The U.S. Department of Agriculture (USDA) released its highly anticipated April World Agricultural Supply and Demand Estimates (WASDE) Report on April 11. This monthly WASDE report, often considered the gold standard for agricultural commodity fundamentals, provides valuable insights for investors and market participants.
At the onset of the Northern Hemisphere’s crop year, the USDA typically forecasts commodity production optimistically, assuming favorable weather conditions. However, the reality is that weather patterns during the planting, growing, and harvest seasons are always uncertain, adding a significant element of risk and potential reward to investments in grain and oilseed funds.
For expert insights on the April WASDE, I turned to Sal Gilberte, the esteemed founder of the Teucrium family of grain and oilseed ETF products, including the Teucrium Wheat ETF (NYSEARCA: WEAT). Sal, with his profound understanding of the market, shared his thoughts with me via email:
*The only surprise in the April WASDE was the continued reluctance of the USDA to reduce South American corn and soybean production levels towards numbers that more accurately reflect the widely held lower production expectations of private analysts. Perhaps the USDA will feel more comfortable with a large 23/24 downward adjustment after the inclusion of the 24/25 crop year in future reports, which will mitigate, at least statistically, the effect of lower supplies for the current crop year on the total longer term global availability of grains.*
Standout numbers continue to reflect the global annual use of more wheat and corn than will be produced this year, and China’s apparent large inventories of wheat and corn in relation to its usage. No doubt all eyes will be on weather as the crop year progresses around the globe. The large short speculative positions held by hedge funds could soon become vulnerable as corn, soybean and wheat prices continue their descent towards the bottom decile of their price history for the past 15 years.
Despite the bearish trends in grain and oilseed prices in mid-April 2024, this could present a promising opportunity for a counter-trend long risk position.
Bearish Trends in Corn and Soybeans
CBOT corn futures prices (C_1:COM) moved 6.21% lower in Q1, settling at $4.42 per bushel. The weekly chart highlights the continuation of the corn futures’ bearish price trend in early Q2 2024, with the price near the $4.40 level.
CBOT soybean futures prices (S_1:COM) moved 8.89% lower in Q1, settling at $11.9150 per bushel. The weekly chart highlights the continuation of the soybean futures downtrend in early Q2 2024, with the price near the $11.65 per bushel level.
Corn and soybeans came within pennies of the 2012 record highs in 2022 when they ran out of upside steam and have made lower highs and lower lows over the past two years. The USDA lowered its price forecasts for corn and soybeans in the April WASDE report.
Wheat Remains Under Pressure
CBOT soft red winter wheat futures rose to a record $14.2525 per bushel high in March 2022, where they turned lower. In Q1, CBOT wheat futures (W_1:COM) posted a 10.79% decline, closing March at $5.6025 per bushel. Wheat prices were a bit higher at over the $5.70 per bushel level in late April 2024.
According to the USDA’s April WASDE report, global wheat stocks for 2023/2024 “would be five percent below last year and the lowest since 2015/2016.”
Open Interest Remains Elevated
The weekly futures charts for corn, soybeans, and wheat display elevated open interest levels in late April. The current levels are:
* Corn- 1,527,159 contracts
* Soybeans- 836,167 contracts
* CBOT Wheat- 389,398 contracts.
The total number of open long and short positions in the futures market for the three leading grains is relatively higher for two reasons:
1. Consumer and producer hedging activity tends to peak at the start of the crop year.
2. Since the 2022 highs, the bearish trends have increased short-side speculative interest as trend-following traders have sold contracts anticipating lower prices.
An overabundance of short positions can trigger a short-covering rally if prices stabilize and turn higher.
The War in Europe’s Breadbasket Distorts Grain Fundamentals
One of the most bullish factors for the grain markets is the ongoing conflict in Europe’s breadbasket. Russia and Ukraine are leading grain-producing and exporting countries. The potential for increased military activity across the fertile growing regions threatens worldwide supplies. Moreover, the Black Sea Ports are crucial logistical hubs for grain exports, which can cause supply issues if hostilities increase and warehouses and ships become targets.
War interrupts trade routes, and Europe’s breadbasket and export hub remains in the eye of a violent storm. While grain and oilseed futures prices remain in bearish trends, the market has discounted the potential for sudden supply issues caused by military actions.
Russia and Ukraine: Major Wheat Producers and Exporters
Russia and Ukraine are leading wheat-producing countries, with Russia being the fourth largest producer and Ukraine being the ninth largest. However, the production data is misleading, as Russia and Ukraine are far more significant wheat-exporting countries. In 2024, Russia is the top wheat-exporting country, with Ukraine being the fifth largest. Therefore, wheat is the grain that remains in the eye of the storm regarding the ongoing conflict.
Teucrium Wheat ETF (WEAT)
WEAT is an ETF that tracks CBOT wheat prices. Russia and Ukraine are leading wheat-producing countries. The most direct route for a risk position in wheat is via the futures and futures options on the CME’s CBOT soft red winter wheat contract, which is the most liquid wheat benchmark.
The Teucrium Wheat ETF moves higher and lower with a portfolio of CBOT wheat futures contracts. WEAT owns three actively traded CBOT wheat futures contracts, excluding the nearby contract, to minimize the agricultural commodity’s roll risk. Since the most volatility tends to occur in the nearby contract, WEAT often underperforms the active-month CBOT wheat futures on the upside and outperforms during corrections and bear market trends.
Investment Considerations
At $5.44 per share, WEAT had $148.80 million in assets under management. WEAT trades an average of 687,696 shares daily. Seeking Alpha states that WEAT charges a 1% management fee, while the Teucrium website lists the expense ratio at 0.28%.
Nearby May CBOT wheat futures prices rose 11.6% from $5.2350 on March 11, 2024, to $5.8425 per bushel on April 23. Over the same period, the WEAT ETF rose 11.2% from $5.02 to $5.58 per share. WEAT slightly underperformed the May CBOT wheat futures on the upside and typically marginally outperforms the nearby futures on the downside.
Wheat (and soybeans and corn) futures remain in bearish trends in late April as the 2024 planting season is underway. While the trend is always your best friend, the war in Ukraine, elevated open interest, and the uncertainty over the weather over the coming months are compelling reasons why the grain and oilseed futures markets could experience sudden and violent upside price recoveries.
