**UPDATED Quarterly Review**
Wheat prices moved higher, while corn and soybeans declined over the past two weeks. The 2021 harvest season will be wrapping up over the coming weeks as we head into the winter months. The focus now shifts below the equator at the beginning of the 2021/2022 crop year. The cost of production has risen dramatically, weighing on profit margins for farmers that feel they are in a now in situation after years of lower price levels. Energy, fertilizer and equipment prices have moved appreciably higher. The USDA released its October World Agricultural Supply and Demand Estimates report on Tuesday, October 12. The full text of the monthly report is available via this link.
I reached out to Sal Gilberte, the founder of the Teucrium family of CORN, SOYB, and WEAT ETF products for his take on the October WASDE report. Sal told me:
It looks like the USDA has found more beans than the markets expected for the second time in as many weeks. The soybean balance sheet is loosening but has a long way to go before supplies approach the levels we had only two years ago. At current price levels, corn is penciling as a more profitable crop for farmers to plant next season, which could keep soybean supplies somewhat restrained from here. That said, soybeans may gain favor with farmers as the price of fertilizer keeps rising, which will affect corn planting and fertilization rates in the coming season, and that could provide more soybean supply. Markets are in a general state of equilibrium right now but will likely test downside price levels a bit during this time of seasonal price weakness due to the Northern Hemisphere’s peak harvest in October, but overall higher price ranges are benefiting farmers around the world which should incent more planting of all crops, if the weather cooperates. Wheat’s balance sheet continues to tighten, with robust demand and inconsistent weather patterns affecting supply in various places around the globe. Wheat prices are firm post report, soybean prices are testing six-month lows, but are still far above year ago price levels.
November soybean futures fell 6.89% since September 29 and were at $11.9525 per bushel on October 13. The price of new crop soybeans reached a high of $14.80 on June 7. The continuous contract reached $16.7725 in May, an over eight-year high. Support on November futures now stands at $11.8400, the March 31 low. Technical resistance is at $12.6250, the October 8 high.
Technical resistance at $12.6250, $13.08, $14.80, $16.7725, and $17.9475 per bushel, the all-time 2012 high. Soybeans are now in the 2021 harvest season. Open interest in the soybean futures market moved 10.61% higher since September 28. Daily price momentum and relative strength indicators were at oversold readings on Wednesday. The USDA told the soybean market:
“U.S. oilseed production for 2021/22 is forecast at 130.8 million tons, up 1.5 million from last month with higher soybean production partly offset by lower forecasts for sunflowerseed, canola, peanuts, and cottonseed. Soybean production is forecast at 4.4 billion bushels, up 74 million on higher yields. Harvested area is unchanged at 86.4 million acres. The soybean yield is projected at 51.5 bushels per acre, up 0.9 bushels from the September forecast. The largest production changes are for Iowa, Minnesota, and Nebraska. Soybean supplies for 2021/22 are projected at 4.7 billion bushels, up 145 million on higher production and beginning stocks. With higher crush and unchanged exports, 2021/22 ending stocks are projected at 320 million bushels, up 135 million from last month. The U.S. season-average soybean price for 2021/22 is forecast at $12.35 per bushel, down 55 cents reflecting larger supplies. The soybean meal price is forecast at $325.00 per short ton, down $35.00. The soybean oil price forecast is unchanged at 65 cents per pound. Foreign 2021/22 oilseed production is lowered 2.4 million tons to 497.4 million on lower soybean, sunflowerseed, and rapeseed output. Soybean production is lowered for Argentina, India, and the EU. Argentina’s production is lowered 1.0 million tons to 51.0 million on lower harvested area. Sunflowerseed production is lowered for Ukraine and Russia on recent harvest results. Canola production for Canada is lowered 1.0 million tons to 13.0 million, reflecting reports by Statistics Canada. Global soybean supply and demand forecasts for 2021/22 include higher beginning stocks, lower crush, and higher ending stocks. Higher beginning stocks reflect increases for the United States, Argentina, and China. Argentina’s beginning stocks are raised on a downward revision to 2020/21 crush. The 2021/22 crush for Argentina is also lowered, leading to lower exports of meal and oil. China’s 2020/21 crush is lowered 1.0 million tons to 93.0 million based on end of year data. Global soybean ending stocks for 2021/22 are increased 5.7 million tons to 104.6 million, with higher stocks for the United States, Argentina, and China.”
