The monthly WASDE report is the gold-standard when it comes to the supply and demand data that assists producers and consumers in making planting and hedging decisions. As we head into the 2020 planting season that begins in late March and April, volatility could start to increase as the uncertainty over the size of this year's crop begins to rise. While economic factors can influence prices, it is always Mother Nature and the weather that have the primary influence on prices. The bottom line is that the next time the weather does not cooperate, and harvests are below bumper levels, the impact of demand could take prices appreciably higher. The Invesco DB Agriculture Fund (DBA) holds a portfolio of futures contracts that includes many of the products covered in the monthly WASDE report.
Sal Gilberte is the founder of the Teucrium family of grain ETFs, including the CORN, WEAT, and SOYB products. I asked Sal for his thoughts on the February WASDE report. Sal told me:
It is important to note that he February 11 WASDE report, which had only minor adjustments versus January's report, did not include any expectations of Chinese buying related to the Phase One Trade Agreement. Nonetheless, U.S. soybean inventories were lowered fifty million bushels on an anticipated increase in export levels based upon the healthy export pace so far this crop year. All eyes will be on the USDA's Agricultural Outlook Forum to be held later this month to see if adjustments will be made in anticipation of Chinese buying. Any actual buying by China, along with any weather-related events during South America's soybean harvest, could cause the USDA to tighten its U.S and global ending soybean stock estimates even further. Soybean and corn prices remain in a sideways price range near their cost of production; they have not followed wheat's lead higher the past several months, but things could change quickly given any further tightening of supplies, most especially in soybeans.
As Sal points out, the WASDE report did not account for any buying from China in the wake of the "phase one" trade deal that the US and Chinese officials signed in Washington, DC, on January 15. Meanwhile, the outbreak of Coronavirus has weighed on the Chinese economy. The spread of the virus has offset optimism over trade.
This month's 2019/20 U.S. soybean outlook is for increased exports and lower ending stocks. Soybean exports for 2019/20 are projected at 1.825 billion bushels, up 50 million from last month partly reflecting increased imports for China. With soybean crush unchanged, soybean ending stocks are reduced 50 million bushels to 425 million. The U.S. season-average soybean price for 2019/20 is forecast at $8.75 per bushel, down 25 cents reflecting reported prices to date. The soybean oil price forecast is lowered 0.5 cents to 33.5 cents per pound. The soybean meal price forecast is unchanged at $305.00 per short ton. This month's 2019/20 global oilseed outlook includes higher production, trade, and stocks relative to last month. Global oilseed production is raised 2.2 million tons to 576.8 million, with higher soybean, sunflowerseed, and cottonseed production. Partly offsetting is lower palm kernel production. Soybean production for Brazil is increased 2 million tons to 125 million due to favorable weather in Mato Grosso as well as improved rainfall in southern and northeastern soybean areas. Sunflowerseed production is increased for Ukraine on a higher yield. Palm kernel and palm oil production are reduced for Malaysia and Indonesia on current production to date and dry weather conditions throughout the past year. Global 2019/20 oilseed exports are raised mainly on a 2.4-million-ton increase to soybean trade. China's soybean imports are increased 3 million tons to 88 million reflecting higher soybean crush. Correspondingly, soybean exports are increased for the United States, Brazil, and Ukraine. Global soybean ending stocks are 2.2 million tons higher than last month, with higher stocks for China and Brazil.
As the daily chart of March CBOT soybean futures shows, the price edged higher in the aftermath of the WASDE report.
The chart of the March soybean crush spread that reflects the economics of processing soybeans into meal and oil shows that the refining margin moved lower following the monthly report from the USDA. The uncertainty of the coming planting season and Chinese demand for US beans and bean products in 2020 should underpin the price of the oilseed over the coming weeks. However, Coronavirus likely weighed on the crush spread over the past days.
This month's 2019/20 U.S. corn outlook is little changed relative to last month, with offsetting changes to exports and corn used for ethanol. Exports are lowered 50 million bushels, reflecting the slow pace of shipments through January. Offsetting is a 50 million bushel increase in corn used for ethanol, based on Grain Crushings and Co-Products Production data through December and the robust pace of weekly ethanol production data as reported by the Energy Information Administration during the month of January. With no other use changes, U.S. corn ending stocks are unchanged from last month. The season average corn price received by producers is also unchanged at $3.85 per bushel. Global coarse grain production for 2019/20 is projected 0.9 million tons higher to 1,402.7 million. This month's foreign coarse grain outlook is for larger production and consumption, and lower stocks relative to last month. Global corn production is raised 0.8 million tons, with increases for South Africa, Moldova, and Ukraine more than offsetting a reduction for Vietnam. For South Africa, production is higher as timely rainfall during the month of January improves yield prospects. Major global trade changes for 2019/20 include higher projected corn exports for South Africa, Ukraine, and the EU, with a largely offsetting reduction for the United States. Corn imports are raised for Turkey and Brazil, with the latter reflecting larger-than-expected shipments to livestock production areas in the southern part of the country. Foreign corn ending stocks are down from last month, mostly reflecting reductions for Vietnam, Brazil, Paraguay, and the EU. Global corn ending stocks, at 296.8 million tons, are down 1.0 million from last month.
Not much changed in the corn market since the January WASDE report according to the USDA, but global stocks edged 1.0 million tons lower.
The chart shows that the price edged lower in the wake of the February report and was trading at the $3.77 per bushel level on February 14.
Corn is the primary ingredient in ethanol in the US. The price of the biofuel was steady following the latest report from the USDA. Like soybeans, corn should have support on price dips as we move into the 2020 planting season in the US over the coming weeks. The current level of the new crop corn-soybean spread points to more corn planting this spring than last year and a smaller soybean crop at the current price levels.
