- Grains prices fell 1.10% in Q3 but were still 4.77% higher so far in 2019
- Rice and soybean oil lead the sector in Q3
- CBOT and KCBT wheat were leading losers
- Corn falls by over 7.6%
- Trade remains the leading issue as we move into Q4 and the 2019 harvest season in the US
Grains continued to be one of the sectors of the commodities markets in the crosshairs of the trade dispute between the US and China. After falling to lows in the aftermath of the escalation of the conflict 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. Q2 was bullish for the grain markets, but in Q3, most prices fell as the trade war escalated once again at the start of August and favorable weather conditions supported crop growth.
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. In Q3, the sector declined by 1.10% but was still 4.77% higher over the first nine 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, crops will be plentiful even though there are more people to feed around the world. In Q2, 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 26.7% 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 each year. The sector continued 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 the first nine months of 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. In Q3, the US put additional tariffs on China, and more retaliation followed. Over the final weeks of September, in a sign that both sides are looking for a way out of the tit-for-tat protectionism, the trade waters calmed. The US and China were back at the negotiating table at the end of Q3 after China gave the US an olive branch in the form of some soybean purchases and an easing of tariffs.
As we head into Q4, the focus will remain on trade issues. However, the weather conditions in the southern hemisphere will move into focus as the 2019/2020 crop year gets underway after the harvest season is finished.
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. In Q3, the dollar was 3.51% higher, and the grains moved 1.10% lower. The rising greenback makes U.S. exports less competitive in global markets. Grains continue to wait for news on trade as we head into the final quarter of 2019.
Corn and wheat posted the most significant losses in Q3. Rice, oats, soybean oil, and soybeans l moved higher, but the other members of the sector posted losses.
The iPath Series B Bloomberg Grains Subindex Total Return ETN product (JJG) moves higher and lower with grain prices. Since 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 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. In Q3, with corn production at sufficient levels and trade issues weighing on the market, the price dropped by 7.67%. Corn was still 3.47% higher over the first nine months of this year compared to the closing price at the end of 2018. On September 30, nearby December corn futures were trading at $3.8800 per bushel.
Corn traded in a range of $3.33550 to $4.6425 over the first nine months of this year and did not move outside the range in Q3. On the daily chart, price momentum in the corn market was rising in overbought territory at the end of Q3, and relative strength was at an overbought condition. Daily historical volatility was at 23.83%, a bit lower than at the end of Q2.
As the weekly chart illustrates, technical resistance is around the $4.65 per bushel level with support at $3.3550. At the end of Q3, the price of corn was below the midpoint of the range as the harvest season approaches. Price momentum on the weekly chart was in oversold territory and crossing higher at the end of Q3, but on the monthly chart, it was at the lower region of a neutral 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, but the price did not follow through on the upside and turned lower in Q3.
In 2013, the corn crop created a surplus, and from 2014 through 2019, we have seen more of the same. Open interest in CBOT corn futures was at the 1.628 million contract level at the end of the third quarter, 86,000 contracts lower than it was at the end of Q2. In early June 2018, the metric rose to a new record high at around 2.0 million contracts.
Meanwhile, crude oil prices spiked higher in September at the end of Q3 on the back of attacks on Saudi oil fields. Higher crude oil and product prices are a bullish 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 traded to a high at $1.645 per gallon level wholesale it Q2 but was at the $1.572 level at the end of Q3. Ethanol futures rose by 4.45% in Q3, which did not support the price of corn.
Corn was in 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 $4.6425 per bushel level, which was the high from June 2019, 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. In Q3, ethanol rose by 4.45% and was 24.37% higher over the first nine 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 the second quarter at 39.16 cents, 14.59 cents lower than at the end of Q1. In Q3, it moved to 0.55 cents premium for nearby ethanol, 15.14 cents higher as gasoline underperformed ethanol futures at the end of the 2019 driving season.
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. This 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.
While it is early and the 2020 crop year is far away, the chart shows, new-crop November 2020 soybean futures divided by new-crop December 2020 corn futures highlights, the spread was under the long-term average at 2.4:1 at 2.34:1. If the spread remains below the norm, farmers will plant more corn than beans next spring for the 2020 crop year in the US.
