Commodities
Commodity price weakness remains a concern.

Inefficient global economies negative impact on U.S. ag sector

A major economic downturn has been avoided, for now, but commodity price weakness means farm bill with adequate safety net is crucial.

Global governments and central banks, through fiscal, monetary, trade, and regulatory policy drivers are sustaining appropriate levels of growth in country after country around the world. The key word is sustaining growth for two to three or more years.Reality is, no major country in the world is presently healthy enough economically to manage a recession without potentially devastating consequences, either socially, economically, and/or politically. Also, consider a social, political, and/or economic misstep potentially creates the catalyst for unintended military aggression between countries or multiple countries. A U.S. or Chinese recession would guarantee a global recession and likely worse and prolonged lows in commodity prices likely across the board.

BOTTOM-LINE: Ongoing policy dynamics through fiscal, monetary, trade, and regulatory policy actions domestically and globally provide potential of avoiding a recession for two to three or more years. Governments and central banks, without question, have accomplished much in maintaining economic momentum.

Near Term Bad News: Commodity price weakness building and maintaining an adequate farm bill safety net is an absolute necessity.  Corn, soybeans, wheat, rice, and cotton producers and, yes, the aggregate Ag Sector and supporting infrastructure are concerned about the ongoing impacts of fiscal, monetary, trade, and regulatory policy actions on their current profitability and future survivability and justifiably so. For multiple years, building market uncertainty and failed profitability for many have the Ag Sector, from producers to supporting infrastructure, in a serious consolidation mode.

What’s the bigger reality? Most, if not all, economic sectors domestically and globally are dealing with financial hardships. Just pick an economic sector, evaluate that sector and you will find mergers and consolidation.   

 

Capsule Overview – Near Term Expectations

Weekly Outlook - Beginning June 25, 2018

  •  Commodity Index, $CRB – Correction may be complete with the index sideways to up due to oil price firmness.
  •  Oil, $WTIC – Correction may be complete with prices sideways to up given supply and demand fundamentals.
  •  Cotton – Chart damaged, but presently I remain bullish, but one worries about contagion due to building near term aggregate commodity weakness outside the oil sector.
  •  S&P 500 – Correction and/or consolidation period before moving higher likely remains underway for one to two 2 months  
  • Foreign Stock Markets – Varies by market, sideways consolidation or corrective period before moving higher, bottom-line: in the aggregate, most foreign markets are building a base to move higher in one to two or more months.   
  • Soybeans, Corn, and Wheat – Key considerations: these commodities have sustained considerable chart damage; therefore, they likely finish correcting their downside move with some minor price strength and then likely one of two outcomes emerge: First, decline and retest the previous low with prices moving higher, or Second, decline to new lows. Therefore, we simply follow the charts.
  •   Long Grain Rice – This Friday, the June 29th USDA acreage report is extremely important to price expectations.
  •  U.S. Dollar – Weakness likely, but bullish bias near term remains dominant.
  • 10-Year U.S. Treasury Yield – Sideways with downside bias. 

Ag Sector Especially Hard-Hit:

U.S. grain and cotton producers and supporting infrastructure, since the 2007/2008 global financial crisis to date have been on the tail-end of the economic recovery and presently grain and cotton producers and the Ag Sector in general are asking: Are we about to revisit the price lows or lower of the previous decade before multiple years of rising prices can be achieved?

Bottom-line:

  •  Good News: Global orchestrated stimulus driven growth has a likely chance of avoiding a domestic or global recession for two to three or more years and elevating the demand for U.S. and global commodities. Remember, a near term recession could be devastating especially to the U.S. Ag Sector and rice, grains, and cotton.
  •  Bad News: Major foreign economies, especially China, European, and North American economies are highly inefficient and are U.S. predators, which has led to building fiscal, monetary, trade, and regulatory policy friction and trade uncertainties, which potentially near term could take many soft and grain commodities back to decade lows if not lower before multiple years of bullish price activity.
  •  2018 Farm Bill now desperately needed to mitigate potential U.S. Ag Sector economic downturn and structural damage.

