- Grains prices rose 6.39% in Q4 and were 11.50% higher in 2019.
- Soybean oil, KCBT and CBOT wheat lead on the upside in Q4- Rice, soybean oil, and CBOT wheat post double-digit percentage gains in 2019
- Corn is the only member of the sector that posts a decline in Q4-Soybean meal slipped the most in 2019, but the decline was just over 2%
- Each crop year is a new adventure- New Year means a new crop is right around the corner
- The ups and downs of the trade war continue to distort agricultural commodity prices
Grains continued to be one of the sectors of the commodities markets in the crosshairs of the trade dispute between the US and China. The “phase one” trade deal was a bullish event for agricultural commodities prices. Prices moved higher in the final quarter of 2019, and for the entire year, that ended on December 31. Grains are the products that feed the world, and each year the demand rises.
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%. In Q4, grains moved 6.39% higher and was up 11.50% in 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. 2019 was more of the same as the trade war between the US and China escalated, and prices moved to the upside. In Q4, the global population rose by 15-20 million. In 2000, just eighteen years ago, six billion people inhabited our planet. Today, the number has grown by 27% 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 when it comes to the path of least resistance for grain prices each year. The sector continues to face an atypical 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 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. In Q4, in a sign that both sides are looking for a way out of the tit-for-tat protectionism, the trade waters calmed. The hopes rose for a “phase one” deal where the US would roll back some tariffs, and China would purchase agricultural products from the US. After a breakthrough in negotiations in mid-December, the year ended with plans to sign the deal on January 15 at the White House in Washington DC.
As we head into 2020, the focus will remain on trade issues. However, the weather conditions in the southern hemisphere will be a significant factor when it comes to prices in Q1 of the new year. With spring right around the corner, the US and other nations in the northern hemisphere will prepare for the 2020 crop year, and the uncertainty of the weather and crop size will cause an increase in price volatility.
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. During the final quarter of 2019, grains were 6.39% higher, and the dollar index moved 2.99% lower. While the grains followed the dollar in Q4, the dollar index was 0.34% higher in 2019, with the grains up 11.50%. The rising greenback makes U.S. exports less competitive in global markets, but the growing population and requirements for food continue to underpin prices.
Soybean oil, KCBT hard red winter wheat and CBOT soft red winter wheat posted the most significant gains in Q4. All other grain futures markets posted gains in Q4. Corn was the only member of the sector to decline in Q4, but the price decrease was marginal.
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 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%. In Q4, the corn market moved marginally lower, as it fell just 0.06% lower. Corn was 3.40% higher in 2019 compared to the closing price at the end of 2018. On December 31, continuous contract corn futures were trading at $3.8775 per bushel.
Corn traded in a range of $3.33550 to $4.7600 in 2019 and did not move outside the range in Q4. On the daily chart, price momentum in the corn market was in the lower region of overbought territory at the end of Q4, and relative strength was well above a neutral reading. Daily historical volatility was at 8.08%, over 10% lower than at the end of Q3.
As the weekly chart illustrates, technical resistance is around the $4.65 per bushel level, with support at $3.3550. At the end of Q4, the price of corn was just below the midpoint of the range as we head into 2020. Price momentum on the weekly chart crossed higher, and on the monthly chart, it was sitting in the upper region of an oversold 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 and was close to unchanged in Q4.
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 1.473 million contract level at the end of the fourth quarter, 115,000 contracts lower than it was at the end of Q3. In early June 2018, the metric rose to a new record high at around 2.0 million contracts.
Meanwhile, crude oil prices traded mostly in a $50 to $60 per barrel range in Q4, but closed the quarter above the $60 level. 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 it declined to the $1.3750 level at the end of Q4. Ethanol futures fell by 12.53% in Q4, which put some pressure on the price of corn.
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 the 2012 high when drought sent the grain 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. 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%. Ethanol declined in Q4, and the 12.53% loss led to a 8.78% gain in 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. In Q4, the spread was at 31.55 cents, 16.41 higher than at the end of Q3, and 27.74 cents higher than at the end of 2018. The decline in ethanol put additional pressure on 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. 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.