The most recent September WASDE report from the USDA indicated ending stocks moved slightly higher, foreign stockpiles fell. However, the optimism over trade sent the price of the grain higher in post-WADE trading. The WASDE said:
“This month’s 2019/20 U.S. corn outlook is for reduced production, lower corn used for ethanol, and slightly higher ending stocks. Corn production is forecast at 13.799 billion bushels, down 102 million from last month on a lower yield forecast. Corn supplies are down from last month, as a smaller crop more than offsets larger beginning stocks due to lower estimated exports and corn used for ethanol for 2018/19. Corn used for ethanol for 2019/20 is lowered 25 million bushels. With use falling more than supply, corn ending stocks are up 9 million bushels from last month. The season-average corn price received by producers is unchanged at $3.60 per bushel. This month’s 2019/20 foreign coarse grain outlook is for virtually unchanged production, with fractionally lower trade and stocks relative to last month. Ukraine corn production is lowered, as dry conditions during the month of August reduce yield prospects for filling corn. EU corn production is unchanged, as reductions for France and Germany offset increases for Bulgaria and Romania. Barley production is raised for Russia, Ukraine, the EU, and Kazakhstan, but lowered for Australia and Canada. Major global coarse grain trade changes for 2019/20 include barley export increases for Ukraine, Kazakhstan, and Russia, with a partly offsetting reduction for Australia. For 2018/19, corn exports for Brazil are raised for the local marketing year beginning March 2019, based on record large shipments during the month of August. Foreign corn ending stocks for 2019/20 are lower relative to last month, mostly reflecting declines for Brazil, Ukraine, Mexico, Paraguay, and Chile.”
The path of least resistance for the price of corn during the offseason over the coming months will depend on the weather in the southern 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 weeks and throughout the rest of 2019. Corn is going into Q4 after a rebound on the final day of the quarter. Like in many other commodities markets, the path of least resistance for prices will depend on trade, the path of the US dollar, and events in the Middle East that could cause elevated price variance in the oil and gasoline markets.
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 nine months of 2019 with the low coming in Q2. In Q1, beans moved only 0.20% higher, but in Q2 they gained 1.75%. In Q3, the beans up by 0.69% and were 2.66% higher through the first three quarters of 2019. Nearby soybean futures settled on September 30, at $9.0600 per bushel.
As the daily chart shows, nearby November soybean futures fell from June through early September on the escalation of the trade war but recovered over recent weeks as some optimism over trade negotiations returned to the market. The purchase of some cargos by China in mid-September caused the price to return to over the $9 per bushel level.
The weekly chart crossed higher above neutral territory at the end of the quarter while the monthly chart was rising above 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 could be a blow-off low.
Open interest in soybean futures moved higher from 642,815 contracts at the end of Q2, to 693,834 contracts at the end of Q3, an increase of 51,019 contracts or 7.94% over the last three months. 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 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 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. Since then, the up and down price action has been the result of news on the trade front.
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. In Q3, the price of meal fell by 5.49%. Soybean meal was 3.38% lower through the first nine 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. In Q3, soybean oil rose by 2.66% and was 5.23% higher over the first nine months of 2019. Nearby soybean meal closed at $295.90 per ton on September 30, 2019, and soybean oil closed at 28.99 cents at the close of the third quarter. Soybean oil futures outperformed the beans in Q3 while meal underperformed, but the economics of crushing beans into products declined 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 moved lower from $1.0125 at the end of Q2 to $0.76 at the end of Q3. Meanwhile, ADM stock moved higher over the period on the back of gains in the stock market during the quarter. ADM stock closed Q2 at $40.80 per share and moved to $41.07 at the end of Q3, an increase of 0.66%.
Term structure in the soybean market indicates healthy supplies.
The forward curve in beans is in contango from November 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 $9.2150, $9.3125, and then at $10.71. A new trade agreement with China could cause a significant price recovery. As of the end of Q3, soybeans were again trading at just over $9.00 per bushel and were waiting for news on trade.
