For the first time in two years, we are back into the soft commodity space and agricultural products in particular.
What attracts our attention are the massive short positions built hedge funds over the past few months while agricultural products are already at extremely low levels after several years of bear markets.
The Trade Wars had a dampening effect on economic activity and soft commodity prices over the past few months and the probable resolution – or some form of resolution – of the Trade war will have a positive impact
From a more strategic standpoint, we feel the time is right to start building positions in that space in a global portfolio.
In fact, most agricultural commodity prices have been in a downtrend for several years and the combination of Trade Wars, climatic changes and low prices is slowly but surely reducing the acreage planted in the US.
Climate changes are probably the most important factor together with an economic recovery in China, the world’s largest consumer of agricultural products.
This winter has surely been one of the more extreme ones for most of the American Midwest – the world largest production area – as the region continues to get regular dumps of precipitation.
For many US regions such as North Dakota, Wisconsin, Iowa, and Illinois, this winter has been one of the wettest (combination of rain and snow) in nearly 130 years.
This includes this past week’s major storm that caused white-outs in the north and flooding through the cornbelt. The subsequent question is whether these acres will get dried up in time for optimal seeding dates for Plant 2019.
Hedge funds have been extremely active shorting soft commodities and hold record short positions in almost every agricultural commodity.
We feel the downside is limited from here – but its does exist – while the upside could be significant if any event were to create shortages or disruptions.
In this article, we look at the prospects for :
WHEAT
CORN
SUGAR and
COFFEE.
WHEAT
Fundamentals
Winter wheat planted area is lower than expected on excessive precipitation and cool temperatures during the planting window. Ending stocks are now projected at 1,010 million bushels. The season-average farm price is unchanged based on NASS prices reported to date and price expectations for the remainder of the marketing year.
World production for the 2018/19 market year is raised 1.3 million tons, led by a 1.6-million-ton increase for Russia, a 0.6-million-ton increase for Brazil, and a 0.5-million-ton increase for Paraguay. These changes are partly offset by a 1.1 million ton decrease for China and a 0.3- million-ton decrease for Argentina.
All these production changes reflect updated government statistics and harvest results.
Global exports are raised 1.3 million tons led by a 0.7-million-ton increase for Pakistan on reports of new export subsidies. Russian exports are raised 0.5 million tons and Paraguay is raised 0.4 million tons, both on larger exportable supplies.
In contrast, Australia’s exports are lowered 0.5 million tons on a slow pace to date, and Argentina exports are down 0.2 million tons reflecting the smaller crop.
Global demand for 2018/19 is raised 2.0 million tons, primarily on a 2.0-million-ton increase in China feed and residual use.
With global use rising more than supplies, world ending stocks are lowered 0.6 million tons to 267.5 million
Technicals
From a technical standpoint, Wheat prices have been falling for the past 5 years and started turning around in 2017. The nice “saucer cup” configuration of the Weekly chart reflects a change of long term trend and the February collapse offers an entry point in a commodity that we see going to 600.
The long term charts confirms that the February fall Brough Wheat prices back to the very long term uptrend in place since 1997, providing a solid entry point, at least better than any other.
Preferred Instrument
To build our position in WHEAT, we privilege the ETFS 3X Daily Long Wheat 3X leveraged commodity ETF. It is a very convenient product to play the rebound and the next unplug that we see coming.
At 4 US$, this ETFS is almost at its all-time low.
It was trading at US$ 11 back in September 2018 when Wheat was trading at 570.
CORN
Fundamentals
Total US Corn production diminished in 2018. Corn 2018 US production is estimated at 14.420 billion bushels, down 206 million on reduction in yield to 176.4 bushels per acre. Harvested area is down fractionally.
The 2018/19 U.S. corn outlook is for lower imports, production, food, seed, and industrial use (FSI), feed and residual use, and stocks.
Total corn use is down 165 million bushels to 14.865 billion. FSI use is lowered 40 million bushels, reflecting reductions to corn used for ethanol and other industrial use. Other FSI use is lowered 15 million bushels with lower projections for high fructose corn syrup and glucose and dextrose.
With supply falling more than use, US corn stocks are lowered 46 million bushels
Foreign corn production is forecast higher with increases for Argentina, China, and Ukraine more than offsetting reductions for South Africa and Mexico.
Argentina’s corn production is up based on higher expected area and yield, with abundant rainfall and benign temperatures over the past two months boosting yield prospects. China and Ukraine are higher based on the latest official statistics. South Africa is lowered as heat and dryness during the month of January, particularly in the western producing areas, reduces yield prospects.
Major global trade changes for 2018/19 include increased corn exports for Argentina and Ukraine, partially offset by reductions for South Africa and Mexico.
Overall, Global corn ending stocks are stable at 309.8 million, up barely 1.0 million bushels.
