Agricultural Commodities: Post The July WASDE Report

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On Thursday, July 11 at noon EST, the US Department of Agriculture released its July World Agricultural Supply and Demand Estimates report. This month’s WASDE report comes at a critical time for agricultural commodities. After the floods of late spring that led to delays in planting, crop progress and any changes in the USDA’s projections could move prices dramatically. Grain prices moved higher in the aftermath of the June report, but have come back down over the recent trading sessions. At the same time, since the last report, President Trump and President Xi met at the G20 meeting in Japan. The leaders agreed to a moratorium on any new tariffs and pledged to restart trade negotiations. China pledged to purchase agricultural commodities from the United States, which could impact the USDA’s projections on the demand side of the fundamental equation.

The WASDE report comes at a time which is the peak of the growing season for the 2019 crop year. On Friday, July 12, in the aftermath of the release of the July WASDE report, the prices of most agricultural commodities were higher. The Invesco DB Agriculture Fund (DBA) holds futures in many of the commodities that were the subject of the USDA’s monthly report.

A view from Sal Gilberte

I reached out to Sal Gilberte, the founder of the Teucrium family of ETF products including the SOYB, WEAT, CORN, and CANE instruments that replicate the price action in the soybean, wheat, corn, and sugar futures markets. Sal pointed out that the July WASDE report focused on demand while the USDA will be resurveying farmers over the coming month to get a better handle on supplies before the 2019 harvest season begins. Sal said:

Wheat received all of the headlines, but soybeans are just as big a story. The July WASDE report showed tightening in the year-on-year global soybean balance sheet, which saw soybean supplies decline by 7.4%, global bean production decline even more by over 9.5% and usage increase by 2.3%. Overall, the report was an eye-opener for those with a long-term view because the total global balance sheet for grains is clearly tightening in the face of truly unrelenting demand. Even with the African Swine Flu pandemic in Asia hurting soybean demand, we still have an overall global increase in projected soybean demand. Wheat demand is at a record, which is offsetting the fact that we have record global wheat stocks.

This was a report about demand, and the next report will be even more revealing because it will be all about supply. The USDA has said it will resurvey farmers to get a better estimate on how many acres were actually planted this Spring, and those results will be factored into the August WASDE. That information should provide some much-needed visibility on how much corn, soybeans, and wheat can actually be expected from this year’s harvest.

Soybeans and corn move higher post WASDE

November soybean futures were moving higher going into the July WASDE, and the price closed at $9.1175 per bushel on July 10, the day before the release of the USDA’s monthly report.

Source: CQG

As the chart shows, November soybeans were at the $9.25 per bushel level on Friday, July 12, which was higher in the aftermath of the WASDE after the fourth consecutive session of gains. The USDA told the soybean market:

This month’s U.S. soybean supply and use projections for 2019/20 include lower beginning stocks, production, exports, and ending stocks. Beginning stocks are reduced with higher 2018/19 residual use more than offsetting lower crush and seed use. Residual use for 2018/19 is raised based on indications in the June 28 Grain Stocks report combined with crush and export data through May. Soybean production for 2019/20 is projected at 3.845 billion bushels, down 305 million based on lower planted and harvested area in the June 28 Acreage report and on lower projected yields. Harvested area, forecast at 79.3 million acres, is down 4.5 million from last month. With planting progress significantly behind in many states, USDA’s National Agricultural Statistics Service (NASS) will collect updated information on 2019 area planted, and if the newly collected information justifies changes, updated acreage estimates will be published by NASS in the August Crop Production report. The soybean yield is forecast at 48.5 bushels per acre, down 1 bushel based on delayed planting progress throughout the major producing states. Soybean exports are reduced 75 million bushels to 1.875 billion reflecting reduced supplies and increased competition from South American exporters. With crush unchanged, soybean ending stocks for 2019/20 are projected at 795 million bushels compared with 1.045 billion last month. The 2019/20 season-average price for soybeans is forecast at $8.40 per bushel, up 15 cents from last month. The soybean meal prices are forecast at $300 per short ton, up 5 dollars. The soybean oil price forecast is unchanged at 29.5 cents per pound. The 2019/20 global oilseed supply and demand forecasts include lower production and stocks compared to last month. Global oilseed production is projected at 586.0 million tons, down 11.7 million mostly on lower soybean production for the United States. Soybean production is also reduced for Canada and Ukraine. Rapeseed production is reduced for the EU, Australia, and Canada. Hot, dry weather during June has reduced yield prospects for the EU. Production is reduced for both Australia and Canada on lower harvested area. Other production changes include lower sunflowerseed production for Russia, higher cottonseed production for India, and lower peanut production for the United States. Global oilseed exports for 2019/20 are projected at 175.0 million tons, down slightly from last month. Lower soybean exports for the United States are offset with increases for Brazil, Argentina, and Uruguay. Global oilseed ending stocks for 2019/20 are reduced 10.7 million tons to 119.5 million, mainly on lower soybean stocks for the United States, Argentina, and Brazil.