Source: USDA October WASDE report
As Sal said, the USA “found” more beans, pushing inventories higher and prices lower to under the $12 per bushel level.
The December synthetic soybean crush spread moved 43.00 cents higher since September 29 to $1.46. The December crush reached a high of $1.5025 on June 30 and made a new low for 2021 on September 10 as it fell below the previous January 19, 2021, 91.25 cents low to 80 cents. Volatile conditions in soybean futures translated to high price variance in the crush spread over the past months. Keep an eye on the processing spread as it is a barometer of demand for soybean products. Port and logistical issues in Brazil caused supply shortages. Chinese demand for soybeans and soybean products remains robust. The rally in the crush spread could be an eventual bullish sign for the soybean futures that are searching for a bottom. At low prices, China could accelerate purchases.
December corn futures were trading at $5.1225 per bushel on October 13, which was 4.96% lower since the previous report. The continuous corn futures contract rose to a new high of $7.75, which is the chart point for the coarse grain. Open interest in the corn futures market moved 0.46% higher since September 28. Corn’s high at $7.75 on May 7 was the highest price since October 2012. While the weather had been the primary factor driving corn prices, energy prices are a significant input for corn as it is the primary ingredient in US ethanol production. Rising oil, gas, and biofuel prices are bullish for corn.
Technical metrics were below neutral territory and falling in the corn futures market as of Wednesday. Support on December corn futures is at the $4.9750 level, the September 10 low. Resistance is at $5.4850, the September 30 high. The USDA told the corn market:
“This month’s 2021/22 U.S. corn outlook is for slightly higher production, increased exports, lower feed and residual use, and larger ending stocks. Corn production is forecast at 15.019 billion bushels, up 23 million on a marginal increase in yield to 176.5 bushels per acre. Corn supplies are forecast up 72 million bushels from last month, on slightly higher production and increased beginning stocks based on the September 30 Grain Stocks report. Exports are raised 25 million bushels reflecting larger supplies and expectations of reduced competition from other major exporters. Projected feed and residual use is lowered 50 million bushels based on indicated disappearance during 2020/21. With supply rising and use falling, corn ending stocks for 2021/22 are raised 92 million bushels. The season-average corn price received by producers is unchanged at $5.45 per bushel. WASDE-617-2 Grain sorghum production is forecast higher from last month, with a 2.6-bushel per acre increase in yield to 72.3 bushels per acre. Barley and oat production estimates are updated based on the September 30 Small Grains Summary report. Global coarse grain production for 2021/22 is forecast down 2.9 million tons to 1,494.0 million. The 2021/22 foreign coarse grain outlook is for lower production, virtually unchanged trade, and larger stocks relative to last month. Foreign corn production is forecast essentially unchanged as increases for the EU, Canada, Venezuela, and Serbia are largely offset by declines for Ukraine, Russia, and Guatemala. EU corn production is raised reflecting increases for Poland and Romania more than offset declines for France and Bulgaria. Corn production in Canada is higher reflecting favorable yield prospects for Ontario. Projected corn yields for Russia and Ukraine are lowered based on reported harvest results to date. Corn exports are raised for India, the United States, and the EU, with partly offsetting reductions for Ukraine, Russia, and Vietnam. For 2020/21, corn exports for Brazil are lowered for the local marketing year beginning March 2021, based on shipments through the month of September. For 2021/22, corn imports are lowered for Vietnam, Chile, Algeria, Israel, Lebanon, and Saudi Arabia, but raised for Bangladesh. Foreign corn ending stocks are higher, mostly reflecting increases for China and Mexico, with a partly offsetting reduction for Ukraine. Global corn stocks, at 301.7 million, are up 4.1 million.”
