Commodities/Forex

Andy Hecht

Top 3 Ranking in Commodities, Metals & FX --SeekingAlpha

Eye on Buying Dips as Grains Start 2019 Planting Season

  • Weather is the number one issue
  • Trade is a close second
  • More corn than beans in 2019
  • Wheat remains weak
  • Buy dips during the time of uncertainty

We are now at the time of the year where farmers across the fertile plains of the United States should be preparing their acreage for planting. However, Mother Nature could be standing in the way given the unprecedented floods facing Midwestern states in the US including Iowa, Illinois, Missouri, Kansas, South Dakota, Minnesota, and Nebraska which make up the lion’s share of the breadbasket of the nation.

Last week, the National Oceanic and Atmospheric Administration’s published their spring outlook and said that the situation for the central US is about to get much worse. Ed Clark, the director of NOAA’s National Water Center in Tuscaloosa, Alabama said, “The extensive flooding we’ve seen in the past two weeks will continue through May and become more dire and may be exacerbated in the coming weeks as the water flows downstream. This is shaping up to be a potentially unprecedented flood season, with more than 200 million people at risk for flooding in their communities.” 

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Source: NOAA

As the map shows, the floods are hitting in the US in the center of the primary areas where crop production is about to begin for the 2019 season. It is likely that excessive moisture and floods will delay planting.

Weather is the number one issue

The weather across the fertile plains of the US and other growing regions around the world is always the primary factor when it comes to grain prices each year. Flooding is likely to increase uncertainty when it comes to crop production for the 2019 crop year. However, if the floods give way to drought over the coming months, the result could become a disaster. Late planting that leads to corn, soybean, and wheat wilting in a dry summer sun could cause the first deficit in grain supplies since 2012 which has the potential to lift prices from their current low levels. In 2012, corn futures reached an all-time peak at $8.4375 per bushel. New crop December corn future settled on March 22 at 4.00 per bushel less than half the price at the height in 2012.

During the same year, soybean futures rose to their record high at $17.9475. Last Friday, new crop November bean futures settled at $9.3750 per bushel. So far, the potential for weather-related shortages in 2019 has not caused buying to emerge in the corn and soybean futures markets in the new crop contracts.

When it comes to wheat, the price in 2012 rose to $9.4725 per bushel. The September CBOT wheat future closed at $4.7950 last Friday as the wheat futures market continues to discount the potential for weather-related supply issues later this year. While flooding and drought can wreak havoc with crops and food supplies, the grain markets are also focusing on trade negotiations between the US and China as farmers are waiting to plant their seeds in flooded areas of the US.

Trade is a close second

The trade dispute between the US and China sent the prices of grains lower in 2018. Soybean futures fell from $10.71 per bushel to the $8.10 level as China canceled purchases for 2018 and 2019. Typically, the Chinese buy one-quarter of US soybean output each year, so the tariffs and retaliatory measures erased a massive percentage of the addressable market for US farmers. At the same time, corn and wheat prices along with other agricultural product prices fell under the weight of protectionist policies.

As the US and Chinese negotiators work towards a new framework for commerce between the world’s leading producer of corn and soybeans and a leading exporter of wheat and the world’s most populous nation, the price paths of many of the agricultural commodities are waiting for news. A trade deal before the start of the growing season would likely lift prices as the leading consumer in the world would come back to the market for US exports as an influential buyer. Therefore, trade is a close second to the weather when it comes to the path of least resistance for grain and oilseed prices over the coming weeks and months.

The rising level of the world’s population has caused the demand side of the fundamental equation for agricultural products to increase. The world has become addicted to bumper crops each year. We witnessed what shortfalls can do the prices in 2012, and the chances for another year of deficits could be in the cards over the coming months.

There is a rising potential for a problem with agricultural commodity production this year. If floods delay planting, and drought destroys crops, and the US and China agree to a new deal on trade, a perfect bullish storm could descend on the soybean, corn, and wheat markets over the coming months.

More corn than beans in 2019

Once farmers can plant their crops over the coming weeks, and perhaps months, if the floods hamper planting, the corn-soybean ratio is telling us that they will be planting more corn in 2019 than last year.

The long-term average for the corn-soybean ratio is around 2.4 bushels of corn value in each bushel of soybean value. When the ratio is above 2.4:1, farmers tend to plant more beans than corn on their acreage as beans offer a superior economic return. When the ratio is below 2.4:1, farmers tend to plant more corn. Last year, going into the 2018 crop year, the ratio was at the 2.8:1 level which led to more soybean planting. The protectionist policies and cancelation of Chinese purchases of US oilseeds led to swollen inventories and lower prices for soybeans.

