Soybean, corn, wheat - where to look for buying opportunity?

Summary:

• WASDE report proved to be surprisingly positive for soybean and corn due to a fall in ending stocks

• A rise in expected wheat inventories in the US

• Global outlook does look quite well for wheat prices

• Weather and trade negotiations will be pivotal topics for grains

WASDE report

Recent several weeks have been quite hard for investors across various grain markets which could be tied to a lack of updated data from the USDA. The institution delivers both monthly and weekly reports concerning commodities. For that reason investors were unable to know if increased Chinese purchases of US soybean de facto took place.

The latest WASDE report was the most bullish for soybean prices, then for corn and wheat prices - based on the data concerning ending stocks. Note that corn and soybean production is forecast to fall. Source: Bloomberg

The quarterly data (Q4) were mixed though. The release was positive for soybean and corn prices and less upbeat in case of wheat. Source: Bloomberg

Apart from the WASDE release, there was also the CONAB report from Brazil. It showed the rosy backdrop for soybean and somewhat less positive numbers for corn. Source: xStation5

No fundamental changes in sight

Taking into account the current fundamental outlook for grains there have been no major changes in recent weeks. Looking forward, this year could bring another modest deficit in the corn and wheat markets globally, whereas the soybean market should see see a slight surplus due to abundant output in South America. Let us notice that the last time when the soybean market saw a deficit was 2011 and before the crisis. The latest data suggest that both corn and wheat should see a deficit:

• The largest deficit in the corn market from many years, however, this scarcity is relatively low compared to surpluses seen since 2009

• The stocks/consumption ratio starts falling but still stays quite high

• The soybean market has been running at a surplus in recent seasons

• Soybean inventories are forecast to reach another peak this year globally

• Wheat output has begun declining of late due to lowered acreage

The current fundamental outlook across major grains has not evolved significantly. It looks fairly well for corn and wheat in the long-term. Source: Bloomberg, XTB

Deal or no deal?

The ongoing trade negotiations between the US and China seem to be key for many markets including agricultural commodities. China decided to implement retaliatory measures last year hitting US farmers by imposing a 25% tariff rate on soybean. Other grains account for a relatively small portion of trade between the two countries. In December China promised to increase US soybean purchases, however, due to the govt shutdown there was no possibility to verify if the increased purchases actually occurred. The data from the start of this year offers rather modest optimism. During the first week of 2019 the US exported a bit more than 8.5 million tons of soybean given 30 million tons at the corresponding period last year. The major reason is still a limited demand from China which keeps buying soybean from Brazil (lower prices) and has dialed back its demand for this grain in general.

Brazilian soybean is already cheaper than US grain even as tariffs are excluded. If there is no trade deal one may expect US soybean could remain under pressure. Source: Bloomberg

In this place it is worth mentioning a possible threat related to a possible change in the kind of grain US farmers sow. Should no deal be reached, US farmers may increase production of other grains. Corn seems to be a natural choice but other commodities like cotton and wheat are also on the cards.

Sluggishness on the corn market

E15 fuel case raised hopes that corn will see an abrupt surge in demand but so far no such development materialized. An agreement was signed in 2018 that allowed sale of new type of fuel throughout the whole year. However, it did not lead to increase in demand for corn from ethanol producents (E15 fuel contains 15% of ethanol while E10 fuel used earlier contained 10%). To be honest, demand forecasts are being revised down currently. The same can be said about demand for dent maize. End stocks did not change significantly and seasonal patterns hint that we will see minor uptrend in the first half of the year while the second one should be marked by declines.

Amount of corn needed for ethanol production (white line on the chart above) as well as demand for dent maize (yellow line) is declining in the United States. Source: Bloomberg

Performance of corn inventories in the United States does not hint at any potential trend reversal looming. Significant volatility in the end-year periods is caused by revisions of the Chinese inventories data. Source: Bloomberg

Wheat - weather remains a key

It turns out that low yields are not the only cause behind shrinking wheat planting area. Terrible weather in regions of the United States where wheat is cultivated caused much less fields to be sown with winter wheat. Moreover, some commentators already suggest that this year’s crops will be hurt by poor weather conditions. On the other hand, we were served data that showed wheat inventories rising. Nevertheless, throughout 2018 we have experienced numerous weather issues that caused wheat prices to rise, especially in Europe and Asia. Changing climate on the Old Continent means that unless technological progress is achieved wheat yields may diminish. Under such circumstances importing wheat from the United States may be an option for Europe. Exports outlook for the US is upbeat since at least few years and is pointing to a higher price levels.

The US wheat may get a boost from improving exports outlook amid shrinking global production. Source: Bloomberg

We see quite a high chance of weather problems to occur once again this year, especially in Europe and to smaller degree in the United States. Additionally, data concerning planned sowing, that is scheduled for release in March, is expected to show smaller area being planned to be sown this season. Those two factors should exert upward pressure on the wheat prices. Taking a look at seasonal patterns one can see that wheat prices often experience rally in the May-June period, what could bring prices as high as to 650 cents per bushel this year. This level can be seen as potential target for the pending buy order at 485 cents per bushel handle with stop loss at 425 cents per bushel.

There is a scope for the short-term rally on wheat market but we see more upward pressure over the medium and longer term. Chances of price rally occuring in mid-year are high according the seasonal patterns. Source: xStation5