The end of the year is a time to start watching the new-crop corn-bean spread for the 2020 crop year. The chart shows, new-crop November 2020 soybean futures divided by new-crop December 2020 corn futures highlights, the spread was over the long-term average at 2.4:1 at 2.4362:1. The spread has been rising throughout the second half of 2019 and was above the long-term average. If the spread remains above the norm, farmers will plant more beans than corn in the 2020 crop year in the US.
The most recent December WASDE report from the USDA indicated that global stockpiles rose. The WASDE said:
“This month’s 2019/20 U.S. corn supply and use outlook is unchanged from last month. The projected season-average farm price is unchanged at $3.85 per bushel. Global coarse grain production for 2019/20 is forecast 6.8 million tons higher to 1,401.7 million. The 2019/20 foreign coarse grain outlook is for larger production, increased consumption, and higher stocks relative to last month. Foreign corn production is forecast higher with increases for China and Bolivia more than offsetting a reduction for Canada. China’s corn production is raised, reflecting increases to both area and yield, based on the latest data from the National Bureau of Statistics. Canada’s corn production is lowered, as an increase in harvested area is more than offset by a reduction in yield. Corn exports are lowered for Canada, Laos, and Mexico. Foreign corn ending stocks are raised from last month, largely reflecting increases for China, Bolivia, and Taiwan that more than offset declines for Canada, Colombia, and Paraguay. Global corn stocks, at 300.6 million tons, are up 4.6 million from last month.”
The path of least resistance for the price of corn during 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 2020. Corn is going into the new decade near the middle of its trading range. 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. However, once the spring season comes near, Mother Nature and the weather across the fertile plains of the US will take over as the most significant factor for the price of the coarse grain.
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. 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%. In Q4, soybean futures rose by 4.08% and were 6.86% higher in 2019. Nearby soybean futures settled on December 31, at $9.4300 per bushel.
As the daily chart shows, nearby March soybean futures traded higher and lower with the news from the trade war over the past months. An abundant crop in 2019 weighed on prices, but trade trumps supply and demand fundamentals over the past months. The rebound in December following the “phase one” deal caused price momentum to rise into overbought territory while relative strength was also at an overbought reading.
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 the lower region of neutral territory as the futures market made a head fake low during Q2, which continues to have the hallmarks of a blow-off low.
Open interest in soybean futures moved higher from 693,834 contracts at the end of Q3 to 713,572 contracts at the end of Q4, an increase of 19,738 contracts, or 2.84% over the last three months. A comprehensive 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 soybean futures market has been a proxy for the ups and downs of the trade war since mid-2018. The mid-December “phase one” deal was bullish for the price of beans.
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%, and in Q4, it rose by 1.35%. Soybean meal was 2.07% lower in 2019.
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%. In Q4, soybean oil futures posted an 18.97% gain and was 25.19% higher in 2019. Nearby soybean meal closed at $299.90 per ton on December 31, 2019, and soybean oil closed at 34.49 cents at the close of the fourth quarter. Soybean oil outperformed the beans in Q4, while soybean meal marginally underperformed the raw oilseed. The economics of crushing beans into products improved, which helped 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 higher from $0.76 at the end of Q3 to $0.9725 at the end of Q4. Meanwhile, ADM stock moved higher over the period on the back of gains in the stock market during the quarter. ADM stock closed Q3 at $41.07 per share and climbed to $46.35 at the end of Q4, an increase of 12.86%.
The term structure in the soybean market indicates healthy supplies.
The forward curve in beans is in contango from January 2020 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 $10.71. The new trade agreement with China ignited a price recovery. As of the end of Q4, soybeans were trading at $9.43 per bushel and were waiting for more positive news on trade.
