• Grains prices rose 2.97% in Q2.
  • Oats and rice move higher
  • Double-digit percentage losses in CBOT and KCBT wheat
  • Soybean and corn prices edge lower
  • The growing season is in full bloom during the summer months- Trade with China continues to weigh on prices

 

Grains continued to be in the crosshairs of the trade war between the US and China in Q2. The two sides signed a “phase one” agreement on January 15, which raised hopes that 2019 would be a better year for farmers in the US. China is the world’s most populous nation, while the US is the leading producer and exporter of corn and soybeans. However, the outbreak and spread of Coronavirus created perhaps the most significant risk-off event since the Great Depression in the US. Beginning in late February, markets across all asset classes declined precipitously, and grains were no exception. The grain markets feed the world, and we are heading into the peak of the 2020 growing season in the US at the start of Q3. The path of least resistance for all agricultural markets is a function of the weather conditions in the leading growing areas. The number of coronavirus virus cases were rising in the US at the beginning of the third quarter. The grain sector of the commodities market posted a small gain during Q2 thanks to oats and rice futures markets. People require nutrition, and the potential for higher prices is always a function of supplies that depend on workers to produce crops and favorable weather conditions in the northern hemisphere. At the same time, bottlenecks at ports in the southern hemisphere may be creating some supply issues around the globe. Inventories remain at elevated levels going into the heart of the growing season in the US and other countries, but the increasing population of the world depends on bumper crops each year.

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 2019, the sector posted an 11.50% gain. In Q1, grains fell 3.81%, making it the best performing sector of the commodities asset class so far in 2020. In Q2, they rose by only 2.97% and were 1.32% lower over the first six months of this year.

There were abundant supplies of agricultural commodities in 2018 and 2019 to feed the world, and while trade issues weighed on prices, the grain sector posted gains during both years. In Q2, the global population rose by around 20 million, according to the US Census Bureau. In 2000, two decades ago, six billion people inhabited our planet. Today, the number has grown over 27.6% 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 2020, the world will consume more food than it did in 2019, and less than it will require in 2021. 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 in the path of least resistance for grain prices each year. The sector faced an atypical dynamic in international trade over the past two years. In 2020, it faces a global pandemic as well as the deterioration of relations between the US and China.

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 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 US goods. Soybeans, corn, and other agricultural products were in China’s crosshairs on the back of 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 President Trump and Xi created some optimism that the two sides could agree in the future when it comes to trade. In Q2 2019, 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. In Q3 2019, the US put additional tariffs on China, and more retaliation followed. In Q4, in a sign that both sides are looking for a way out of the tit-for-tat protectionism, the trade waters calmed. China and the US signed a “phase one” deal where the US rolled back some tariffs, and China agreed to purchase agricultural products from the US. In Q1, the outbreak of Coronavirus in China and the spread of the virus around the globe presented a unique and severe challenge. Not since the Spanish flu that killed over fifty million people in 1918-1920 has the world faced a pandemic with no vaccine or treatment on such a widespread scale. The impact of Coronavirus sent markets across all asset classes into a deflationary spiral. Governments and central banks around the world employed unprecedented amounts of monetary and fiscal stimulus to keep the global economy afloat while scientists and health professionals raced against the clock to save lives. The bull market in stocks was a victim of the virus that continued to spread infection and death around the world at the end of the first quarter of 2020. In Q2, stocks came roaring back on the back of the stimulus, but grain prices remained under pressure.

As we head into Q3, the focus will continue to be on the health and wellbeing of the citizens of the world. When the spread of the virus slows, and treatments and a vaccine becomes available, the world will need to pick up the pieces of an economic disaster not seen since the 1930s. When it comes to the grain markets, the weather conditions across the fertile plains of the US and other producing nations in the northern hemisphere over the coming weeks will determine the path of prices. So far, it seems that 2020 will bring another year of sufficient supplies to meet global requirements.

The grain sector moved 3.63% higher in 2018, even though the dollar index rose by 4.26% that year. In 2019, the dollar index was 0.34%, with the grains up 11.50%. In Q2, the dollar index was 1.76% lower, and 1.35% higher over the first six months of 2020. Grain prices fell by 1.32% so far this year, and the strength in the US currency was partially responsible. The rising greenback makes U.S. exports less competitive in global markets, but the growing population and requirements for food continue to underpin prices. The rise in the dollar was a function of a flight to quality in Q1 as the global pandemic accelerated. In Q2, the dollar fell as the interest rate gap between the US currency and the euro narrowed. The weak performance in the grains was also a function of risk-off conditions in all markets.