Source: USDA October WASDE report
Corn stocks and production were higher, weighing on prices.
Corn will continue to be sensitive to the price path of gasoline. Ethanol production in the US accounts for approximately 30% of the annual corn crop. The price of the illiquid November ethanol swaps moved 12.90% higher over the past week to the $2.0950 per gallon level. The spread between November gasoline and November ethanol swaps was at 31.05 cents per gallon on Wednesday, with gasoline at a premium to ethanol. The spread moved 3.55 cents higher since September 29 as gasoline rose more than ethanol over the past week on a percentage basis. The prospects for ethanol prices are a function of gasoline, crude oil, and corn prices over the coming weeks. Energy gains support the corn futures market.
Nearby CBOT wheat futures rose to a new high at $7.7475 per bushel on August 13, the highest price since February 2013. December CBOT wheat futures moved 1.20% higher since September 29. The December futures were trading at the $7.1875 level on October 13. Open interest increased by 7.41% over the period in CBOT wheat futures.
Technical resistance on December is at $7.6350 per bushel, the October 4 high, $7.7475, and $9.4725, the 2012 peak. Support is at $7.0125, the September 30 low. Price momentum and relative strength in CBOT wheat were above neutral readings and trending lower on Wednesday.
The USDA told the wheat market:
“The outlook for 2021/22 U.S. wheat this month is for reduced supplies, lower domestic use, unchanged exports, and decreased ending stocks. Supplies are reduced primarily on lower production from the NASS Small Grains Summary, issued September 30. Supplies are also lowered on reduced imports, down 10 million bushels, to 125 million on the import pace. Annual feed and residual use is lowered 25 million bushels to 135 million despite the NASS Grain Stocks report indicating greater disappearance in the first quarter compared to last year. Significantly reduced supplies of Hard Red Spring, Durum, and White wheat for 2021/22 are expected to curtail feed and residual use for the remainder of 2021/22 along with the continued large price premium of wheat over corn. Exports are unchanged at 875 million bushels but there are offsetting by class changes. Projected 2021/22 ending stocks are reduced 35 million bushels to 580 million, which are the lowest U.S. ending stocks since 2007/08. The projected 2021/22 season-average farm price is raised $0.10 per bushel to $6.70 on reported NASS prices to date and price expectations for the remainder of 2021/22. The global wheat outlook for 2021/22 is for reduced supplies, lower consumption, nearly unchanged trade, and smaller ending stocks. Supplies are projected falling by 8.6 million tons to 1,064.2 million, primarily on the combination of reduced beginning stocks for Iran and reduced production for Canada, Iran, and the United States. Iran’s 2021/22 beginning stocks are lowered 3.6 million, the result of a multi-year production revision from 2017/18 onward. Iran’s 2021/22 production is lowered 1.5 million tons to 13.5 million, based on indications of greater 2021/22 imports driven by reduced domestic supplies. Canada’s production is reduced 2.0 million tons to 21.0 million on reduced harvested area as increased abandonment is expected from the severe drought affecting the Prairie Provinces this past summer. Projected 2021/22 world consumption is lowered 2.6 million tons to 787.1 million with the majority of the reduction for food, seed, and industrial use in India and Canada and feed and residual use for the United States. Projected 2021/22 global trade is fractionally lower at 199.6 million tons on lower exports by Canada that are nearly offset by higher exports by Australia, the EU, and India. Projected 2021/22 world ending stocks are reduced 6.0 million tons to 277.2 million and are the lowest since 2016/17 with Iran, the United States, and Australia accounting for most of the reduction.”
Source: USDA October WASDE report
US and global wheat stocks declined, supporting prices of the primary ingredient in bread.