Source: USDA

As Sal pointed out, the soybean report was bullish with lower beginning and ending stocks, and lower acreage, which pushed the price higher.

Source: CQG

December corn futures closed on July 10 at $4.3850 per bushel. The corn market put in a bullish reversal on the day of the release of the report and was at around the $4.57 per bushel level on Friday, July 12. The USDA told the corn market:

This month’s 2019/20 U.S. corn outlook is for larger production and beginning stocks, greater feed and residual use, lower food, seed, and industrial (FSI) use, and increased ending stocks. Corn beginning stocks are raised 145 million bushels, reflecting lower use forecasts for 2018/19. Exports are reduced based on current outstanding sales and shipments to date, with export inspection data for June the lowest for the month since 2013. Feed and residual use is down based on indicated disappearance during the first three quarters of the marketing year in the June 28 Grain Stocks. FSI is lowered with forecast declines in several categories of non-ethanol industrial use. For 2019/20, corn production is projected 195 million bushels higher based on increased planted and harvested areas from the June 28 Acreage report. Excessive rainfall prevented planting at the time of the Acreage survey, leaving a portion of acres still to be planted for corn in a number of major producing states. In July, USDA’s National Agricultural Statistics Service (NASS) will collect updated information on 2019 acres planted, and if the newly collected data justify any changes, NASS will publish updated acreage estimates in the August Crop Production report. The national average corn yield is unchanged at 166.0 bushels per acre. Silking as reported in the Crop Progress report is behind the recent historical average, thus for much of the crop the critical pollination period will be during late July into early August. Projected feed and residual use is raised 25 million bushels, reflecting a larger crop. FSI is lowered 20 million bushels, reflecting lower projections for non-ethanol industrial use. Small revisions are made to historical trade and utilization estimates based on the 13th month trade data revisions from the Census Bureau. With supply rising more than use, stocks are raised 335 million bushels to 2.0 billion. The season-average corn price received by producers is lowered 10 cents to $3.70 per bushel. This month’s 2019/20 foreign coarse grain outlook is for larger production and trade, and slightly lower stocks relative to last month. Ukraine corn production is raised, reflecting increased area. Barley production is raised for Canada but lowered for Ukraine and India. For 2018/19, Argentina corn production is higher based on harvest results to date. Major global trade changes for 2019/20 include higher corn exports for Ukraine, with increased imports for Zimbabwe. For 2018/19, corn exports are raised for Argentina and Brazil reflecting higher-than-expected shipments during the month of June. Foreign corn ending stocks are virtually unchanged from last month.

Source: USDA

The USDA increased its projections for US production and beginning and ending stocks. Global stocks were unchanged from the June report, but corn moved higher with the wheat and the beans in the wake of the WASDE report by the end of the week.

Bullish news on wheat

The wheat market received the most bullish news from the USDA last Thursday.