Oats, rice, and soybean oil futures all posted gains in Q2, but all of the other members of the sector moved lower on a quarter-by-quarter basis. CBOT and KCBT wheat and soybean meal were the leading losers for the quarter than ended on June 30 as they all posted double-digit percentage losses.

The iPath Series B Bloomberg Grains Subindex Total Return ETN product (JJG) moves higher and lower with grain prices. Since most of these commodities are all in contango, meaning that deferred prices are higher than nearby prices, when the market does not move, the ETN loses value as it rolls nearby futures to the next active month.

 

Corn

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 and was 3.40% higher in 2019. In Q1, the price of corn futures fell 12.12%. In Q2, corn was 0.66% lower and fell 12.70% over the first half of 2020. On June 30, continuous contract corn futures were trading at $3.3850 per bushel.

Source: CQG

Corn traded in a range of $3.0025 to $4.0475 so far in 2020. On the daily chart, price momentum in the corn market was rising above neutral territory at the end of Q2 after a late June rally, and relative strength was also above a neutral reading. Daily historical volatility was at 34.23%, higher than at the end of Q1.

Source: CQG

As the weekly chart illustrates, technical resistance remains around the $4.00 per bushel level, with support at $3.00. At the end of Q2, the price of corn was below the midpoint of the range as we head into Q3. Price momentum on the weekly chart was trending higher, and on the monthly chart, it was sitting below a neutral condition.

Source: CQG

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, and another test of the $3 level in Q2 2020, but price action again rejected that low. In Q1 2020, the impact of Coronavirus weighed on the price of the grain as energy prices plunged, in Q2 the decline in oil into negative territory and rise to the $40 per barrel level caused some volatility in the corn futures market, which recovered with the price of gasoline and ethanol.

In 2012, drought pushed the price of corn to an all-time high. In 2013, the corn crop created a surplus, and from 2014 through 2019, we have seen more of the same. 2020 is shaping up to be another year of substantial supplies. Open interest in CBOT corn futures was at the 1.560 million contract level at the end of the second quarter, 171,000 contracts higher than it was at the end of Q1 2020. In early June 2018, the metric rose to a new record high at around 2.0 million contracts. The rise in the metric was likely because of increased hedging activity by farmers as the growing season progresses. Open interest rose to a high of 1.643 million contracts on June 25, but the number of open long and short positions declined as the July futures contract rolled to the next active months. Speculative longs likely closed positions given the lack of upside volatility in the corn market rather than rolling them to the new-crop December futures contract.

Meanwhile, crude oil prices tanked in Q1 on a combination of demand destruction caused by Coronavirus and a decision by OPEC and Russia to flood the market with the energy commodity. In Q2, nearby NYMEX oil futures fell into negative territory for the first time in history on April 20. Nearby corn futures fell to the low at just above $3 per bushel as oil reached its bottom. Corn is the primary ingredient in ethanol in the United States, which provides support for the grain. Ethanol traded to a high at $1.645 per gallon level wholesale it Q2 2019, but it traded to 79.9 cents per gallon in April 2020. Nearby ethanol futures recovered to $1.22 per gallon level at the end of Q2. Ethanol futures rose by 33.92% in Q2, which helped corn to rally off the $3 bottom.

Source: CBOT/RMB

Corn was in contango out to July 2021, which indicates ample available supplies of the grain. From July 2021 through December 2023, the forward curve reflects seasonal factors, which are strength during the growing season and weakness during the offseason winter month contracts. Corn remained well below half the price it traded in 2012 when drought sent the grain to over $8.40 per bushel.

Technical resistance for nearby corn futures is at the $3.9400 per bushel level, which was the high from January 2020, with support at $3.0025 on the weekly chart, which was the April 2020 low. Since the U.S. is the world’s largest producer of corn, the grain is the primary ingredient in US 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 but gained 8.78% in 2019. In Q1, the biofuel fell by 33.75%, but it recovered by 33.92% in Q2 and was 11.27% lower over the first six months of this year.