The latest, December WASDE report from the USDA reflects lower US, but higher global production in 2019:
“Total U.S. oilseed production for 2019/20 is forecast at 107.6 million tons, down slightly due to a decrease for cottonseed. Soybean supply and use projections for 2019/20 are unchanged from last month. The U.S. season-average soybean price for 2019/20 is forecast at $8.85 per bushel, down 15 cents. The soybean meal price forecast is reduced $15.00 to $310.00 per short ton. The soybean oil price forecast is unchanged at 31.0 cents per pound. Global 2019/20 oilseed production is forecast up 3.3 million tons to 574.6 million, with greater soybean, sunflowerseed, and peanut production partly offset with lower rapeseed and cottonseed forecasts. China’s soybean production is projected up 1.0 million tons to 18.1 million reflecting higher area and yield reported by the National Bureau of Statistics. Sunflowerseed production is forecast higher for Russia and Ukraine. Sunflower yields for both Ukraine and Russia established new record highs based on a continuing strong upward yield trend, seasonably cool temperatures, and timely mid-summer rainfall. Other changes include increased peanut production for India, lower rapeseed production for Canada, higher cottonseed production for Brazil, and lower cottonseed production for Pakistan.”
Trade and the weather in South America are the issues that will face the soybean market as we move forward into Q1 2020. However, the focus will quickly shift to the uncertainty of the weather in the US in the 2020 growing season that will begin at the end of Q1.
The wheat complex was the best performing member of the grain sector in 2018, 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 three months. In Q3, all three of the wheat contracts posted losses. In Q4, all three of the wheat contracts posted gains with CBOT and KCBT wheat two of the top three performers for the quarter.
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%. In Q4, CBOT wheat moved 12.71% higher. The CBOT wheat wound up with a, 11.03% gain in 2019. CBOT wheat traded in a range from $4.1625 to $5.7350 in 2019 and made a new high during Q4. The price of wheat moved higher throughout the final quarter of 2019.
As the daily chart of the CBOT March wheat futures contract highlights, the price found a bottom in early September. March CBOT wheat futures were in the lower region of overbought territory after making new highs, and on December 31, 2019, they were trading at $5.5875 per bushel on the final day of Q4.
Meanwhile, the weekly chart displays that price momentum was in overbought territory at the end of Q4.
The quarterly chart shows that wheat is trending higher, and the price trend is bullish with an above neutral reading at the end of Q4. Open interest in the most liquid wheat futures series of contracts moved higher from 365,447 at the end of Q2 to 411,204 contracts at the end of Q4, a rise of 45,757 contracts, or 12.52%. 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 $4.8600 per bushel on December 31, 2019, and was 17.11% higher in Q4, making it the best-performing gain in the sector. 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, but it made a bit of a comeback at the end of 2019.
On December 31, at the end of Q4, the spread between CBOT and KCBT wheat was trading at a premium for CBOT wheat of 72.75 as it moved 8 cents towards the norm for the spread in Q4. The long-term average 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 $5.6100 per bushel on the nearby futures contract and posted a gain of 3.03% in Q4 and 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 action in wheat prices in 2016 and 2015 indicated some emerging tightness in 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 spread was at a level that could trigger panic in 2020 if drought conditions threaten supplies.
The USDA told markets that US exports rose leading to lower ending stocks. However, global inventories rose because of a decline in consumption in the December WASDE report:
“The outlook for 2019/20 U.S. wheat is for decreased supplies, higher exports, and lower ending stocks. Wheat imports are lowered 15 million bushels to 105 million on a slower than expected pace to date; Hard Red Spring (HRS) is down 5 million bushels and Durum is lowered 10 million. If realized, these would be the lowest imports in nine years. U.S. wheat exports are raised 25 million bushels to 975 million on a strong pace to date, more competitive prices, and reduced supplies from several major competitors. Hard Red Winter and Durum exports are each raised 10 million bushels, and HRS is raised 5 million. With reduced supplies and higher use, 2019/20 ending stocks are cut 40 million bushels to 974 million, the lowest in 5 years. Despite the tightening stocks, the season-average farm price is lowered $0.05 per bushel to $4.55 based on NASS prices to date and expectations of cash and futures prices for the remainder of the market year. The global outlook for wheat this month is for several mostly offsetting production changes, slightly lower global use and trade, and increased ending stocks. The Argentina and Australia wheat crops are cut 1.0 million tons and 1.1 million tons, respectively, both on continued drought conditions. The Argentina crop is now pegged at 19.0 million tons and Australia’s crop is estimated to be 16.1 million tons. This is Australia’s smallest crop since 2007/08. Canada’s crop is cut 0.7 million tons to 32.4 million on updated government data. Partly offsetting is a 1.6-million-ton production increase for China to 133.6 million on updated National Bureau of Statistics data. The EU and Russia crops are each raised 0.5 million tons reflecting updated harvest data. Projected 2019/20 global exports are reduced 0.9 million tons as reductions for Argentina, Australia, and Canada are partly offset by increases for Russia and the U.S. The U.S. has become more price competitive in some international markets, and increased sales are expected to continue in the second half of the market year from reduced competition. With global use down 1.4 million tons, world ending stocks are raised 1.2 million tons to a record 289.5 million tons. China’s 2019/20 ending stocks are raised 1.8 million tons to 147.5 million and account for 51 percent of the global total.”
