On Friday, November 8, at noon EST, the US Department of Agriculture released its November World Agricultural Supply and Demand Estimates report. The monthly WASDE is the gold-standard when it comes to supply and demand data for the markets that feed and clothe the world.
The November WASDE came one day after the news that the US and China made significant progress on a “phase one” trade agreement. A deal on trade that de-escalates the trade war and ends the cycle of tariffs and retaliatory measures are welcome news for the agricultural commodities. China is the world’s leading addressable market with 1.4 billion people that amounts to over 18% of the global population. The United States is the leading producer and exporter of soybeans and corn and a substantial exporter of wheat. The US also produces cotton and animal proteins. The trade war distorted prices since 2018, leading to glut conditions in the US and deficits in China. The US farmer has been in the crosshairs of the trade war.
The news that the US and China agreed on the terms for a “phase one” agreement trumped the November WASDE report last Thursday. Agricultural commodities prices moved higher on Thursday, November 7, on the back of the trade news. As the harvest season is ending in the US, the focus will now shift to weather conditions in the growing regions of the southern hemisphere. However, the monthly report from the USDA is always a reminder that the growth of the population continues to expand the market for agricultural commodities around the world, and output needs to keep pace with requirements.
The Invesco DB Agriculture Fund (DBA) holds futures contracts in most of the products that are the subject of the monthly WASDE report.
A word from Sal Gilberte
I reached out to Sal Gilberte, the founder of the Teucrium family of grain ETF products including, CORN, SOYB, and WEAT. Sal’s take on the November WASDE was:
“This month’s WASDE report, while deviating slightly from market expectations, was largely a non-event. However, the USDA continues to confirm much lower soybean stocks than were anticipated only five months ago in the June WASDE. Projected United States soybean inventories are down about fifty-five percent, and global soybean inventories are down fifteen percent from the June 2019 projections. More importantly, global soybean stocks are now projected to be 13% lower versus last year, and global corn inventories are now projected to be down over seven percent from last year. Continued projections of a tightening annual global balance sheet in both corn and soybeans, with no corresponding price reaction in either commodity, maybe providing longer-term investors and asset allocators with an opportunity to tactically add grains to their portfolios while prices are range-bound near their breakeven production costs. It could be that perceptions surrounding the trade war with China are suppressing the reality of a tightening balance sheet in grains in the minds of investors. All eyes will be on the trade war and on the December and January 2020 WASDE reports which will show final harvest numbers for the season.”
Prices did not move all that much in the aftermath of the WASDE release on Friday, November 8.
Global soybean and corn inventories fall
Soybean prices drifted lower following the November WASDE report.
The daily chart shows that the nearby January oilseed futures contract moved from $9.3650 on November 7 to $9.205 on November 11, a decline of 16 cents per bushel. The USDA told the soybean market:
“The U.S. soybean outlook is for slightly lower production, reduced crush, and higher ending stocks. Soybean production is forecast at 3.55 billion bushels, down less than 1 million on fractionally lower yields and unchanged harvested area. Soybean crush is reduced 15 million bushels to 2.11 billion on lower-than expected early-season crush and reduced soybean meal export prospects. With reduced crush, soybean ending stocks are projected at 475 million bushels, up 15 million. The U.S. season-average soybean price for 2019/20 is forecast at $9.00 per bushel, unchanged from last month. The soybean meal price forecast is also unchanged at $325.00 per short ton. The soybean oil price is forecast at $0.31 per pound, up $0.01 from last month on sharply higher reported prices through October. The foreign oilseed supply and demand forecasts for 2019/20 include lower production, crush, and stocks, compared with last month. Foreign production is forecast at 463.6 million tons, down 3.4 million on lower soybean, cottonseed, sunflowerseed, and rapeseed production. Soybean production for India is reduced 2.0 million tons to 9.0 million on lower yields resulting from excessive late-season rainfall. Soybean production is also reduced for Canada on lower yields. Other production changes include lower sunflowerseed production for Argentina and lower rapeseed production for Australia and the European Union. Foreign soybean crush changes for 2019/20 include reductions for India, China, and Canada. Foreign soybean ending stocks for 2019/20 are reduced with lower projections for Argentina, Canada, and India only partly offset with higher forecasts for Brazil and Egypt.”
