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Agricultural Commodities: Pre-July WASDE – Seeking Alpha

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On Thursday, July 12, at noon EST the U.S. Department of Agriculture will release its July World Agricultural Supply and Demand Estimates report. The July report comes as the 2018 growing season is well underway, so it can offer lots of insight into crop progress. After five consecutive years of bumper crops in the U.S. and around the world, market participants will be looking to the USDA for clues as to whether 2018 will be the sixth.

Meanwhile, this year is unlike most others as trade disputes have caused tariffs, retaliation, and a general environment of protectionism. Commodities are ground zero when it comes to the trade issues, and Chinese retaliation against $50 billion in U.S. tariffs have put agricultural commodities on the hot seat. Reports that President Trump will up the ante to $200 billion exacerbated market action the day before the July WASDE report. Prices of many of the grains and other agricultural products that grow in the U.S. and flow to China have experienced dramatic losses since the June WASDE report. At the same time, we have seen a dramatic increase in markets across all asset classes based on the trade issues. While the USDA will likely concentrate on current growing conditions and demand, it would be surprising if the agency does not alter some of their forecasts to take trade impediments into account in their report that will come out on Thursday.

Ugly price action in beans

Soybeans have been the commodity on the front line in the trade dispute between the U.S. and China.

Source: CQG

As the monthly chart of CBOT soybean futures highlights, the price of the oilseed futures dropped like a stone to the lowest level in a decade when they traded at $8.2950 per bushel on the nearby futures contract this month. China recently canceled all of their soybean shipments from the United States for 2018 and 2019 in retaliation for the first round of tariffs on Chinese goods that took effect on July 6. The recent price decline was the result of supportive weather, but it was exacerbated by the trade issues. The USDA lowered U.S. ending stocks for 2018/2019 in their June report to 385 million bushels. Global stock projections for 2018/2019 in the June WASDE were at the 87 million ton level.

The July WASDE offers a high potential for an increase in the number because of falling demand for U.S. soybean exports. China typically purchases one-quarter of the U.S. crop each year, and the cancelation is likely to increase supplies and fill terminals and silos with the oilseed. However, the market is likely to shift trade flows which could result in some surprises in the July report. The potential for lots of price volatility following the July WASDE report on Thursday is high.

Source: CQG

As the chart of new crop November soybean futures illustrates, the price trend shifted higher in oversold territory after the recent lethargic bounce from the low on July 6. On Wednesday, it turned lower once again on the intensification of the trade issues with China. Open interest has declined as many long and shorts exited positions during the recent selling. Daily historical volatility is now approaching 32% which is the highest level of the year. Support for November beans is a moving target on the downside. On the longer-term chart, the technical level on the downside is at the December 2008 bottom at $7.7625 per bushel. We could see wild trading conditions in the soybean futures market on Thursday in the aftermath of the WASDE report.

Corn is weak

As the corn futures market goes into the July WASDE report, there are bullish and bearish factors at play. Corn slumped in sympathy with soybeans as the U.S. is also the world’s leading producer and exporter of the grain.

Source: CQG

As the weekly chart shows, nearby corn futures on the CBOT dropped to lows of $3.3150 per bushel over recent sessions, the lowest level of 2018 and since December 2017. In their June WASDE, the USDA lowered U.S. ending stocks for 2018/2019 to 1.577 billion bushels, the lowest level since 2013/2014. They also lowered foreign stocks because of declining output in the EU, Brazil, and Vietnam.

Source: CQG

New crop December corn futures are going into the July WASDE report at its lowest level of 2018. Support is a moving target on the downside, on the weekly chart the technical support level is at $3.2850. Corn is in a downtrend on the daily and weekly charts, but both are in negative territory. Like in beans, open interest has declined as market participants exited positions over recent weeks.

On the bullish side of the corn market, the prices of oil and gasoline had been moving higher. However, a sharp downside correction in the oil market on Wednesday drove the price of crude oil close to $70 per barrel on the nearby NYMEX futures contract. Meanwhile, the trade issues could cause fewer exports of the grain over coming months. The next two weeks are critical for corn production as the weather conditions will impact pollination. The weather, energy prices, and trade issues combine to create the potential for wild volatility following the release of the July WASDE report in the corn futures market.

Wheat falls below the $5 per bushel level

While beans are trading close to the lowest price in a decade, and corn is at its lowest price for 2018, wheat continues to maintain its pattern of higher lows this year.

Source: CQG

As the weekly chart of CBOT wheat shows, the primary ingredient in bread has been making higher lows throughout 2018. However, after trading to a high of $5.54 in late May and early June, the price has declined dramatically with other agricultural futures market over recent sessions.

Source: CQG

The daily chart of CBOT September wheat futures highlights the drop in open interest and that price momentum crossed to the downside in neutral territory as the price of the grain moved below the $5 per bushel level. Daily historical volatility in wheat at over 45% is the highest in a very long time.