Powell says U.S. trade policy could impact outlook

WASHINGTON (Reuters) – “Concerns about U.S. trade policy are increasing among business officials who are beginning to hold off on hiring and investment decisions given the level of uncertainty,” U.S. Federal Reserve Chairman Jerome Powell said on June 20, 2018.

“Concerns seem to be rising,” said Powell, speaking to a European Central Bank conference in Portugal. While Powell said he would not comment on specific proposals from the Trump administration, “for the first time we are hearing about decisions to postpone investment, postpone hiring, postpone making decisions. That is a new thing. If you ask is it in the forecast yet, is it in the outlook, the answer is no. And you don’t see it in the performance of the economy.”

But “in principle, changes in trade policy could cause us to have to question the outlook.”

 Bloomberg Surveillance‏ Tweet: "There's no question that the level of friction around the trade discussion has been escalating...that's leading to some uncertainty." -Goldman Sachs COO & President David Solomon with Stephen Engles on June 20, 2018. Watch full segment: https://bloom.bg/2yCFXlP 

 The Week Ahead June 25, 2018 

 10-Year US Treasury Yield: Near term range bound and stable, longer term sideways to up. For the week of June 22, 2018, the 10-Year US Treasury ended the week down 1 percent at 2.90 percent. The 10-Year Treasury Yield is building a sideways trading range. For a multi-month period this market likely trades in an interest rate range of 3.3 percent on the upside and 2.7 percent on the downside before moving higher. The Fed Fund Rate was increased .25 percent at the June 13, 2018, meeting to 2 percent. Presently another rate hike of .25 percent is expected by market participants at the next Federal Reserve Open Market Committee (FOMC) meeting on September 25-26, 2018, and market participants presently expect another increase at their December 2018 meeting. (Charts A1-A4). Presently, I have no expectation of a rate increase at their December 2018 meeting. The Fed is positioning to maintain a balanced yield curve, given global economic dynamics, as the year progresses by continuing to shrink their balance sheet. The upward trend of U.S. interest rates is essential to the financial health of pension funds, individuals, and businesses dependent on a more normalized interest rate. Prolonged Business Cycle: Understand, global governments and central banks continue positioning to prolong the business cycle for an extended period of two to three or more years, which implies slowly rising interest rates and inflation over that period.   

U.S. Dollar Index: Bullish. With the dollar index presently at 94.2 (Charts A5-A8) and off its low of 88.15, the index is in a slow, determined corrective grind to the upside. The dollar has entered a possible one to two or more months of more strength than weakness with an upside potential target of 96 to 98 before returning to the dominate downside trend.Understand, this is an extremely challenging market and chart strength or weakness is highly dependent on global government and central bank orchestrated fiscal, monetary, trade, and regulatory policy objectives being achieved.Since the U.S. Dollar strength has negative economic consequences to frontier, emerging, and developing economies that mostly borrow in dollars, a prolonged rise in the dollar moves country after country toward their own economic slowdown. Thus, a key reason for the ongoing economic slowdown; therefore, we will closely monitor this market and adjust our expectations accordingly.What could keep the dollar index rising? One near term factor is European Union collective and individual social, economic, and political mismanagement of their region and individual countries.

S&P 500: Bullish Bias, sideways consolidation or even a corrective period before moving higher.  

Prices need to hold above 2720 to maintain near term potential needed to retest previous highs of 2873. Prices falling through 2560 would be near term bearish, but market cleansing. The trend in this market remains up: Consider:

  •  First, present global economic uncertainties and a stronger dollar have been supportive of this market, due to enhancing foreign investor interest;
  •  Second, continue to anticipate an additional one to two or more months corrective or consolidation period before this market resumes its upward march;
  •  Third, only fight the Fed with high conviction and a sound risk management strategy (seek professional marketing assistance);
  •  Fourth, the bigger trend remains up with corrections along the way.  

