The August WASDE Report- Grain and Oilseed Prices Remain Elevated

The August WASDE is a critical report for agricultural commodity prices as it provides concrete data on crop yields. August is the later part of the growing season, with the fall harvest only weeks away. Each year, the August WASDE has the potential to move soybean, corn, wheat, and other agricultural commodity prices when yield projections differ from the market’s expectations. Meanwhile, the 2022 crop year that runs into 2023 is unique as Europe’s breadbasket, and the Black Sea ports remain battlegrounds. 

Record and multi-year highs in 2022

Nearby CBOT wheat futures rose to a new record high of $14.2525 in March 2022. After correcting from the high, the nearby September contract was trading at around $7.70 on August 17, the highest price since 2012. 

Nearby soybean futures rose to $17.84 per bushel in June 2022, only 10.75 cents below the 2012 record $17.9475 high. New-crop November beans were at the $13.90 level on April 17. Beans are sitting at a level not seen since 2014.

The continuous corn futures contract reached a peak of $8.27 in April 2022, 16.75 cents below the 2012 $8.4375 all-time high. New-crop December corn futures were at the $6.11 level on August 17, the highest price since 2013.

The August WASDE was not bearish for the grain and oilseed markets

The USDA’s August World Agricultural Supply and Demand Estimates Report’s full text is available via this link. 

I reached out to Sal Gilberte, the founder of the Teucrium family of agricultural ETF products, including CORN, SOYB, WEAT, and CANE, for his take on the latest WASDE report. Sal told me:

The August WASDE is always interesting with the USDA giving its first serious yield estimates of the season. Surprisingly, the USDA is projecting a near record US soybean yield, which seems aggressive this early in the growing cycle. Not surprisingly, corn and wheat yield and production estimates have been reduced versus last month across the globe, due primarily to hot, dry weather in parts of the US, the EU, and India. With the notable exception of soybean inventories which are expected to rise this year versus last year, global total grain usage and global total wheat usage will both exceed production this year, meaning global food balance sheets are continuing to tighten for a third consecutive year. It is worth emphasizing that global wheat production, even with this month’s cut in production estimates due to weather events, is projected to be record high, meaning demand is the driver behind shrinking global wheat balance sheets. Farmers are clearly responding to high prices with increased production, but demand seems relatively inelastic, regardless of price, at least thus far. Weather and time will set the future direction of prices from this point onward as we head into the Northern hemisphere’s harvest season.

Sal points out that consumption will exceed production during the 2022 crop year, tightening food balance sheets. The bottom line is that economic and geopolitical conditions continue to underpin prices as the world heads into the 2022 harvest season in the Northern Hemisphere. 

A potent bullish cocktail going forward

More than a few issues favor higher grain and oilseed futures prices over the coming months and perhaps years:

• The war in Europe’s breadbasket- Russia and Ukraine are significant wheat, corn, and other agricultural product exporters. The conflict in Europe’s breadbasket and the Black Sea ports, a critical logistical hub, threatens worldwide supplies.
• Fertilizer prices and availabilities- Russia is a substantial fertilizer producer. Prices have soared, and availabilities have declined, impacting agricultural commodity producers and lifting production costs. 
• Supply chain bottlenecks- Pandemic-inspired supply chain issues continue to present roadblocks for transporting commodities from producers to consumers. Moreover, high traditional fuel prices have increased transportation expenses.
• Inflation at the highest level in four decades- Global central bank monetary policy and government stimulus programs in 2020 and 2021 planted inflationary seeds that continue to push prices higher. US inflation remains at the highest level in over four decades, even after the declines in the consumer and producer price indices in July 2022. High inflation increases the prices of all goods and services, and grain, oilseed, and food prices are no exception.
• Addressing climate change- As the world addresses climate change by supporting alternative and renewable fuel sources and inhibiting traditional hydrocarbons, agricultural products are critical ingredients in biofuel production. In the US, corn is the primary ingredient in ethanol, and soybeans are required for biodiesel production.
• The weather- Mother Nature is fickle, and the weather across the fertile growing regions worldwide always impacts the path of least resistance of agricultural commodity prices. Hot and dry conditions that create droughts can limit supplies, as can floods and other weather or natural events that destroy crops.
• Geopolitical bifurcation- The “no-limits” alliance between China and Russia, the war in Ukraine, and Chinese plans for reunification with Taiwan have caused tensions with the US, Europe, and their allies. Geopolitical tensions often translate to trade embargos and other policies that restrict the flow of commodities.

These issues and more pose significant upside risks for the agricultural products that feed the world. 

More price spikes are possible

Russia’s invasion of Ukraine caused the first round of price spikes that took CBOT wheat to a record high and corn and soybean prices to the highest levels since 2012. Over the coming weeks, months, and years, the potential for more explosive price behavior has increased. 

Each year the world depends on an ever-growing supply of the grains and oilseeds that feed and increasingly fuel people’s lives. Each quarter, the global population grows by around twenty million people, putting consistent pressure on the demand side of the fundamental equation for agricultural products. 

With CBOT wheat futures back below $8, beans under $14, and corn near $6 per bushel, this could be the perfect time to consider adding grain and oilseeds to your portfolio. Market prices reflect the economic and geopolitical landscapes, which remain bullish for future grain and oilseed prices, and uncertainty is likely to cause periodic explosive price moves. 

The Teucrium ETFs follow soybean, corn, and CBOT wheat prices

The most direct route for a risk position in the grain and oilseed markets is via the futures and futures options that trade on the CBOT division of the Chicago Mercantile Exchange (CME). While some diversified ETF and ETN products reflect the price action in the grain and oilseed markets, the Teucrium family of grain and oilseed ETFs are the only products that move higher or lower with a portfolio of futures contracts in the CBOT wheat, corn, and soybean markets. The highlights of the Teucrium products are:

• At the $8.02 per share level on August 17, the Teucrium Wheat ETF (WEAT) had over $316.9 million in assets under management. WEAT trades an average of over 1.614 million shares daily and charges a 1.14% management fee. 
• At $24.80 per share, the Teucrium Corn ETF (CORN) had $198.11 million in assets. CORN trades an average of 162,020 shares daily and charges a 1.14% management fee. 
• At $26.24 per share, the Teucrium Soybean ETF (SOYB) had $62.576 million in assets. SOYB’s average daily volume is 75,226 shares, and it charges a 1.16% management fee. 

The Teucrium products hold a portfolio of three futures contracts to minimize the impact of roll risk from one active month to the next. Since the most price variance tends to occur in the nearby contract, the WEAT, CORN, and SOYB ETFs often underperform the nearby futures on the upside but outperform during downside price corrections. 

I remain bullish on grain and oilseed prices for all the reasons stated above. However, even the most aggressive bull market can suffer from nasty corrections that take prices below logical, reasonable, and rational levels. Therefore, when considering adding upside exposure to grain and oilseed markets to your portfolio, leave plenty of room to add on further declines as picking bottoms is dangerous. 

The August WASDE told us that grain and oilseed balance sheets are tightening, which is bullish given the ever-increasing world population and current supply uncertainty. 

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