The latest, September WASDE report from the USDA reflects lower ending global inventories:
“U.S. oilseed production for 2019/20 is projected at 110.2 million tons, down 1.3 million from last month with lower soybean and cottonseed production partly offset by a higher peanut forecast. Soybean production is projected at 3.6 billion bushels, down 47 million on a lower yield forecast of 47.9 bushels per acre. Soybean supplies are reduced 2 percent on lower production and beginning stocks. With soybean crush and exports unchanged, ending stocks are projected at 640 million bushels, down 115 million from last month. The U.S. season-average soybean price for 2019/20 is forecast at $8.50 per bushel, up 10 cents. The soybean meal price is projected at $305 per short ton, up $5.00. The soybean oil price forecast is unchanged at 29.5 cents per pound. Changes for 2018/19 include higher U.S. soybean exports, higher crush, and lower ending stocks. Exports are increased 45 million bushels based on official trade data through July and indications from August export inspections, which were record high for the month. With crush raised 20 million bushels, ending stocks for 2018/19 are projected at 1.0 billion bushels, down 65 million. This month’s 2019/20 global oilseed outlook includes lower production, increased trade, and reduced stocks relative to last month. Global rapeseed production is at a 3-year low, mainly reflecting lower production for the EU on both area and yield. Australia’s production is also lowered this month due to dry weather conditions in New South Wales and Queensland. Soybean production is down slightly this month as lower U.S. production is mostly offset by higher output for India, Canada, and China. Major global oilseed export changes for 2019/20 include higher rapeseed and soybean exports for Canada. For 2018/19, soybean exports for Brazil are lowered based on lower than-expected shipments during the past few months. However, higher-than-expected exports by Argentina and the United States, particularly to China, are offsetting. Global soybean ending stocks for 2019/20 are lower as reduced stocks for Argentina and the United States are partly offset by higher stocks for Brazil, Iran, and India.”
Trade and the weather in South America are the issues that will face the soybean market as we move forward into Q4 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 Q3, all three of the wheat contracts posted losses.
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. In Q3, it went the other way and posted a loss of 6.11%. The CBOT wheat was 1.49% lower over the first nine months of 2019. CBOT wheat traded in a range from $4.1625 to $5.58 in over the first nine months of 2019 and remained within the range during Q3. Trade issue and abundant crops weighed on the price of the primary ingredient in bread in Q3.
As the daily chart of the CBOT December wheat futures contract highlights, the price found a bottom in mid-May. They made a higher low in early September. December CBOT wheat futures were in overbought territory after the recent recovery, and on September 30, 2019, they were trading at $4.9575 per bushel on the final day of Q3.
Meanwhile, the weekly chart displays that price momentum crossed higher from oversold territory at the end of Q3.
The quarterly chart shows that wheat is trending modestly higher, and the price trend is bullish with a neutral reading at the end of Q3. Open interest in the most liquid wheat futures series of contracts moved marginally higher from 363,150 at the end of Q2 to 365,447 contracts at the end of Q3, a rise of 2,297 contracts or 0.63%. Technical resistance is at the 2018 high at the $5.93 level with support at the $4.1625 per bushel.
December hard red winter wheat futures, traded on the Kansas City Board of Trade (KCBT) closed at $4.15 per bushel on September 30, 2019, and was 8.08% lower in Q3, and was 15.09% lower over the first nine 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 and third quarters.
On September 30, at the end of Q3, the spread between CBOT and KCBT wheat was trading at a premium for CBOT wheat of 80.75 cents as it moved 4.25 cents away from the norm in Q3. 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 $5.4450 per bushel on the nearby December futures contract and posted a loss of 1.76% in Q3 and was 0.82% lower over the first nine months 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. 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 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.
The USDA told markets that they project that global stocks will rise to a new record level in the September WASDE report:
“The 2019/20 U.S. wheat supply and demand outlook is unchanged this month but there were offsetting by-class changes for wheat exports. The projected season-average farm price is $4.80 per bushel, down $0.20 on NASS monthly prices reported to date and expectations for cash and futures prices for the remainder of the marketing year (MY). Global wheat prices are expected to be restrained for the rest of the MY on greater 2019/20 exportable supplies for several major U.S. competitors compared to last year. The global outlook for wheat this month is for lower supplies, reduced consumption and exports, and higher ending stocks. Supplies are reduced primarily on lower production forecasts for Australia and Kazakhstan on continued dry conditions. Australia’s production is lowered 2 million tons to 19.0 million, mainly on the second consecutive year of drought in New South Wales and Queensland. Kazakhstan’s wheat production is lowered 1.5 million tons to 11.5 million on further deteriorating conditions, and this would be its lowest output since 2012/13. This reduction in global production is tempered by higher carry-in stocks, which results in global supplies less than 1 million tons lower this month. World exports are decreased by 1.8 million tons to 180.8 million on reductions for Australia and Kazakhstan. Global consumption is lowered 1.9 million tons, led by declines for Indonesia, Russia, Uzbekistan, and Ukraine. Despite a reduction this month in global supplies, 2019/20 ending stocks are projected record large at 286.5 million tons with China comprising 51 percent of the total.”
