 13.7 billion, which if realized would be the lowest since 2015/16. Unprecedented planting delays observed through early June are expected to prevent some plantings and reduce yield prospects. USDA will release its Acreage report on June 28, which will provide survey-based indications of planted and harvested area. With sharply lower supplies, use is projected to decline 425 million bushels to 14.3 billion, based on reductions to feed and residual use and exports. With supplies falling more than use, ending stocks are projected to decline 810 million bushels to 1.7 billion, which if realized would be the lowest since 2013/14. The season-average farm price is raised 50 cents to $3.80 per bushel. This month’s 2019/20 foreign coarse grain outlook is for lower production, increased trade and lower stocks relative to last month. Argentina corn production is raised on increased area with higher prices. Canada corn production is lowered on reductions to both area and yield with planting delays in Ontario. Russia corn production is higher based on government data indicating larger-than-expected planted area. Barley production is lowered for the EU reflecting a reduction for Spain. For 2018/19, Brazil corn production is raised based on the latest government statistics. Major global trade changes for 2019/20 include larger forecast corn exports for Argentina and Russia, with a partly offsetting reduction for Zambia. For 2018/19, exports are raised for Brazil and Argentina for the local marketing year beginning in March 2019 based on higher than-expected shipments during May. Foreign corn ending stocks are lowered from last month mostly reflecting reductions for Argentina, Brazil, Canada, and the EU.”
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 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.
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.
The weekly chart was trending higher towards overbought territory at the end of the quarter while the monthly chart was rising in a neutral condition.
Meanwhile, the quarterly chart was crossing higher in oversold territory as the futures market made a head fake low during Q2, which appears to have created a blow off low.
Open interest in soybean futures moved lower from 738,038 contracts at the end of Q1, to 642,815 at the end of Q2, a decrease of 95,223 contracts or 12.9% over the last three months. While farmers initially planned on planting more corn than beans, the price action over recent weeks resulted in late-season soybean planting which likely weighed on the price of the oilseed futures. 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.
Crushing soybeans create two products, soybean meal, and soybean oil. The meal was 18.39% higher in 2016 and fell by only 0.10% in 2017. Meal dropped 2.03% in 2018. In Q1 2019, soybean meal edged 0.08% higher. In Q2, the meal moved 2.15% higher as it marginally outperformed the oilseed. Soybean meal was 2.24% higher through the first six months of this year.
Soybean oil was up 12.67% in 2016, but it moved 3.89% lower in 2017. Soybean oil declined by 16.72% in 2018. In Q1, soybean oil posted a 2.94% gain. In Q2, soybean oil posted a marginal 0.42% loss and was 2.5% higher over the first half of 2019. Nearby soybean meal closed at $313.10 per ton on June 28, 2019, and soybean oil closed at 28.24 cents at the close of the second quarter. Soybean oil futures underperformed the beans in Q2 while meal marginally outperformed meaning the economics of crushing beans into products did not move much which did not help margins for companies like Archer Daniels Midland (NYSE: ADM).
The weekly chart of the synthetic soybean crush spread shows that the processing margin for refining the oilseed into products edged lower from $1.02 at the end of Q1 to $1.0125 at the end of Q2. Meanwhile, ADM stock moved lower over the period. ADM stock closed Q1 at $43.13 per share and moved to $40.80 at the end of Q2, a decline of 5.4%.
Term structure in the soybean market indicates healthy supplies.
The forward curve in beans is in contango from July 2019 through August 2020 and then reflects seasonal factors with strength during the uncertain growing season.
Support for soybean futures on the weekly chart is at the mid-May 2019 low at just over $7.80 per bushel. Technical resistance is at $9.3125 and then at $10.71. A new trade agreement with China could cause a significant price recovery. As of the end of Q2, soybeans were trading at around $9.00 per bushel and were waiting for news on trade and, more significantly the weather over the coming weeks, before making their next move.