Wheat prices corrected lower after the release of the final WASDE report of 2019. However, they turned higher on December 12 and rallied to higher highs through the end of the month.
Wheat is in contango from March 2020 through March 2021 when season factors take over, 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.
Oat futures rose 5.89% in Q4 and were 6.09% higher in 2019 after moving 14.2% higher in 2018. Nearby oat futures closed on December 31 at $2.9200 per bushel. Rice futures rose by 9.32% in Q4 and were 30.11% higher in 2019 after falling 13.57% in 2018. Nearby rough rice futures closed at $13.135 on December 31. Rice tends to trade by appointment in the US futures market as the contracts lack liquidity. The USDA reported falling US, but rising global rice stocks in the December WASDE report:
“The outlook for 2019/20 U.S. rice this month is for unchanged supplies, higher exports, and reduced ending stocks. All rice exports are raised 2.5 million cwt to 97.5 million on export sales and shipment pace to date and on expectations for continued improved competitiveness of U.S. long-grain exports in Western Hemisphere markets. Long-grain exports are increased 3.0 million cwt to 69.0 million, the highest since 2016/17. Conversely, combined medium- and short-grain exports are lowered 0.5 million cwt to 28.5 million on reduced exports outside of Northeast Asian markets. Projected 2019/20 all rice ending stocks are lowered 2.5 million cwt to 33.9 million, down 24 percent from last year. The projected 2019/20 all rice season-average farm price is unchanged at $13.00 per cwt, compared to $12.30 for 2018/19. Global 2019/20 rice supplies are raised by 0.6 million tons to 671.6 million, mainly on higher production for China as its output is raised by 0.7 million tons to 146.7 million on updated production data from China’s National Bureau of Statistics. World 2019/20 consumption is lowered by 0.2 million tons to 493.8 million. Global 2019/20 trade is decreased fractionally to 45.7 million tons, as reduced exports by India and Thailand are not completely offset by higher exports from Vietnam and Burma. Projected global ending stocks are up 0.8 million tons this month to a record-large 177.8 million with China accounting for 66 percent of the total.”
Grain prices are going into 2020 with optimism after the trade deal in mid-December. With an ever-rising demand side of the fundamental equation and the supply side as fickle as the weather, we could see lots of volatility in the grain sector in 2020. However, it is the progress trade negotiations between the US and China over the first months of 2020 that will guide prices until the uncertainty over the crop year takes over in February.
The bottom line: Outlook for Q1 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 now entering a new year and a new decade, and the one sure thing is that 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 and the ongoing trade frictions between the US and China at the end of 2019. At the same time, a weaker US dollar in Q4 helped to support 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 2020 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 price weakness over the coming weeks as 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 a $0.7275 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 had been a losing proposition throughout 2019 until the end of the year when it fell below the $1 level.
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 6.39% gain in Q4.
As the chart of JJG illustrates, it moved from $44.55 at the end of Q3 to $46.15 at the end of Q4, a gain of $1.60, or 3.59%. The lower performance reflects the price action in the corn market 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 $20.39 million, trades an average of 1,926 shares each day, and charges an expense ratio of 0.45%. Net assets rose from the end of Q3 to the end of Q4, but the average daily trading volume declined substantially.
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. As we enter the time of year where uncertainty over the 2020 crop will rise, I expect periods of volatility and risk-reward favors the upside for prices.
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.