Even though global supplies declined, ending stocks rose to a record level. The price of wheat rose in sympathy with corn and bean prices on the back of optimism over trade.
Wheat is in steady contango out to May 2021 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 in 2020 to keep the price from running away on the upside.
Oat futures rose 1.00% in Q3 and were 0.18% higher over the first nine months of 2019 after moving 14.2% higher in 2018. Nearby oat futures closed on September 30 at $2.7575 per bushel. Rice futures rose by 6.56% in Q3 and were 19.02% higher over the first nine months of the year after falling 13.57% in 2018. Nearby rough rice futures closed at $12.015 on September 30. Rice tends to trade by appointment in the US futures market as the contracts lack liquidity. The USDA reported a significant decline in both US and global rice stocks in the September WASDE report:
“The outlook for 2019/20 U.S. rice this month is for much lower supplies, reduced domestic use and exports, and lower ending stocks. The August 23 NASS Rice Stocks report indicated lower 2018/19 ending stocks than previously estimated, thereby reducing 2019/20 beginning stocks by 5.7 million cwt. In the September Crop Production report, NASS reduced the 2019/20 crop by 18.1 million cwt to 187.3 million on lower harvested area and yields. NASS incorporated FSA certified acreage data this month, and all rice planted area is lowered by 216,000 acres, the result of excessive precipitation at planting time especially in the upper Mississippi River Delta. Long-grain planted area is lowered 278,000 acres while combined medium- and short-grain area is up 62,000 acres. The average all rice yield is down 14 pounds per acre to 7,563 pounds. Long-grain production is cut 22.4 million cwt and combined medium- and short-grain production is raised 4.4 million. All rice supplies are lowered 23.4 million cwt to 261.8 million, which is 7 percent below last year. Domestic and residual use and exports are each lowered 6.0 million cwt on the lower supplies. All rice ending stocks are lowered 11.4 million cwt to 35.8 million and the season-average farm price is raised $1.00 per cwt to $13.20. Global 2019/20 supplies are lowered 3.1 million tons, led by a 3.0-million-ton crop reduction for India and a 0.6-million-ton reduction for the United States. Beginning stocks are raised 0.5 million tons. World 2019/20 exports are lowered 1.5 million tons with India down 0.8 million tons on the smaller crop and Thailand down 0.5 million tons on a slow pace and lack of price competitiveness in international markets. Global consumption is cut 1.2 million tons, and world ending stocks are lowered 1.9 million tons to 172.7 million, but both remain record large.”
Grain prices are going into Q4, which is the harvest season in the US and northern hemisphere with ample supplies and the trade war hanging over the markets. With an ever-rising demand side of the fundamental equation and the supply side as fickle as the weather, we are coming the time of the year when the weather in the southern hemisphere will become a critical favor for prices. However, it is the trade war between the US and China that will move markets over the final three months of 2019.
The bottom line: Outlook for Q4 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. At the end of Q3, we are now entering the harvest season with plenty of supplies to meet the global requirements. The prices of most of the leading grain futures market reflect ample supplies and the ongoing trade war between the US and China. At the same time, a strong US dollar has helped to weigh on the prices.
Population growth should continue to support higher lows for all agricultural commodities. Growing demand for food means puts constant pressure on the supply side of the fundamental equation for grains. 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 and 2019.
Therefore, I am going into Q4 with minimal long positions in the CORN, SOYB, and WEAT ETFs and the futures and options on futures on the CBOT. However, I will look to buy on any significant price weakness as the end of the 2019 crop year means that the beginning of the 2020 season is on the horizon.
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, with 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 will lose value. Therefore, buying strategically on dips when downside price momentum declines may be the optimal approach to the grain markets over the coming months.
I continue to believe that the level of the KCBT-CBOT wheat spread at an 80.75 cents 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 has been frustrating throughout 2019.
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 1.10% loss in Q3.
As the chart of JJG illustrates, it moved from $47.80 at the end of Q2 to $44.57 at the end of Q3, a loss of $3.23 or 6.8%. The losses reflected the price action in corn and wheat markets over the 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 $19.96 million, trades an average of 4,863 shares each day, and charges an expense ratio of 0.45%.
After the harvest season ends over the coming weeks, the focus will shift to the weather conditions in South America. As China will be buying lots of grains from countries like Brazil and Argentina, the crop progress over the coming months will be particularly significant this year. 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.
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.