Higher ending stocks in the US trumped lower global ending inventories, which sent the price of soybean marginally lower in the aftermath of the WASDE report.
Meanwhile, the price of corn futures moved marginally lower since before the release of the report.
The daily chart of December corn futures shows that the price fell from $3.7525 on November 7 to $3.7475 on November 11. The WASDE told the corn market:
“This month’s 2019/20 U.S. corn outlook is for lower production, reduced use, and smaller ending stocks. Corn production is forecast at 13.661 billion bushels, down 118 million from last month on a 1.4-bushel reduction in yield to 167.0 bushels per acre. Feed and residual use is down 25 million bushels based on a smaller crop and higher expected prices. Exports are reduced reflecting the slow pace of early-season sales and shipments. Corn used for ethanol is down 25 million bushels based on September data from the Grain Crushings and Co-Products Production report and weekly ethanol production data as reported by the Energy Information Administration for the month of October. With supply falling more than use, corn ending stocks are lowered 18 million bushels from last month. The season-average corn price received by producers is raised 5 cents to $3.85 per bushel based on observed prices to date. Global coarse grain production for 2019/20 is forecast 1.8 million tons lower to 1,394.9 million. This month’s 2019/20 foreign coarse grain outlook is for larger production, increased trade, and lower stocks relative to last month. Foreign corn production is forecast higher as increases for several African countries, as well as Russia and Turkey, more than offset declines for Mexico, Ukraine, and the EU. For Mexico, production is lowered as area for summer season corn is expected to be the lowest on record. Yield forecasts for Russia and Ukraine are raised and lowered, respectively, based on observed harvest results to date. Corn exports are raised for Brazil and Russia, with reductions for the United States and Mexico. For 2018/19, corn exports for Brazil are raised for the local marketing year beginning March 2019, based on shipments observed through October. For 2019/20, corn imports are raised for Vietnam, Colombia, Japan, and South Korea. Partly offsetting, are reductions for Iran, Egypt, Malaysia, and Turkey. Foreign corn ending stocks are lower relative to last month, with declines for Brazil, Iran, Mexico, China, and Argentina that are partly offset by small increases for several African countries. Global corn ending stocks, at 296.0 million tons, are down 6.6 million.”
US and global corn inventories fell from the previous month in the November WASDE report.
Record wheat inventories
The price of wheat futures declined after the release of the November report.
As the daily chart of December CBOT wheat futures illustrates, the price fell from $5.1250 to $5.-825 per bushel from November 7 to November11. The KCBT discount under CBOT wheat in December closed last week at 88.75 cents per bushel as the hard red winter wheat price continues to trade far from its long-term norm, which is a premium to the CBOT wheat.
The USDA told the wheat market:
“The outlook for 2019/20 U.S. wheat this month is for smaller supplies, reduced domestic use, and lower stocks. Wheat supplies are decreased 42 million bushels, based on updated production estimates for the States resurveyed following the NASS Small Grains Summary, issued September 30. Adjustments to production in these States, where significant acreage remained unharvested in early September, lowers production estimates for Hard Red Spring wheat, White wheat, and Durum with most reductions occurring in North Dakota and Montana. Estimated seed use is reduced 7 million bushels to 61 million, reflecting a projected 2020/21 all wheat planted acreage of 45.0 million. Food use is lowered 5 million bushels to 955 million, primarily based on the NASS Flour Milling Products report, issued November 1. Projected 2019/20 wheat stocks are reduced 30 million bushels to 1,014 million. The season-average farm price is reduced $0.10 per bushel to $4.60, based on NASS prices reported to date and expectations for cash and futures prices the remainder of the 2019/20 marketing year. The global outlook for wheat this month is for higher supplies, increased exports, fractionally greater consumption, and higher ending stocks. Supplies are raised with increased production forecasts for the EU, Russia, and Ukraine more than offsetting reductions for Argentina and Australia. EU and Russia production forecasts are raised to 153.0 and 74.0 million tons, respectively, on updated harvest results. Australia’s production is lowered to 17.2 million tons on further damage from the continent’s severe drought and is now forecast lower than last year’s drought-affected crop. Argentina’s production is reduced to 20.0 million tons on dry conditions but remains record large. World exports are raised by 1.0 million tons to 180.7 million on increases for the EU, Russia, and Ukraine more than offsetting reductions for Argentina and Australia. Global consumption is nearly unchanged at 755.2 million tons, which is 3 percent greater than last year. With global supplies rising more than consumption, 2019/20 ending stocks are raised to a record 288.3 million tons with China comprising 51 percent of the total.”