Hedge funds boosted their net-short position in corn to an all-time high as of March 12, U.S. government data showed Friday. Since then, “catastrophic flooding” reached parts of the U.S. Plains and Great Lakes region, saturating Midwest fields ahead of spring planting.
Uncertainty on trade issues and the subsequent price movements associated with speculation on the topic added a degree of difficulty to acreage decisions this year.
The March 29 Prospective Plantings report will provide the initial indication of potential acreage allotments for spring crops and sets the tone for production potential as we move into planting season.
Over the 2016 to 2019 period, corn, soybean, and wheat acreage combined came in at 227.6, 226.4, and 226.1 million acres respectively.
Current USDA projections for the three crops indicates 224 million acres planted. The lower acreage estimate implies either a drop in principal crop acreage or an increase in acreage for other crops in 2019.
Through January, CRP acreage enrollment is reported at 22.4 million acres, down from the 23.5 million acres last year. However, the snow storm and whiteouts of the past few weeks could have a significant impact on final planted acreage.
Technicals
Corn prices have been extremely stable over the past 5 years in a tightening range between 320 and 450. More recently, a succession of higher lows and last week’s sharp reversal combined with the record high short positions plant the scene for a sharp move ahead.
The longer term chart shows that we are trading very close to the log term uptrend that has been in place since 2005 and that we are nearing the end of the 5-years consolidation phase that followed the 2010- 2014 rally.
This is as good an entry point as can be with limited downside and potentially high upside.
Preferred Instrument
We privilege the ETFS 2X DAILY LONG CORN Commodity ETF with a leverage of 2X.
At 1.612, the LCOR LN is almost at an all-time low.
It was trading at 2.40 when Corn was trading at 400 in June 2018.
SUGAR
Fundamentals
World Global production for Year 2018/19 is forecast down 9 million tons to 186 million primarily due to the 8-million-ton drop in Brazil caused by unfavorable weather and more sugarcane being diverted towards ethanol production. Exports are down, driven by the lower supplies in Brazil.
Record consumption is expected due to growth in markets such as China, India and Indonesia.
Global stocks are forecast to rise to a new high of 53 million metric tons (raw value) as massive stock building in India more than offsets lower stocks in China and the European Union.
India’s production is forecast to rise 1.8 million tons to a record 35.9 million due to higher area and yields (in spite of pest and weather concerns), eclipsing Brazil’s for the first time in over 15years.
Consumption is also forecast at a record, 27.5 million tons, due to a growing population and strong demand from food processors. Exports are forecast to more than double to 4.0 million as sugar mills seek to reduce stocks which are expected to soar to a record18.1 million tons.
Brazil’s production is estimated to be down 8.3 million tons to 30.1 million due to lower sugarcane yields and more sugarcane being diverted towards ethanol production as record global sugar supplies have led to weak prices.
Exports are projected to drop similarly to 19.6 million tons, lowering Brazil’s market share of exports to 34 percent (down from a 5-year average of 45 percent). Stocks and consumption are both relatively unchanged.
Thailand’s production is forecast to decline 900,000 tons to 13.8 million on lower sugarcane yields and sugar extraction rates due to lower than expected precipitation.
Consumption is down slightly due to lower industrial demand in response to a new sugar excise tax on beverages. With high supplies from record production last year, exports are forecast at a
record 11.5 million tons, bringing stocks down to 6.9 million.
Production in the European Union is forecast to fall 1.4 million tons to 19.5 million on a return to average yields compared with last year’s record. Because of lower supplies, exports are projected to fall 600,000 tons to 3.0 million. With unchanged imports and consumption, stocks will tighten.
U.S. production is forecast down 3 percent to 8.2 million tons. Imports at 2.5 million tons are down 14.5 percent based on projected quota programs and the calculation of U.S. Needs, as defined in the antidumping and countervailing duties suspension agreements. Consumption is forecast relatively flat but stocks will decline.
China’s production is forecast up for the third straight year, this time to 10.8 million tons, due to favorable weather and expanded area. Imports are forecast lower for the third year in a row,especially following the safeguard measures amended in July 2018 that make additional duties apply to all suppliers. Previously, certain supplying countries had been exempted from these duties.
China’s Consumption is up on a continually rising urban population growth.
Mexico’s production remains essentially unchanged for a seventh year at 6.4 million tons. Exports are projected down slightly with lower expected exports to the United States partially offset by an increase in non-U.S. exports of 326,000 tons. Consumption and stocks are expected to rise.
Currently, Pakistan’s export policies include an unsubsidized 1.0-million-ton export quota compared with 2.0 million tons exported and freight subsidies of up to $97 per ton in 2017/18.
Formerly a major sugar importer, Russia has been a net exporter since 2016/17.
Australia’s production is forecast up 4 percent to 5.0 million tons on higher yields due to favorable weather. Consumption is unchanged while exports are expected to be up due to the higher production. As one of the top five exporters, Australia’s major markets include China, Japan, Indonesia, Malaysia, New Zealand, South Korea, Taiwan, and the United States.