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 2019, the spread was at 31.55 cents, 27.74 cents higher than at the end of 2018. On March 31, 2020, the spread was at a 31.83 cents premium for ethanol, 63.38 cents above the level at the end of 2019, with the spread flipping to a premium for the biofuel. In Q2, ethanol was still at a 1.85 cents premium to gasoline, but the spread moved 29.98 cents lower as gasoline and ethanol prices moved towards parity. The rebound in ethanol in Q2 on the back of gasoline prices provided some support for the price of corn.

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 was not be the same as last. Last year, farmers planted more corn than beans as the relationship returned to the average level as the planting season approached during the winter and spring of 2019.

Source: CQG

In Q2, the new-crop November 2020 soybean futures divided by new-crop December 2020 corn futures spread was at consistently above the long-term average at 2.4:1. With the spread above the long-term average farmers planted more beans than corn this year as the oilseed offered a better return on their acreage.

The most recent June WASDE report from the USDA indicated US beginning and ending stocks rose fractionally, while global supplies declined, which was not bearish for the price of the coarse grain. The WASDE said:

This month’s 2020/21 U.S. corn outlook is little changed from last month, with fractional increases to beginning and ending stocks. Beginning stocks are raised, as a 45-million-bushel reduction in estimated production for 2019/20 is largely offset by a 50-million-bushel reduction in projected corn used for ethanol. Corn used for ethanol is lowered reflecting a slower-than-expected rebound in ethanol production as indicated by Energy Information Administration data during the month of May and into early June. For 2020/21, with supply up slightly and no changes to projected use, ending stocks are 5 million bushels higher at 3.3 billion bushels. The season-average farm price is unchanged at $3.20 per bushel. The global coarse grain production forecast for 2020/21 is raised 3.2 million tons to 1,484.6 million. This month’s foreign coarse grain outlook is for larger production, increased use, and lower stocks relative to last month. Brazil corn production is raised based on higher expected area. Barley production is raised for the EU, based mostly on a forecast increase for the United Kingdom that is partly offset by a reduction for France. Barley production is raised for Australia, but lowered for Ukraine, India, and Russia. For 2019/20, Brazil corn production is unchanged, as higher indicated area is offset by a reduction in yield. Yield prospects for much of the Center-West are generally favorable in contrast to the South where conditions have been poor. Major global trade changes for 2020/21 include a larger corn export forecast for Zambia, with increases in corn imports for Thailand and Honduras. Barley exports are lowered for Australia, based on a reduction in projected imports for China. For 2019/20, corn exports are raised for Argentina but lowered for Brazil for the local marketing year beginning March 2020 based on observed data through early June. Foreign corn ending stocks for 2020/21 are lowered from last month, mostly reflecting reductions for China, Argentina, South Africa, and Paraguay that more than offset increases for Brazil and India.

Source: USDA

The path of least resistance for the price of corn during the coming weeks will depend on the weather in the US and northern hemisphere, but increasing population means the world depends on more output each year. Trade considerations and volatility in energy markets could cause volatility in the corn futures market over the coming months and throughout the second half of 2020. Corn is going into Q3 with energy prices rebounding. Mother Nature and the weather across the fertile plains of the US is always the most significant factor for the price of the coarse grain. However, the corn market is running short of time when it comes to the potential for a significant rally in 2020 as crops will become less vulnerable to dry conditions over the coming weeks. The window for a substantial move to the upside is closing as we are in the heart of the summer season.

 

Soybeans

Soybeans moved higher by 14.54% in 2016 but were 14.64% lower in 2015. In 2014, soybeans fell by 20.94%. In 2017, the price of soybean futures fell 4.49%. In 2018, they moved 7.28% lower for the year. In 2019, the oilseed future moved 6.86% higher. In Q1, the oilseed futures fell by 6.04%. In Q2, they were only 0.20% lower, and down 6.23% over the first six months of 2020. Soybeans traded in a range of $8.0825 to $9.8275 per bushel over the first half of 2020. The beans hit a new low for the year in Q2. Nearby soybean futures settled on June 30, at $8.8425 per bushel.

