Tariffs and Market Response for CZ2018 Futures

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Take a look at the CZ2018 futures contract for the last few weeks and you'll feel you stomach drop.

WASDE June 12 / Planted Acres Report June 29 (summary)

Supply:
Planted Acreage (million acres):  88/89.1
Harvested Acreage: 80.7/81.7
Yield (Bushels/Acre): 174/174

Ending Stocks (million bushels): 1,577/1753
Ending Stocks/Total Consumption (%): 10.79%/11.99%

*Model Projected Prices: $4.41/$4.14

*Corn Price = a + b (1/Stocks-Use Ratio)

On Friday June 29 USDA released its planted acres report and increased planted and harvested acres. According to the updated balance sheets, that could have been slightly bearish (see below). This makes you ask a couple questions. 1) how much of this was already priced in and already reflected on the chart 2) how much of the price drop we have seen is due to trade and tariffs?

This is an ongoing question. It looks like whatever the impact, we're beginning to see sideways trading until something major in terms of weather upsets the above normal crop conditions ratings. How exceptional does this have to be to push back against the price headwinds we are getting from talk about tariffs? That is a hard question. Sonny Perdue and folks at USDA are working on it according to this story:

 "Our economists are using formulas and algorithms to determine the elasticity of what that trade disruption is, versus [other] market factors" - Sonny Perdue

from: https://www.morningstar.com/news/dow-jones/TDJNDN_201806269373/grain-highlights-top-stories-of-the-day.print.html 

That would be good to know from a marketing standpoint (how much can we expect weather to impact price vs. a change in the policy environment and how do we hedge against that) and a need to know if they are going to develop a scheme to compensate financial and economic losers in what many think to be an impending trade war. It is just perplexing to me that we are talking about completely changing the market environment for our food supply...including tariffs and to 'correct' those distortions with possible payments, supports, purchases etc. by government. While far from being a truly 'free' market to begin with, this seems like a clumsy step backwards.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Market Analysis June 15, 2018 (Dec 18 Corn)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

A few weeks ago I was looking at the decline in December corn futures and attributed some of the drop to scares related to potential tradewars. Trade wars aside, when you look at the balance sheet after the latest WASDE report nothing substantial changed:

WASDE Estimates for May/June

Supply:
Planted Acreage (million acres):  88/88
Harvested Acreage: 81/81
Yield (Bushels/Acre): 174/174
Beginning Stocks (million bushels):  2,182/2,182
Total Production: 14,040/14,040
Imports: 50/50
Total Supply: 16,272/16,272

Consumption:
Feed and Residual (million bushels):  5,375/5,350
Other Food, Seed, and Industrial: 7,115/7,165
Exports: 2,100/2,100
Total Consumption 14,590/14,615


Ending Stocks (million bushels): 1,682/1,577
Ending Stocks/Total Consumption (%): 11.53%/10.79%

Model Projected Prices: $4.24/$4.41

Using data pulled from past USDA reports and historical December futures prices I developed a model similar to Darrel Good and Scott Irwin predicting price as a function of stocks-to-use ratios:

price = a + b (1/Stocks-Use Ratio)

What we can see from these projections are that the changes in the balance sheet from the May to June WASDE are minimal, and if anything could be trivially bullish with an increase in the projected price. With announcements this week of tariffs by the Trump administration the specter of trade wars at least for the near term is continuing to weigh the markets.

In addition to any loss in demand related to trade, many traders (the funds?) could be also thinking about the compound impact of trade wars in addition to better than expected yields. While I would tend to discount the really great crop ratings reports that have been coming out in the last couple of weeks (because they are so early) you can't discount how resilient modern genetics have been and allowed those 'better than expected' yields the last couple years despite some expectations of yield impacts from stress. 

Ignoring any impact of trade wars on the demand side, it is easy to see what could happen to ending stocks to use and price as the yields tick up. If we were to beat last year's record yields you can really see the price pressure.

Yield Stocks to Use Price

174                  10.8% 4.41

176                  11.91%        4.16

178                  13.01%  3.95

180                  14.12% 3.78

On the technical side, this is playing out on the charts with price falling below the 200 day moving average (blue) for a number of sessions and the 20 day (red) dropping below the 50 day (black) and lots of volume behind this momentum. The MACD mirrors this with no hint of reversing.

What happens next will ultimately depend on how trade issues unfold and how the summer weather impacts pollination and grain fill. One thing to nail down will be actual planted acres to come out at the end of June. It seems like the worst of the trade issues are being priced in now, so as long as planted acres don't surprise us with unexpected increases perhaps a weather issue or trade resolution will create some price bounces as we go through the summer.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. ***** 

Closing Market Analysis June 5, 2018 (Dec 18 Corn)

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

This makes the 5th day in a row December corn closed below the 20 day moving average. You might chalk most of this up to the uncertainty over trade talks (read Trump). I have a hunch that there is potential for recovery if this works out but others are having their doubts about when and how that might take place.

Fundamental analysis (trade wars aside) indicate solid support around $4 or higher, but if a trade war does unfold, we might adjust that lower on a fundamental basis. I think recovery (if there is no trade war) will be limited to the extent that corn demand is dampened as a result of the hit that livestock exports and demand for feed takes in all of this. Of course maybe China is leveraging Trump's rhetoric to drive down prices and then come in and buy up cheap grain. No trade war, and both Trump and China win. But that's a stretch.

***This commentary is provided for descriptive and entertainment purposes only and is not intended to be used for specific trading strategies or interpreted to be investment advice. *****  

Flat Earth Certified Travel

From the New Yorker: Looking for Life on a Flat Earth

These people and the Non-GMO project folks really need to get together. Together they could spin a theory that global warming is impossible on a flat earth. Or have ‘Flat Earth Certified’ cruise ships that verify their course won’t go dropping off the edge of the planet. Even though there might be a scientific consensus that the earth is round, there are no independent scientific studies on what happens when actual cruise ships travel near the ‘ends’ of the earth. The precautionary principle would require cruise ships to stay closer to the shore until more studies are done. But the cruise companies probably would not be cooperative and conceal any findings or bias studies with funding. Consumers have a ‘right to know.’