The year, the ratio for the new crop corn and soybean prices dropped.

Source: CQG

As the chart of new crop November beans divided by new crop December corn shows, at 2.3435:1 corn currently provides a more attractive economic alternative to beans which will lead farmers to plant more corn than beans this crop year.

Meanwhile, an early season flood that leads to a summer drought and return of the Chinese to the US market could cause prices of both grains to soar if shortages develop. However, at $4 for new crop corn and $9.375 for new crop beans, the futures market currently discounts the potential for any shortfalls or deficits between supplies and demand which could be a tragic mistake if the bullish stars line up over the coming weeks and months.

Wheat remains weak

While the US is the world’s leading producer and exporter of corn and soybeans, it is only one of many wheat producing nations. The US is a leading exporter of the primary ingredient in flour and bread, but wheat is a highly political commodity as bread is a staple nutritional product.

I often write that wheat is the most political commodity in the world, even more so than crude oil. A look back over history will show that bread shortages have led to more than a few revolutions. The latest example is the Arab Spring in 2010 which began as a series of bread riots in Tunisia and Egypt. In 2008, drought caused the price of CBOT wheat futures to rise to a record high at $13.345 per bushel which ignited political turmoil in the Middle East.

A deficit in the wheat market could have a disastrous impact on the world from both an economic and political perspective. Wheat prices remain at low levels going into the 2019 crop year in the northern hemisphere. However, the longer-term trade remains bullish as demographic trends continue to point to more people, with more money, competing for food around the world each day.

Source: CQG

As the weekly chart illustrates, wheat futures have made higher lows since 2016 when the price fell to just below the $3.60 per bushel level. In March 2019, wheat fell to a low at $4.24 per bushel which was the lowest price since January 2018. The CBOT wheat futures market put in a bullish key reversal trading pattern on the weekly chart during the week of March 11 and has followed through on the upside.

In a sign that consumers are not hedging their wheat purchases, the spread between Kansas City hard red winter wheat futures (KCBT) and Chicago soft red winter wheat futures (CBOT) is trading at a significant discount for the KCBT wheat. The historical norm for the spread is a 20 to 30 cents premium for KCBT wheat. Bread manufacturers in the US tend to price and hedge their requirements using formulas tied to the price of KCBT wheat futures.

Consumers tend to panic during bull market periods and are often complacent when prices are stable or moving to the downside. The September KCBT versus CBOT wheat spread closed last Friday at a 14.5 cents discount for KCBT wheat versus CBOT wheat which highlights that many consumers have not hedged or locked in prices or their requirements for the coming months. A sudden spike in the price of wheat would likely cause the spread to explode on the upside. When wheat was at higher levels over the past years, the spread traded at over a $1 premium for KCBT wheat as the demand for hedging increased with the price of the commodity. It is both funny and ironic that consumers tend to make poor economic choices when markets are susceptible to price reversals. With the potential for a trade agreement on the horizon that would increase demand for US wheat from China, floods in the US breadbasket, and uncertainty over the 2019 crop, a logical consumer should be locking in price and availability at the current level. However, history has taught us that they will be more likely to hedge when the price of wheat is above $5 or $6 per bushel, and a move above $7 or higher would cause a frenzy of buying activity.

Buy dips during the time of uncertainty

Given the many dilemmas facing agricultural markets these days, I am a buyer of any price weakness in the corn, soybean, and wheat markets. The most direct route for a trade or investment position in these commodities is via the futures and futures options provided by the CBOT and KCBT divisions of the Chicago Mercantile Exchange. Given the low level of volatility in these markets over the past months, call options offer a limited risk approach where buyers only risk the premium paid for the chance to participate on the upside if prices suddenly soar.

Futures and options are not for everyone as they are highly leveraged and volatile instruments. The Teucrium Family of agricultural ETF products provides alternatives via their CORN, WEAT, and SOYB products that track the price action in the futures markets on the CME.

I am a buyer of grains and oilseeds on any price weakness over the coming weeks. The flood that is likely to delay planting means that crops will need to survive the hot summer sun at early stages of development. A drought could create a disaster for supplies this year. Moreover, a trade deal with China would likely lift prices as they declined last year on the back of the protectionist policies. I like the prospects for the corn, soybean, and wheat markets on a risk-reward basis as we are now entering the most uncertain period of the world.

Andy Hecht covers Commodities and Forex as one of the original contributing analysts at FATRADER. A former senior trader at one of the world’s leading commodities trading houses, Philipp Brothers (now part of Citigroup), Andy has worked and consulted for banks, hedge funds, and commodities producers and consumers around the world for over 35 years.
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