In other words, the supply/demand equation is NOT favorable for a rise in sugar prices.
But, as a consequence, the managed money traders increased their net short positions by 38,703 contracts in just one week to 68,726 contracts as of March 5th, the highest level on record.
Technicals
The short term chart shows a positive configuration with a double higher low in 2019 after the lengthy 2016 – 2018 bear market. The US$ 10 support is extremely solid.
The long term chart confirms the solidity of the 10 $ support and the completion of the A-B-C 2016 -2019 bear market. The MACDs are sending a BUY signal.
Preferred Instrument
We privilege the ETFS 3X Daily Long SUGAR 3SUL LN, a commodity ETF with 3 times leverage.
The technical configuration of the 3SUL LN is very favorable with a clear “Saucer Cup” and consolidation triangles that indicate a sharp move relatively soon. This is confirmed by the Three moving averages now exactly on the same level, a clear indicator that something is bound to happen very soon.
COFFEE
Fundamentals
Coffee year 2018/19 is expected to be the second consecutive season of surplus, as global output, estimated at 167.47 million bags, exceeds world consumption, estimated at 165.18 million bags.
However, given the stronger growth in demand, the surplus for 2018/19 is projected to be 2.29 million bags, around 1 million bags less than in 2017/18.
In coffee year 2017/18, global coffee output is estimated 4.8% higher at 163.51 million bags compared with coffee year 2016/17
Total shipments of all forms of coffee increased in four out of the ten largest exporters for coffee year 2017/18.Brazil exported 32.34 million bags of coffee in 2017/18 compared to 31.93 million bags in 2016/17.
However, Brazil’s coffee year production is split across two crop years so that 2017/18 shipments reflect both the smaller output produced in crop year April 2016 to March 2017 and the 14.7% increase in production for crop year 2017/18.
Brazil’s exports for April to September 2018 reached 15.52 million bags, which is 11.2% greater than the volume shipped from April to September 2017.
Vietnam saw a 21.7% increase, shipping 28.64 million bags in coffee year 2017/18 compared to 23.54 million bags in 2016/17. This reflects the growth in production that benefited from favourable weather.
In contrast, Colombia’s exports for coffee year 2017/18 decreased by 5.7% to 12.72 million bags as decreased output limited the volume available for shipment.
After achieving a record of 7.29 million bags, exports from Honduras fell in 2017/18 to 7.14 million bags, due in part to a shortage of labour for harvesting.
India was the fifth largest exporter in 2017/18, and its exports declined by 1.4% to 6.28 million bags.
Indonesia saw the largest decrease in exports as shipments fell from 8.72 million bags in 2016/17 to 5.64 million bags in 2017/18. A shortfall in production coupled with increasing domestic demand led to this decline.
Like Honduras, Uganda’s exports decreased following a year of record exports. Uganda shipped 4.36 million bags in 2017/18 compared to 4.61 million bags in 2016/17.
Peru’s exports remained stable at 3.96 million bags while exports from Ethiopia and Guatemala increased by 4.5% to 3.65 million bags and 5.4% to 3.47 million bags, respectively.
World coffee consumption is provisionally estimated at 161.93 million bags in coffee year 2017/18, 1.8% higher than coffee year 2016/17.
The fastest growing region is Asia & Oceania where consumption in coffee year 2017/18 is estimated at 35.9 million bags, up 3.1% from last year. This is followed by North America, which is estimated to grow 2.6% to 30.34 million bags in coffee year 2017/18
Coffee Consumption by region
World Supply / Demand
2017/2018 was in surplus and 2018/2019 should also be, but as can be seen form the previous years, climatic conditions can change the picture significantly,
For the world coffee producers, Climate changes are seen as an existential threat. Increasingly unpredictable seasons, crop disease and invasive insects associated with climate change are seen as endangering the livelihoods of coffee growers.
Over 90% of the coffee farmers polled in South America reported changes in average temperature. Some 74% said droughts had gotten longer and worse, and 61% reported an increase in mountainside erosion and landslides because of more rain.
The farmers also perceived impacts of these environmental changes on their crops. Some 91% reported changes in the flowering and fruiting cycles of the coffee plants, 75% had noticed an increase in pests, and 59% reported an increase in crop disease.
Technicals
The short term picture depicts the inability of Coffee to bounce off its current support level, with prices strongly inscribed in a downtrend.
The longer term chart shows how crucial the current 94 level is ! A Break below that level points to 50. However, this level has always been the key long term equilibrium price since the 1980s and a logical level from where a bounce should take place.
Preferred Instrument
We privilege the ETFS 3X Daily long Coffee Commodity ETF offering a 3X leverage in case of a rebound.
Currently trading at 4.57, the 3CFL Ln was trading at 12.5 in September 2018 when Coffe bounced back to 125.
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