As of October 13, the KCBT-CBOT spread in December was trading at a 3.0 cents per bushel premium, with KCBT higher than CBOT wheat futures in the December contracts. The spread moved 1.50 cents higher since September 29. The long-term norm for the spread is a 20-30 cents premium for the Kansas City hard red winter wheat over the CBOT soft red winter wheat. The CBOT price reflects the world wheat price, and it is the most liquid wheat futures contract. The KCBT price is often a benchmark for bread manufacturers in the US who purchase the grain from suppliers.
As I had been writing:
“at a discount to CBOT, consumers are not hedging their requirements for KCBT, which is a sign that they continue to buy on a hand-to-mouth basis.”
The spread had not traded at a premium for KCBT wheat in years, which was a sign that consumer hedging was increasing as wheat prices continue to make higher highs making them nervous. The potential for a continuation of even higher prices could cause consumers to increase hedging their requirements. Consumers tend to panic when the price moves higher. The KCBT-CBOT spread moved marginally towards the long-term norm over the past week, and the trend over the past weeks remains bullish. Keep an eye on the spread as it could be an excellent barometer of hedging activity and panic buying by consumers over the coming weeks and months. Deteriorating US-Russian relations could also impact the wheat market over the coming months.
Spring MGE wheat was at $9.4875 per bushel on the December contract on October 13, up 45.25 cents over the past two weeks. The spring wheat suffered from adverse weather conditions, creating shortages. I expect elevated volatility to continue over the coming weeks as the 2021 crop year heads towards the fall harvest. I had been a buyer of grains in the futures and ETF markets over the past months.
Over the past months, I have written:
“From the 2008/2009 lows through 2012, the prices exploded higher in the aftermath of the global financial crisis, which could be a model for 2020 and the coming years.”
As always, the weather conditions determine supplies and are the most significant fundamental factor each year. Bull market corrections can be severe. I will be following trends in the grain sector during the harvest.
As the chart of soybeans for delivery in November 2022 divided by corn for delivery in December 2022 shows, the ratio is near the average at the 2.35:1 level. Keep an eye on the spread over the coming weeks and months as it is an excellent value indicator telling is if beans or corn are historically expensive or cheap.
As I have written over the past weeks:
“The grain and oilseed price action continues to tell us that food prices will remain elevated into 2022.”
Prices remain appreciably higher in October 2021 than they were in October 2021. It costs a lot more to eat this year, and the demand is likely to rise with the population, which is not bearish even at the current price levels.
Lean hog futures declined since September 29 but live, and feeder cattle prices moved higher. The USDA’s latest October World Agricultural Supply and Demand Estimates report told the animal protein sector:
“The forecast for 2021 total red meat and poultry production is lowered from last month as lower pork, broiler, and turkey forecasts more than offset a higher beef forecast. Beef production is raised from the previous month as lower expected steer and heifer slaughter are more than offset by higher cow slaughter and heavier average carcass weights. The pork production forecast is reduced on lower expected fourth quarter hog slaughter. For 2022, the total red meat and poultry forecast is reduced from the previous month. Although higher expected placements of cattle in second half 2021 are expected to support higher early-year supplies of fed cattle, placements in the first half of 2022 are lowered and fed cattle supplies in the second half or 2022 are expected to be tighter. USDA’s Quarterly Hogs and Pigs report, released on September 24, estimated a lower pig crop for June-August and lower farrowing intentions for September/November. This supports lower hog slaughter expectations for first half 2022. Slower expected growth in pigs per litter during 2022 resulted in lower expected hog supplies in the second half of the year. For 2021 and 2022, beef import forecasts are raised reflecting continued strength in demand while the export forecasts are unchanged. The pork import forecasts are raised on increased supplies of pork on the global market. The pork export forecast for 2021 is reduced on weaker expected demand from China and increased competition in global markets; however, exports are increased for 2022 as growth in several key markets recovers. Fed cattle prices for 2021 are lowered on current price movements and relatively large supplies of fed cattle. However, the 2022 price forecast is raised on tighter expected supplies of cattle. The 2021 and 2022 hog price forecasts are raised on lower expected hog supplies.”
Source: USDA October WASDE report
The picture for beef and pork prices was mostly bullish during the offseason for demand.