Source: CQG

As the daily chart shows, new-crop November soybean futures fell with almost all other markets on the back of risk-off conditions in all markets as Coronavirus spread around the world in February through April. However, the price recovered in early June and broke higher at the end of the second quarter. At the end of Q2, short-term price momentum and relative strength indicators were above neutral territory.

Source: CQG

The weekly chart was heading for an overbought condition at the end of the second quarter while the monthly chart displayed a neutral condition as we head into the US peak growing months in the US.

Source: CQG

Meanwhile, the quarterly chart was still sitting below a neutral reading after the period of risk-off selling in Q1 and Q2.

Open interest in soybean futures moved higher from 793,202 contracts at the end of Q1 to 811,476 contracts at the end of Q2 2020, an increase of 18,274 contracts, or 2.30% over the last three months. The increase in open interest was a function of hedging activity as we head into the heart of the 2020 crop year in the United States. The “phase one” trade deal was bullish for soybeans, but the virus pushed the price lower. The US is the world’s largest producer and exporter of soybeans. China purchased around one-quarter of the annual crop from the US in the past, which is why tariffs had been bearish for the price of soybean futures in 2018 and in May and August when the trade dispute escalated. The soybean futures market had been a proxy for the ups and downs of the trade war since mid-2018. Meanwhile, as Coronavirus spreads around the world, it has been causing some bottlenecks in South American ports. The weather over the coming weeks will determine the path of the price of the oilseed and this year’s crop. 

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. Soybean meal was 2.07% lower in 2019. In Q1, the product that is the primary ingredient in animal feed moved 7.02% higher, but in Q2, it dropped 10.95% and was 4.53% lower over 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 and was 25.19% higher in 2019. The price of soybean oil futures fell 21.69% in Q1. In Q2, soybean oil gained 3.59% but was still 18.88% lower in 2020 as of the end of June. Nearby soybean meal closed at $286.30 per ton on June 30, 2019, and soybean oil closed at 27.98 cents at the close of the second quarter. Soybean meal underperformed the beans in Q2, while soybean oil outperformed the raw oilseed, a reversal of fortune from Q1. The economics of crushing beans into products decline, which typically weighs on the margins for companies like Archer Daniels Midland (NYSE: ADM).

Source: CQG

The weekly chart of the synthetic soybean crush spread shows that the processing margin for refining the oilseed into products moved significantly lower from $1.1850 the end of Q1 to $0.8575 at the end of Q2 2020 on the back of weakness in soybean meal. Meanwhile, ADM stock recovered with the stock market in Q2. ADM stock closed Q1 at $35.18 per share and rallied to $39.90 at the end of Q2, a rise of 13.42%. ADM shares underperformed the overall stock market in the second quarter.

The term structure in the soybean market indicates some emerging tightness in the oilseed futures market.

Source: CBOT/RMB

The forward curve in beans is flat from July 2020 through November 2023, which could be a sign of emerging tightness or supply concerns over the coming months and years.

Support for soybean futures on the weekly chart is at the April 2020 low at $8.0825 per bushel. Technical resistance is at $9.49, the high from late 2019. As of the end of Q2, soybeans were trading at $8.8425 per bushel after flirting with the $9 level in late June.

The latest, June WASDE report from the USDA reflects slightly lower US stocks, but lower global inventories from the previous month:

This month’s U.S. soybean supply and use projections for 2020/21 include higher beginning stocks, higher crush, and slightly lower ending stocks. Beginning stocks are raised 5 million bushels with higher crush for 2019/20 more-than-offset with lower production and a lower export forecast. Lower 2019 production reflects the latest re-survey by NASS for North Dakota. The 2019/20 soybean crush is raised 15 million bushels WASDE-601-3 reflecting increased domestic soybean meal use. Soybean exports are reduced 25 million bushels on increased competition from South America. Increased beginning stocks for 2020/21 are more than offset with a higher soybean crush forecast, which is raised along with increased domestic soybean meal use. With higher soybean crush more than offsetting higher beginning stocks, 2020/21 ending stocks are projected at 395 million bushels. The 2020/21 season-average soybean and product price forecasts are unchanged this month. The 2020/21 global oilseed supply and demand forecasts include slightly higher production and lower ending stocks compared to last month. Higher peanut, soybean, and sunflowerseed production is partly offset by lower cottonseed output. A notable revision to production is for EU canola, lowered 0.2 million tons to 16.8 million, based largely on lower yields for Germany. The EU revision is offset by higher Australian canola production. The 2020/21 soybean ending stocks are lowered 2.1 million tons to 96.3 million, mainly reflecting lower carryin due to revisions to 2019/20 balance sheets. For 2019/20, soybean exports are increased 1 million tons each for Argentina and Brazil based on the recent pace of shipments and reflect increased crush demand and imports for China. Partly offsetting is reduced 2019/20 U.S. exports. These revisions result in higher stocks for China and lower stocks for South America.