In their June WASDE report, the USDA raised global ending stocks for 2018/2019 to 266.2 million tons, but the projection was below the prior year’s record level at 272.4 million tons. The market expects the July WASDE to include significant production declines in European and Australian crops based on recent weather conditions. In the June report, the USDA said Russian wheat output would be 19% lower this year compared to last.

Support for September CBOT wheat futures is at $4.795 per bushel, the July 2 low. On the weekly chart, the technical level on the downside is just over $4.65 per bushel.

The KCBT-CBOT wheat spread in September was trading at the 1.75 cents premium for the KCBT hard red winter wheat level on July 11. The spread appears to have found a bottom at a discount of the KCBT wheat over recent sessions which could be a supportive sign for the grain. The potential of wide price variance following Thursday’s WASDE is high. Like soybeans and corn, the price of wheat is limping into the report compared to recent prices.

While trade issues are weighing in the prices of the three primary grain futures markets that trade on the CBOT division of the CME, the weather over coming weeks and the July WASDE report could cause massive price variance in all of these markets. 2018 is a year like few others as trade has trumped the weather. Keep in mind that people around the world still need to eat, and demographics continue to point to more people, with more money, who are competing for limited food. Grains provide nutrition to the world, and population and wealth increases across the globe will underpin prices as governments will not starve their citizens because of trade disputes.

Cotton corrects from highs

In the June WASDE report, the USDA lowered their projections for production of the fiber for 2017/2018 and 2018/2019, and they lowered stock numbers for next year. The price of cotton rose to its highest price since 2014 in June when the nearby futures contract hit 96.50 cents per pound.

Source: CQG

As the weekly chart shows, cotton reached its most recent high during the week of the June WASDE report and corrected to lows of 83.01 cents per pound. Nearby cotton futures are going into the July report between 85-86 cents per pound, but price momentum crossed to the downside in overbought territory on the weekly chart. Open interest has declined from record levels over recent weeks, but the price correction occurred with lower volume in the cotton futures market which is not necessarily a bearish sign.

Source: CQG

Price momentum on the now active month December ICE cotton futures contract has crossed higher in oversold territory, and the price has increased from lows of 81.75 to over 86 cents per pound and then moved to around the 84.60 cents level on July 11 going into the USDA’s July report. Support for cotton is at around the 80 cents per pound level with technical resistance at the June high at 96.50 cents. The potential for volatility in the cotton market is always high following the release of the monthly WASDE report.

Meats reflecting seasonality but trade weighs on prices

Meat prices are also highly sensitive to the tariffs issue, as China and Mexico are both significant importers of U.S. pork. Beef prices have also suffered under the weight of protectionist policies over the 2018 grilling season.

Source: CQG

The monthly chart of nearby lean hog futures shows that the price recovered over since late April, which was likely the result of the start of the 2018 grilling season which is the time of the year for peak demand each year. However, at the current price of 79.75 cents per pound, hog futures rose to a lower level than in prior year’s during the peak season because of trade issues. While the USDA lowered production projections in the June WASDE, tariffs and retaliation weighed on the price of pork. In coming months, after the end of the 2018 grilling season in the U.S., we could feel the full impact of trade issues on the price of pork as the meat tends to make lows in October.

Source: CQG

The monthly chart of live cattle futures shows that they are at the lowest level for the peak season of demand in years. Trade issues rather than WASDE will likely drive the prices of the meats over the coming days and weeks.

Late Tuesday, there were reports that President Trump is preparing to up the ante on the trade dispute with China. The President threatened to increase the total amount of tariffs from $50 to $200 billion, which will likely result in commensurate retaliation from the Chinese over the coming days.

A combination of Thursday’s WASDE report and another escalation in the trade dispute between the U.S. and China is a potent cocktail for price volatility in the agricultural futures markets. Be careful out there over coming days when it comes to trading in these futures markets, the price variance could become wild, and we could experience a period of the widest price swings in many years.

Source: Barchart

DBA is the Invesco DB Agriculture ETF that holds long positions in many of the commodities futures that will move after the July WASDE report on Thursday at noon EST. As the chart shows, DBA traded in a range from $17.25 to $43.50 since 2007. DBA is trading at its lowest level since inception and was at the $17.27 per share level on Wednesday, July 11. The ETF has $700 million in net assets and trades over 560,000 shares on average each day.

People all over the world need to eat, and the addressable market for food continues to grow as a result of increases in population and wealth. Trade disputes that lead to hunger will topple governments. The bottom line is that while the rhetoric between the U.S. and China continues to rise and prices for agricultural commodities are falling as a victim of the trade dispute, in the medium to long-term the current price levels are unsustainable.

Fasten your seatbelts; we could be in for a wild ride in the agricultural futures markets following the release of this Thursday’s World Agricultural Supply and Demand Estimates report.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.