December live cattle futures were at $1.2900 per pound level, up 1.54% from September 29. Technical resistance is at $1.30600 per pound on the December contract, the October 8 high. Technical support is at $1.2500 per pound level, the October 1 low. Daily price momentum and relative strength indicators turned higher from oversold readings and were rising above neutral territory on Wednesday. Open interest in the live cattle futures market moved 3.37% lower since the last report. The disconnect between cattle prices in the futures market and consumer prices at the supermarket created dislocations in the market in 2020. Beef and pork markets are now officially in the offseason.
Live cattle made higher lows and higher highs from October 2020, reaching a higher high on August 24 when prices turned lower, reflecting seasonal forces. They have been rallying since October 1.
November feeder cattle futures moved higher since September 29, rallying 3.67%. November feeder cattle futures were trading at the $1.609750 per pound level with support at $1.52000, the September 30 low, and resistance at the $1.624750 per pound level, the high from October 12. Open interest in feeder cattle futures moved 6.94% lower since the previous report. Sometimes live cattle prices lead feeder cattle prices, while at others, the opposite occurs. Price momentum and relative strength metrics were rising towards overbought readings on the daily chart on Wednesday. Feeders will be sensitive to corn prices over the coming weeks as feed impacts production costs. Lower corn over the past two weeks supported the feeder cattle futures. December lean hog futures fell to 78.150 cents per pound on October 13, which was 6.52% below the level in the previous report. Price momentum and the relative strength index turned lower from overbought readings and were below neutral territory on October 13. Short-term support on December hogs is at the September 24, 77.200 cents high. Technical resistance on the December futures contract is at 85.675 cents, the September 30 high. Open interest rose 6.84% since September 28. Hogs and cattle prices are mostly strong a little over one month into the offseason for demand.
African Swine Fever continues to be a concern in China. If ASF continues to kill Chinese pigs, we could see an increase in the demand for US pork, which would push lean hog futures higher over the coming weeks and months. China is the world’s leading pork-consuming nation. At the last G-7 meeting, leaders put additional pressure on the Chinese, which only exacerbated tensions with the US. The Chinese own the leading US hog processing company, Smithfield Foods. A Chinese company purchased the Virginia-based company in 2013. Smithfield could divert some of its pork and pork products to China if shortages develop over the coming weeks and months. China has faced substantial challenges with pork supplies over the past years. Rumors of AFS cases in China continue to support pork prices as we enter the offseason for demand in the US. Meanwhile, bottlenecks at supply plants caused by COVID-19’s delta variant could cause price distortions as supplies of live animals rise, and meat available for consumers falls.
The long-term average for the spread between live cattle and lean hogs is around 1.4 pounds of pork for each pound of beef. The December spread moved lower towards the long-term average over the past week as live cattle far underperformed the lean hog futures.
Based on settlement prices, the spread was at 1.65070:1 compared to 1.51970:1 in the previous report. The spread rose 13.10 cents as live cattle moved higher, and lean hog futures fell over the past two weeks. The spread moved away from the long-term average of 1.40 over the past week, which is the historical fair value level for the meats. The December cattle-hog spread hit the high at 1.9475 in August 2020. The spread made a low at 1.4474:1 on June 10, 2021. As we are now in the offseason for demand, the spread is above the historical norm.
Cattle are historically more expensive than hogs on the December contracts as the spread is above the 1.4:1 level. Soybean and corn prices will continue to impact cattle and hogs over the coming weeks and months as they are the main ingredients in animal feed products.
The COW ETN is illiquid but can be an acceptable substitute for those who do not venture into the futures arena. I remain neutral on the meats, but bullish and bearish factors pull them in opposite directions. Meat prices tend to decline in the fall, but nothing is ordinary about 2022, given the inflationary pressures and rising number of delta variant cases that threaten to cause new supply chain bottlenecks. The October WASDE report was not bearish for meat prices, but seasonality is bearish. I will follow the developing trends over the coming weeks and months.