The latest, June WASDE report from the USDA reflects the higher beginning and ending US stocks, but marginally lower global inventories:
“This month’s U.S. soybean supply and use projections for 2019/20 include higher beginning and ending stocks. Beginning stocks are raised reflecting a 75-million bushel reduction in projected exports for 2018/19 based on lower-than-expected shipments in May and a lower import forecast for China. Although adverse weather has significantly slowed soybean planting progress this year, area and production forecasts are unchanged with several weeks remaining in the planting season. With soybean use unchanged, 2019/20 ending stocks are projected at 1,045 million bushels, down 25 million from the revised 2018/19 projection. Other changes for 2018/19 include increased soybean meal imports and exports, reduced soybean oil used for biodiesel production, and higher soybean oil ending stocks. The 2019/20 season-average price for soybeans is forecast at $8.25 per bushel, up 15 cents reflecting the impact of higher corn prices. Soybean meal prices are forecast at $295 per short ton, up 5 dollars. The soybean oil price forecast is unchanged at 29.5 cents per pound. The 2019/20 global soybean supply and use projections include lower production and stocks compared to last month. Global production is down 0.3 million tons to 355.4 million due to lower crops for Ukraine and Zambia. The 2019/20 soybean ending stocks are lowered 0.4 million tons mainly reflecting lower carryin due to revisions to 2018/19 balance sheets. Beginning stocks for 2019/20 are reduced for Argentina and China offsetting higher stocks for the United States. For Argentina, stocks are lowered on a 1.5-million-ton increase to exports to 7.8 million for 2018/19 based on the recent pace of shipments. Beginning stocks are lowered for China due to a 1-million-ton decrease to imports to 85 million for 2018/19.”
Trade and the weather are the issues that continue to face the soybean market as we move forward into Q3 2019.
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.
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.
Meanwhile, the weekly chart displays that price momentum was in overbought territory at the end of Q2.
The quarterly chart shows that wheat is rising from the lows, and the price trend is bullish with a neutral reading at the end of Q2. CBOT wheat futures fell just shy of putting in a bullish key reversal trading pattern on the quarterly chart in Q2. Open interest in the most liquid wheat futures series of contracts moved lower from 494,712 at the end of Q1 to 363,150 contracts at the end of Q2, a decline of 131,562 contracts or 26.6%. Technical resistance is at the 2018 high at the $5.93 level with support at the $4.1625 per bushel.
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.
On June 28, at the end of Q2, the spread between CBOT and KCBT wheat was trading at a premium for CBOT wheat of 76.50 cents as it moved 48.75 cents away from the norm in Q2. The norm for the spread is a 20-30 cents premium for KCBT hard red winter wheat.
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.
The action in wheat prices in 2016 and 2015 indicated that there was plenty of wheat available for the market. The significant gains in Q2 2017 were on the back of a drought scare, and prices came back down to earth throughout the summer and into September. However, all of the wheat contracts finished 2017 with gains, and MGE wheat posted a double-digit percentage increase in 2017 when compared with the previous year. CBOT wheat moved 17.86% higher in 2018, and KCBT wheat moved 14.4% higher over the same period while MGE wheat dropped by 10.7% after spectacular gains in 2017 because of drought in Montana and the Dakotas. While MGE wheat continues to correct from the price action over the recent years, the spread between KCBT and CBOT wheat is a historical divergence that is telling us that consumers in the US that price off the KCBT benchmark are not hedging their requirements. If the price of wheat continues to rise, we could see a scramble to hedge future consumption, which could fuel higher prices and a mean reversion move in the KCBT-CBOT spread.