Source: CQG

September CBOT wheat futures settled at $5.045 per bushel on July 10 and were trading at around the $5.21 level on July 12. The USDA told the wheat market:

The outlook for 2019/20 U.S. wheat this month is for lower supplies, higher domestic use, larger exports, and reduced stocks. Supplies are reduced as a smaller carry-in is not completely offset by higher production. Forecast 2019/20 U.S. wheat production is raised 18 million bushels to 1,921 million. The all wheat yield is forecast 1.3 bushels per acre higher at 50.0 bushels. Winter wheat production is raised to 1,291 million bushels with increases in all winter wheat classes this month. The first 2019/20 survey-based production forecasts for other spring wheat and Durum are both lower than last year, mainly on reduced harvested area at 572 and 58 million bushels, respectively. Domestic use is higher this month on increased feed and residual use as wheat is expected to be more competitively priced with feed grains in 2019/20. Exports are projected at 950 million bushels, up 14 million from the revised 2018/19 exports. Exportable supplies for several major exporters are significantly reduced on lower 2019/20 production forecasts. As a result, the United States is expected to improve its export competitiveness, especially in the latter stages of the 2019/20 marketing year. Ending stocks for 2019/20 are projected 72 million bushels lower than last month at 1,000 million. The projected season-average farm price is $5.20 per bushel, up $0.10 from last month on reduced stocks. Foreign 2019/20 wheat supplies are decreased 10.5 million tons primarily on lower production in several major exporting countries. The production declines are led by a 3.8-million-ton reduction for Russia due to extremely high temperatures and below-average precipitation in June during winter wheat grain fill. Russia’s production of 74.2 million tons is still the second largest on record. Both the EU and Ukraine are also lowered on hot and dry conditions during June, which are expected to reduce yields although production in both countries remains well above last year. Australia and Canada are lowered as well, mainly on reduced area, based on recent government reports. Global 2019/20 exports are lowered 2.3 million tons on decreased supplies. Russia’s exports are reduced 2.5 million tons and Australia and Ukraine are lowered 1.0 million and 0.5 million, respectively. These export reductions are partially offset by a 0.5 million ton increase for the EU and a 1.4 million increase for the United States. World consumption is lowered 2.9 million tons, primarily on reduced feed and residual use. With global supplies declining more than projected use, world ending stocks are reduced 7.9 million tons to 286.5 million but remain record large.

Source: USDA

The USDA lowered its production projections and increased demand, which lifted the price of wheat futures in the wake of the July report. In previous reports, WASDE projected that Russia would be the leading exporter of wheat in 2019, but high temperatures and lower than average rainfall are reducing the crop. While the global ending stocks are still at a record level for 2019, population growth means that demand is an ever-increasing factor for the wheat market.

Cotton makes a lower low

While grain prices moved to the upside after the release of the July WASDE report, the price of December cotton futures moved lower.

Source: CQG

As the daily chart illustrates, cotton settled at 63.92 on July 10 and traded to a low at 62.65 cents in the aftermath of the July WASDE report. December cotton was around the 63.12 cents per pound level on Friday, July 12. The USDA told the cotton market:

The U.S. 2019/20 cotton projections show higher beginning and ending stocks compared with last month. Beginning stocks are 350,000 bales higher due to decreases in 2018/19 domestic consumption and exports. A reported slowdown in domestic spinning results in a 100,000-bale decline in consumption, and exports are reduced 250,000 bales based on the pace of recent shipments. Ending stocks in 2018/19 are raised 300,000 bales to 6.7 million, or 33 percent of use. The forecast for the marketing-year average price received by producers is reduced 1 cent to 63 cents per pound, a 4-year low. Changes to this month’s 2019/20 world cotton supply and demand estimates are primarily driven by higher beginning stocks (up 1.7 million bales) and lower consumption (down 1.0 million bales), resulting in higher ending stocks (up 3.2 million bales). Higher beginning stocks stem largely from reduced 2018/19 consumption estimates for Bangladesh and China. Similarly, 2019/20 world consumption is projected lower as reductions for Bangladesh and China more than offset mill-use gains for India, Turkmenistan, and Vietnam. World production is nearly 500,000 bales higher this month in both 2018/19 and 2019/20, largely due to increases in India’s crop.