Source: USDA

Trade with China, the weather over the coming weeks, and the global pandemic will together dictate the path of the price of soybean futures over the third quarter of 2020.

 

Wheat

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, and as 17.86% higher in 2018, and moved 11.03% to the upside in 2019. In Q1, CBOT wheat rose 1.79%, but in Q2, it moved 13.85% lower. CBOT wheat declined by 12.30% over the first half of 2020 and traded in a range from $4.6825 to $5.9275 so far this year. The price of wheat fell to a new low for this year in Q2.

Source: CQG

As the daily chart of the CBOT September wheat futures contract highlights, the price found at least a temporary bottom in late June. September CBOT wheat futures were on either side of neutral territory after a correction from the recent low, and on June 30, 2020, they were trading at $4.9000 per bushel on the final day of Q2.

Source: CQG

Meanwhile, the weekly chart displays that price momentum was in oversold territory at the end of Q2.

Source: CQG

The quarterly chart shows that wheat is trending higher, and the price trend is bullish with price momentum and relative strength indicators on either side of neutral readings at the end of Q2. Open interest in the most liquid wheat futures series of contracts moved higher from 372,589 at the end of Q1 to 403,108 contracts at the end of Q2 2020, an increase of 30,519 contracts, or 8.19%. Technical resistance is at the 2018 high at the $5.93 level with support at the $4.1625 per bushel, the April 2019 low.

Nearby hard red winter wheat futures, traded on the Kansas City Board of Trade (KCBT) closed at $4.3550 per bushel on June 30, 2020, and was 11.66% lower in Q2 after a gain of 1.44% in Q1. Over the first six months of 2020, the hard red winter wheat futures declined 10.39%. KCBT wheat was 0.56% lower in 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 2019, and at the end of Q2 2020.

On June 30, at the end of Q2, the spread between CBOT and KCBT wheat was trading at a premium for CBOT wheat of 54.50 as it moved 21.25 cents towards the norm for the spread in Q2. The long-term average for the spread is a 20-30 cents premium for KCBT hard red winter wheat. At almost a 55 cents discount, KCBT wheat remains historically inexpensive versus CBOT wheat futures.

Hard red spring wheat, traded on the Minneapolis Grain Exchange (MGE), closed at $5.1050 per bushel on the nearby futures contract and posted a loss of 5.33% in Q2, and was 9.0% lower over the first six months of 2020. MGE wheat was 2.19% higher in 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 spread between KCBT and CBOT wheat is a historical divergence that is telling us that consumers in the US are still not hedging their requirements. If the price of wheat turns higher, we could see a scramble to hedge future consumption, which could fuel higher prices and a mean reversion move in the KCBT-CBOT spread. Many break consumers in the US price requirements on the KCBT price. The level of the spread is telling us that they continue to purchase their wheat on a hand-to-mouth basis.

The USDA told markets that US stocks moved higher in June. Global inventories rose to a record high level in the June WASDE report:

U.S. 2020/21 wheat supplies are up on a larger crop and a slight increase in beginning stocks. The change in beginning stocks reflects a 5-million-bushel reduction in 2019/20 exports. Winter wheat production is forecast up 11 million bushels to 1,266 million with increases in Hard Red Winter and White Winter more than offsetting small decrease for Soft Red Winter. Total 2020/21 wheat production is now forecast at 1,877 million bushels, and total supplies are raised 16 million to 3,000 million. Domestic use and exports for the new marketing year are unchanged this month, and ending stocks are raised 16 million bushels to 925 million, which is a 6-year low. World 2020/21 wheat supplies are raised 5.7 million tons on a 4.9-million-ton production increase and higher beginning stocks. India production is raised 4.2 million tons, and Australia is up 2.0 million, both on updated government statistics. India’s crop is projected to be record-large, and Australia’s crop is expected to rebound on improved conditions following two consecutive years of drought. Turkey and China are both increased by 1.0 million tons. Partly offsetting these changes are crop reductions of 2.0 million tons for the EU and 1.5 million for Ukraine, both reflecting dry conditions during key parts of the growing season. Projected 2020/21 global exports are raised 0.9 million tons to 188.9 million, led by a 2.0- million-ton increase for Australia on larger supplies, and a 1.0-million increase for Russia on reduced export competition from Ukraine. Exports are lowered 1.5 million tons for Ukraine and 0.5 million for the EU, both on smaller crops. With increased supplies, and global use lowered fractionally, world ending stocks are raised 6.0 million tons to a record-high 316.1 million, with China and India accounting for 51 percent and 10 percent of the total, respectively.

Source: USDA

Wheat prices turned a bit higher at the end of June.

Source: CBOT/RMB

Wheat is in a small contango from July 2020 through July 2022, which is a sign of sufficient supplies.

Demographics, when it comes to population growth continues to put upward pressure on demand, and the world will need another year of a bumper wheat crop around the globe in 2020 to keep the price from running away on the upside. Coronavirus will continue to pose a threat to demand.

Oat futures rose 26.21% in Q2 and were 14.21% higher so far in 2020. They rose 6.09% in 2019. Oats moved 14.2% higher in 2018. Nearby oat futures closed on June 30 at $3.350 per bushel. Rice futures moved 3.35% higher in Q2 and were 10.43% higher over the first six months of 2020. Rice moved 30.11% higher in 2019 after falling 13.57% in 2018. Nearby rough rice futures closed at $14.505 on June 30. Rice tends to trade by appointment in the US futures market as the contracts lack liquidity. In the June WASDE report the USDA told the rice market that US and global stocks rose as of the most recent report:

The outlook for 2020/21 U.S. rice this month is for larger supplies, greater domestic use, reduced exports, and increased ending stocks. Most of the 2020/21 revisions are the result of 2019/20 supply and use changes. The 2020/21 all rice beginning stocks are increased 1.5 million cwt to 32.0 million, a result of higher 2019/20 imports, now forecast at a near-record 33.5 million, raising 2019/20 ending stocks. All of the increase in 2019/20 imports is for long-grain, based on a record import pace to date, primarily aromatics from Thailand. Long-term growth in imports is expected to continue in 2020/21 as projected imports are raised 1.0 million cwt to a record-high 33.6 million. The combination of increased beginning stocks and higher imports raises 2020/21 total supplies by 2.5 million cwt to 281.8 million. Total 2019/20 domestic use and residual is raised 2.0 million cwt to 135.0 million, based on the higher import forecast. Similarly, total 2020/21 domestic use is also raised by 2.0 million cwt to 139.5 million, based on higher imports. Total 2019/20 exports are lowered by 2.0 million cwt to 96.0 million, all for long-grain as the U.S. is becoming increasingly uncompetitive as the marketing year nears completion. Total 2020/21 exports are reduced by 1.0 million cwt to 99.0 million, all based on lower long-grain exports as the U.S. is expected to remain uncompetitive early in the marketing year. Projected 2020/21 all rice ending stocks are raised 1.5 million cwt to 43.3 million, up 35 percent from the 2019/20 revised ending stocks. The 2020/21 all rice season-average farm price (SAFP) is unchanged at $12.90 per cwt, compared to the upwardly revised 2019/20 SAFP of $13.10. The 2020/21 global outlook is for larger supplies, fractionally lower consumption and trade, and increased stocks. Supplies are raised by 1.0 million tons to a record 683.3 million, mainly on higher beginning stocks for China and Thailand. World production is only fractionally higher at 502.1 million tons as increases for Brazil and Nigeria are almost completely offset by a reduction for Vietnam, with global production remaining record high. World 2020/21 consumption is lowered by 0.1 million tons to 498.0 million, still a record, as decreases for Vietnam and Philippines are not completely offset by increases for Brazil, China, Nigeria, and the U.S. Global trade is reduced 0.3 million tons to 44.9 million, primarily on lower exports from Vietnam and China. Projected 2020/21 world ending stocks are raised 1.2 million tons to a record high of 185.4 million with China accounting for 63 percent of the total.