The USDA told markets that they project that global stocks will rise to a new record level in the June WASDE report:
“U.S. 2019/20 wheat supplies are down with lower beginning stocks partly offset by slightly higher production. Beginning stocks are down 25 million bushels on increased 2018/19 exports. Winter wheat production is forecast up 6 million bushels to 1,274 million with an increase to Hard Red Winter more than offsetting decreases for Soft Red Winter and White Winter. Total wheat production is now forecast at 1,903 million bushels, up 5.8 million bushels from the May forecast. Exports for 2019/20 are unchanged at 900 million bushels but feed and residual use is raised 50 million bushels to 140 million on reduced projected corn supplies. Ending stocks are lowered 69 million bushels to 1,072 million, and the season-average farm price is raised $0.40 per bushel to $5.10. The price increase reflects sharply higher wheat futures prices and reduced 2019/20 corn supplies. World 2019/20 wheat supplies are raised 4.9 million tons on a 1.6-million-ton increase in beginning stocks and a 3.3-million-ton increase in global production. India’s wheat crop is raised 1.2 million tons on updated government data. Production in Russia and Ukraine are each raised 1.0 million tons reflecting favorable weather to date. Projected 2019/20 global trade is expanded 0.8 million tons with a 1.0-million-ton increase for Russia and a 0.5-million ton increase for Ukraine, both due to larger crops. Russian exports are now projected at 37.0 million tons and Ukraine exports are projected at a record 19.5 million. Partly offsetting is a 0.5-million-ton decrease for EU exports with greater competition from Black Sea origins. Projected 2019/20 world consumption is raised 3.6 million tons on both higher food and feed and residual use. With supplies rising more than use, ending stocks are projected up 1.3 million tons to a record 294.3 million.”
Wheat is in steady contango out to May 2020 when season factors take over, which is a sign of abundant supplies.
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 USDA reported a decline in both US and global rice stocks in the June WASDE report:
“The outlook for 2019/20 U.S. rice this month is for lower supplies, reduced domestic use and exports, and lower ending stocks. Projected U.S. all rice production is lowered 20.1 million cwt or 9 percent to 198.1 million with all of the decrease in long-grain, primarily on a reduction in planted area. The excessive spring precipitation in the Delta is expected to result in lower rice area in this region compared to the NASS Prospective Plantings intended acreage, issued March 29. Partially offsetting the smaller production are higher projected imports, which are raised by 1.2 million cwt to a record large 29.2 million with increases for both long-grain and medium- and short-grain. All rice projected domestic and residual use is lowered 7.0 million cwt to 133.0 million, mainly the result of reduced long-grain supplies. Projected all rice exports are reduced 1.0 million cwt to 100.0 million. The reduction in longgrain exports on higher projected prices is partially offset by increased medium- and shortgrain exports as a portion of outstanding sales from the 2018/19 market year are expected to be shifted to 2019/20. Projected 2019/20 all rice ending stocks are lowered 7.2 million cwt to 51.6 million with long-grain accounting for all of the reduction. The projected 2019/20 all rice season-average farm price (SAFP) is raised by $0.50 per cwt to $11.70 with increases in the projected SAFPs of all rice classes this month. Global 2019/20 rice supplies are decreased by 0.5 million tons to 667.8 million as higher carryin stocks are more than offset by lower production. Global production is down as reductions for the United States, North Korea, and Thailand are not completely offset by higher projected production for Madagascar, Egypt, and the EU. World 2019/20 consumption is lowered fractionally to 496.0 million tons on reduced expected use in China, North Korea, and the United States more than offsetting higher use in Madagascar, Bangladesh, Burma, and Egypt. Global 2019/20 trade is lowered 0.4 million tons to 47.2 million as reduced exports by India, Burma, and the United States are not completely offset by higher exports by China. Projected world ending stocks are adjusted lower this month to 171.9 million tons but remain record large.”
Grain prices are going into Q3, which will be the most critical time of the year when it comes to the weather, at close to highs after the rebounds since mid-May. If drought conditions follow the floods that delayed planting, watch out because prices could become explosive as the world is addicted to bumper crops. With an ever-rising demand side of the fundamental equation and the supply side as fickle as the weather, we are coming into the period where uncertainty will peak over the coming month.
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. Therefore, I am going into Q3 with small core long positions in the CORN, SOYB, and WEAT ETFs as well as futures and options on futures on the CBOT on any price weakness. The individual corn, soybean, and wheat ETFs offered by the Teucrium family of funds tend to do a good job replicating price action in the grain futures markets. I took profits during the recent rallies but will remain long just in case we experience a period of drought as the plants are going into the hot summer season after late planting which could make them more vulnerable to poor growing conditions than in past years. Additionally, I believe that the level of the KCBT-CBOT wheat spread at a 76.5 cents premium for CBOT wheat is unsustainable and that it will move towards the norm, which is a 20-30 cents premium for the KCBT hard winter wheat.
The Invesco DB Agriculture product (DBA) 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.
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.
Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.