Lower US stocks did not provide support for the price of wheat as global supplies rose to a new record level at 288.3 million tons.
Cotton stocks do not move
The price of cotton moved higher in the aftermath of the November WASDE, which was likely more a reaction to optimism over a trade deal than the fundaments for the fiber.
The price of December cotton futures on ICE rose from 64.35 cents on November 7 to 64.65 cents on November 11. The WASDE report told the fluffy fiber market:
“This month’s 2019/20 U.S. cotton estimates include lower production and ending stocks due to a smaller crop in the Southwest. While the U.S. production forecast is reduced 4 percent, to 20.8 million bales, domestic mill use and exports are unchanged. U.S. ending stocks are now 900,000 bales lower at 6.1 million but, at 31 percent, are still forecast at their highest share of use since 2008/09. The marketing-year average price received by upland producers is forecast at 61 cents per pound, 5 percent (3 cents) above the October forecast, but 13 percent lower than the final 2018/19 price of 70.3 cents. This month’s 2019/20 world cotton forecasts include lower production, lower ending stocks and higher world trade. World production is reduced nearly 3.0 million bales, with reductions occurring primarily in the United States, Pakistan, India, and China. There are also smaller declines in the production estimates for Turkey and Turkmenistan. World trade is forecast 1.1 million bales higher, with higher imports by Turkey, Pakistan, and India more than offsetting a 200,000-bale decline in Indonesia. Higher exports are projected from Brazil, Malaysia, Benin, Greece, India, and several smaller countries. With little change from the previous month in beginning stocks or consumption, world 2019/20 cotton ending stocks are projected nearly 3.0 million bales lower this month. At 80.8 million bales, world ending stocks in 2019/20 are forecast nearly unchanged from 2018/19.”
While cotton stocks moved a touch lower this month, they are around the same level as in 2018/2019.
Meats stable with the DBA ETF
Nearby December live cattle rose marginally from $1.19 on November 7 to $1.1950 on November 11.
December lean hogs fell from 64.30 cents on November 7 to 64.200 cents on November 11. The USDA told the animal protein markets:
“The forecast for 2019 total red meat and poultry production is raised from last month on higher beef, pork, broiler, and turkey production. Beef production is raised from the previous month on higher expected slaughter of both fed and non-fed cattle. The pork production forecast is raised on both higher hog slaughter and slightly higher carcass weights.
For 2020, the total red meat and poultry forecast is increased from last month as higher broiler and turkey production more than offsets a lower beef production forecast. The pork production forecast is unchanged. The beef production forecast is reduced on a slower expected pace of gains in carcass weights. A slightly slower pace of feedlot marketings also contributes to the reduced production forecast. Beef and pork trade for 2019 are adjusted to reflect third quarter reported data; the forecasts for the fourth-quarter 2019 and for 2020 are unchanged from last month. The cattle price forecast is raised for fourth-quarter 2019 based on recent data; no change is made to the 2020 forecast. The 2019 and 2020 hog price forecasts are reduced on current price weakness.”
The USDA increased its price forecast for cattle and lowered it for hogs.
The agricultural commodity markets will now focus on the trade issues and the weather conditions in the southern hemisphere until we hear from the USDA again on December 10.
The top holdings of the Invesco DB Agriculture Fund (DBA) include:
Source: Yahoo Finance
The DBA ETF did not move much from the close of business on November 7 to November 11, as the November WASDE was, as Sal Gilberte pointed out, a “non-event.”
Source: Yahoo Finance
DBA moved from $16.08 on November 7 to $16.09 on November 11.
One thing to always keep in mind about the commodities that feed and clothe the world is that the growth in population means that the demand side of the fundamental equations for all of the products is always increasing. Any weather problems or other events that cause supplies to decline can have explosive events for grains, meats, cotton, and all of the commodities in the agricultural sector. I continue to favor buying these commodities on price weakness and taking profits during rallies while holding a small core long position.
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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.