The outlook for 2019/20 U.S. wheat is for stable supplies, increased exports, and decreased ending stocks. The only supply or use category that was changed this month was a 25 million bushel increase in exports reflecting growing competitiveness in international markets. Ending stocks are cut by a corresponding amount and are now forecast to total 940 million bushels, a five-year low. Global wheat supplies are lowered fractionally on small and mostly offsetting changes to beginning stocks and production. World exports are increased 1.8 million tons led by a 1.0- million-ton increase for the EU on strong shipments and more competitive prices. Kazakhstan is raised 0.8 million tons, also on a fast export pace. United States is increased 0.7 million tons and is projected to have the largest exports in three years. Partly offsetting are export reductions of 0.5 million tons for Canada and 0.3 million tons for Pakistan. World imports for 2019/20 are raised 1.9 million tons led by a 0.8-million-ton increase for China and a 0.7-million-ton increase for Turkey, both on a strong pace to date. There are also several historical revisions for trade, consumption, and ending stocks reflecting updated export data, particularly for Pakistan. For the 2019/20 market year, global consumption and ending stocks are lowered fractionally though world ending stocks remain record large.
The USDA lowest its forecast for ending US wheat stocks and lowered its projections for global consumption and inventories. However, world stockpiles remain at a record level, which sent the price of nearby wheat futures a bit lower over recent sessions but the grain was steady following the release of the report.
The price of March wheat future had gone into the WASDE report after correcting since reaching a high of $5.9250 per bushel on January 22. The price fell to a new low of $5.3825 on February 12 but recovered to just under the $5.45 level later during the session on Friday.
The March KCBT-CBOT wheat spread was at around the 78.75 cents discount for the KCBT hard red winter wheat, which is a sign that consumers continue to purchase requirements on a hand-to-mouth basis rather than hedging. The long-term norm for the spread is a 20-30 cents premium for KCBT wheat.
Cotton had been one of the commodities caught in the crosshairs of the trade war between the US and China. While the "phase one" deal should have been bullish for the fiber, Coronavirus that has shuttered many factories across China has weighed on the price of cotton futures. The USDA told the cotton market:
The U.S. cotton estimates for 2019/20 are unchanged, except for a 1 cent-per pound reduction in the season-average upland farm price, to 62 cents, 8.3 cents lower than in 2018/19. The 2019/20 world cotton forecasts include a 2.5-million-bale increase in ending stocks, driven by both larger production and lower consumption. A 1-million-bale decline in China's expected consumption is the largest single change this month: consumption is lower despite the positive impact of the U.S.-China trade agreement, due in part to the negative economic effects of the novel coronavirus outbreak. Consumption is also projected lower in Vietnam but higher in Pakistan and Turkey. Production in Brazil in 2018/19 is revised upward by 480,000 bales reflecting higher production in Mato Grosso. Pakistan, Brazil, and Tanzania production in 2019/20 is revised upward. Total production changes this month come to a 1.3- million-bale global increase, while total consumption changes net to a 1.2-million-bale reduction.
Global production of cotton increased marginally, but US fundamentals remained steady according to the USDA.
Cotton was sitting at just around the 68 cents per pound level in the aftermath of the February WASDE report. We are coming into a time of the year when the uncertainty over the global crop tends to lift the price of cotton. However, Coronavirus in China has trumped all other fundamental data in the soft commodity.
The 2020 forecast for total red meat and poultry production is raised from last month on higher forecast beef, pork, and broiler production. The beef production forecast is raised from the previous month on higher cattle slaughter and heavier cattle weights in the first half of the year. However, the forecasts for second half beef production is reduced on lower anticipated steer and heifer slaughter in the second half of the year. This reflects a smaller number of cattle outside feedlots implied by the January 1 Cattle report which results in lower placements during 2020. Pork production is raised on higher expected hog slaughter and heavier carcass weights. Broiler production is raised on recent hatchery data which shows continued growth in the laying flock. Estimates of 2019 red meat, poultry, and egg production are adjusted to reflect December data. For 2020, the beef export forecast is lowered slightly reflecting weakness in several markets, but no change is made to the beef import forecast. The pork export forecast is raised from last month on expected robust global demand. Fed-cattle prices for the first quarter of 2020 are lowered from last month on recent prices. Hog price forecasts are reduced from last month on increased production.
The overall picture for cattle and hogs was bearish as the USDA lowered price forecasts and raised production.
The daily chart of April live cattle futures shows that the price dropped to a new and lower low on February 12 at $1.1665 per pound, the lowest level since late September at the end of the peak season for demand last year. By Friday, live cattle futures recovered to over the $1.20 level.
The chart of April lean hog futures illustrates that the price of pork had been dropping steadily since October and remained not far above the most recent February 3 low of 61 cents. The hog futures were trading at 64.75 cents on February 12.
While prices of most of the agricultural commodities edged lower in the aftermath of the WASDE report, we are coming into a time of the year when uncertainty will likely prevent most from falling too far from the current levels. At the same time, the USDA did not account for any increase in demand from China. If the Chinese get Coronavirus under control, we could see a significant increase in demand for agricultural products over the coming months in the wake of the trade deal.
As always, Mother Nature and the weather conditions in the northern hemisphere will determine the path of least resistance of prices. The demand side of the equation continues to be an ever-increasing factor that reflects the growing world population.
The Invesco DB Agriculture Fund is a product that holds futures contracts in many of the products that the USDA reports on in its monthly WASDE report. The most recent top holdings of DBA include:
DBA has net assets of $338.61 million, trades an average of over 228,000 shares each day, and charges an expense ratio of 0.85%.
Given that we are on the verge of entering the season of uncertainty in most agricultural futures markets, I believe any price weakness presents a buying opportunity.
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