Source: USDA

The USDA boosted US beginning and ending stocks as well as global inventories of the fiber. However, the storm bearing down on Louisiana this weekend could impact cotton production and the August WASDE report, which was likely holding prices on Friday despite the overall bearish report from the USDA.

Animal proteins- Cattle and hogs lean higher

Live cattle and feeder cattle moved in opposite directions in after the latest report from the USDA while lean hog futures edged lower after the recent price recovery.

Source: CQG

August live cattle futures settled at $1.07625 per pound on July 10 and were trading at the $1.0865 level on Friday, July 12.

Source: CQG

Meanwhile, August feeder cattle futures settled at $1.4235 per pound on July 10 and were a bit lower on July 12 at the $1.41475 level.

Source: CQG

Lean hog futures settled at 81.475 cents per pound on July 10 after recovering from 74 cents in late June. The price of August hogs pulled back to the 80.40 cents per pound level in the aftermath of the release of the July WASDE report.

The USDA told the animal protein markets:

The 2019 red meat and poultry production forecast is raised from last month as higher forecast pork and broiler production more than offsets lower beef and turkey production forecasts. The beef production forecast is reduced primarily on lighter carcass weights and slightly lower third-quarter steer and heifer slaughter. USDA will release the Cattle report on July 19th, providing a mid-year estimate of U.S. cattle inventory as well as producer intentions regarding retention of heifers for beef cow replacement. Forecast pork production is raised from last month on higher-than-expected second-quarter commercial hog slaughter. In addition, the Quarterly Hogs and Pigs report, released on June 27th, indicated a first-half pig crop 4 percent above 2018 which supported a higher second-half production forecast.

For 2020, the red meat and poultry production forecast is raised on higher forecast pork production. Although producers indicated intentions to farrow about the same number of sows in the second half of 2019, growth in pigs per litter will help support higher numbers of pigs for slaughter in 2020. Beef, broiler, and turkey forecasts are unchanged from the previous month. The beef import forecast is raised for 2019, but the export forecast is lowered from the previous month on recent trade data. The 2020 beef trade forecasts are unchanged from last month. The pork export forecast for 2019 is lowered on recent trade data, but no change is made to the 2020 export forecast.

Cattle price forecasts for 2019 are lowered from last month, reflecting current prices. For 2020, forecasts are unchanged from the previous month. Hog price forecasts are lowered on recent prices and pressure from increased pork production in late 2019. Hog prices for 2020 are reduced slightly on increased supply pressure.

Source: CQG

There was not much meat on the bone in the animal protein report to cause any significant price movement in the cattle or hog futures. However, the USDA continued to downplay the impact of African swine fever on Chinese pork supplies, and the potential for increased demand for US exports despite the ongoing trade dispute.

The Invesco DB Agriculture Fund (DBA) holds long positions in many of the futures markets that are the subject of the monthly WASDE report. The most recent top holdings include:

Source: Yahoo Finance

DBA has net assets of $420.23 million and trades an average of 320,798 shares each day. DBA charges an expense ratio of 0.85%.

Source: Barchart

DBA moved higher in the aftermath of the July WASDE report as it settled at $16.66 on July 10 and was at the $16.85 per share level on July 12. On the day of the USDA report, DBA put in a bullish reversal on the daily chart as the product traded to a lower low than the previous day and settled above the prior day’s high. On Friday, DBA followed through on the upside.

Agricultural products feed the world, and while each year is a new adventure when it comes to supplies, demographics provide ever-increasing demand to these markets. The weather over the coming weeks will determine the path of least resistance for these commodities, and the USDA will return on August 12 with more data when it comes to supplies as we come closer to the 2019 harvest season.

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.