Source: USDA

Grain prices are going into Q3 after a period of price weakness throughout much of 2020. However, the rallies in the leading grain and oilseed futures at the end of June could be the start of a recovery. The weather over the coming weeks will determine the path of prices, but it is getting late in the new-crop cycle for dry conditions to impact prices dramatically. Meanwhile, the demand side of the fundamental equation continues to expand as it is a function of population growth.

 

The bottom line: Outlook for Q3 2020

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 in the heart of the 2020 growing season, as the global pandemic and friction between the US and China continues to dominate the price action in the agricultural commodities that feed the world. The one sure thing is that the demand for grains will rise as it is a function of demographics. The prices of most of the leading grain futures market reflect ample supplies, but the weather and ability to plant and transport grains around the globe in the face of a pandemic are the crucial factors for prices. The coronavirus could cause some dislocations in grain markets as they have in the animal proteins in 2020. The US dollar weakened in Q2, which is supportive of prices.

Population growth should continue to support higher lows for all agricultural commodities in the months and years to come. Growing demand for food means puts constant pressure on the supply side of the fundamental equation for grains.

I am going into Q2 with minimal long core positions in the CORN, SOYB, and WEAT ETFs and the futures and options on futures on the CBOT. However, I will look to take profits on any rallies over the coming weeks.

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. However, when the forward curve in contango where deferred prices are higher than nearby prices long positions in ETFs, futures or options on futures reflect the cost of the term structure. If the prices do not move to the upside, and even if they remain static, many of the products lose value.

I continue to believe that the level of the KCBT-CBOT wheat spread at a $0.5450 premium for CBOT wheat is unsustainable. The spread will eventually move towards the norm, which is a 20-30 cents premium for the KCBT hard winter wheat, eventually. However, a position in this spread from the end of Q1 to the end of Q2 yielded a marginal profit.

The iPath Series B Bloomberg Grains Subindex Total Return ETN product (JJG) moves higher and lower with the price of grains. The fund summary for JJG states:

The investment seeks return linked to the performance of the Bloomberg Grains Subindex Total Return. The ETN offers exposure to futures contracts and not direct exposure to the physical commodities. The index is composed of one or more futures contracts on the relevant commodity (the “index components”) and is intended to reflect the returns that are potentially available through (1) an unleveraged investment in those contracts plus (2) the rate of interest that could be earned on cash collateral invested in specified Treasury Bills.

Source: Yahoo Finance

The grain sector posted a 2.97% gain in Q2.

Source: Barchart

As the chart of JJG illustrates, it moved from $42.60 at the end of Q1 to $40.06 at the end of Q2, a loss of $2.54, or 5.96%. The lower performance reflects the price action in the wheat market over the second quarter. Additionally, the cost of rolling futures from one active month to the next in contango markets weighed on the value of the JJG ETN. JJG has net assets of $15.87million, trades an average of 2,770 shares each day, and charges an expense ratio of 0.45%. Net assets fell from the end of Q1 to the end of Q2 2020, along with the average daily trading volume.

I believe that the long-term trend in this sector of the raw materials asset class that feeds the world is higher. More people, with more resources in the world, will continue to require nutrition to sustain their lives. However, the time is running short in the 2020 crop year for a significant rally in all of the leading grain futures markets. The devaluation of the dollar and other fiat currencies could have a long-term impact on the grain markets in the coming years. During the 2008 global financial crisis, the prices of wheat, soybeans, and corn all fell to lows before exploding to highs in 2012. While drought lifted the prices in 2012, the stimulus from central banks likely played a role in bullish grain markets. The levels of stimulus from central banks and governments in 2020 are far higher than in 2008, which could cause higher lows and higher highs in the agricultural products in the coming years. Weather conditions can be highly volatile. After eight years of a favorable growing environment, we could be overdue for a crop year where supplies fall short of global demand requirements. On any significant declines, I am a buyer of all of the leading grain markets. Meanwhile, 2020 is shaping up to be another year where supplies will outstrip demand, keeping prices from running away on the upside.

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.