Bottom-line: Just let price action provide guidance until stronger momentum is regained. Note the collection of attached Equity Charts A14 to A28.

NASDAQ Composite Index: Potential sideways consolidation or even a corrective period before moving higher is still the primary consideration. The trend in this market is up, but be respectful of market dynamics. Just let price action provide guidance and be an active risk manager.  Respect is warranted. Why? Market liquidity lacking, if major selling were triggered then sellers would find a very thin market of buyers and a potential rapid decline in prices.The NASDAQ is a high visibility market where speculative interest, high frequency traders, passive investors, etc. Dominant price action absorbs its energy and leadership from the likes of Facebook, Apple, Google, Amazon, Netflix, Microsoft, etc. These high-tech giants will continue experiencing on-again and off-again headwinds on many different fronts extending beyond consumer privacy rights.

$WTIC Light Crude Oil: Correction maybe complete with prices sideways to up.  Why would oil prices move higher? Stimulative global growth over the next two to three or more years remains the driver as supply increasingly struggles to keep up with demand. Is the demand for oil waning? Not hardly. The summer months are the strongest demand months for the oil sector and stimulus driven global growth is achieving its objective of maintaining global economic momentum and the demand for oil.

Two major supply concern:

  • The Venezuelan economic, social, and political crisis has that country and oil sector near collapse.
  •  Likely Iranian sanctions have the potential to contract global supply, even though significant Iranian oil will move through the global black oil market or directly into China.

An interesting array of factors from fundamentals, to global policy drivers, to social, economic, political, and military uncertainties keep this market at elevated levels and they do not appear to be losing their influence anytime soon.

CRB Commodity Index: Correction maybe complete with the index sideways to up due to oil price firmness. Commodity bulls need to see this index push through resistance at 205 (currently at 197.5). Commodity bears need to see this index lose support at 185, otherwise major across the board commodity weakness would likely emerge.

Of  interest: Corn/Soybean Video: Dr. Aaron Smith on Marketing Corn and Soybeans during the Growing Season: 2018 Outlook and Pricing Opportunities, June 21, 2018 https://bit.ly/2KlFbLB

Presenter: Dr. Aaron Smith, Assistant Professor, Department of Agricultural and Resource Economics, University of Tennessee - Recipient 2015 Premier Forecaster Award by the Agricultural & Applied Economics Association Extension Section. Description: The presentation examines the current market outlook for corn and soybeans including an overview of global and domestic supply and demand. In-season marketing and risk management strategies and opportunities for corn and soybean producers are discussed. Lastly, 2018 and 2019 price projections and factors that could influence corn and soybean prices are presented.

Rice, Grain and Cotton Charts B1-B28 in Chart Book

  • Soybeans: Key considerations: Soybeans likely finish correcting their downside move into the $9.40 per bushel area and then likely one of two outcomes emerge: First, decline and retest the previous low with prices moving higher, or second, decline to new lows. Therefore, we simply follow the charts given ongoing policy uncertainties.
  • Corn: Key considerations: Corn likely finishes correcting its downside move into the $3.80 area and then likely one of two outcomes emerge: First, decline and retest the previous low with prices moving higher, or second, decline to new lows. Therefore, we simply follow the charts.
  • Wheat: Key considerations: Wheat likely finishes correcting its downside move into the $5.30 area and then likely one of two outcomes emerge: First, decline and retest the previous low with prices moving higher, or second, decline to new lows. Therefore, we simply follow the charts.
  • Long Grain Rice: New crop price weakness is a function of market participants expectation of the June 29th USDA acreage report possibly significantly exceeding the acreage figure released in the March 29, 2018 USDA Planting Intentions Report.  
  • Cotton: Bullish. Trade tensions and profit taking in the grain sector could weigh heavily on this market. Cotton prices remain bullishly sideways to up. 

Bobby Coats is a professor in the Department of Agricultural Economics and Agribusiness, University of Arkansas System, Division of Agriculture, Cooperative Extension Service. E-mail: [email protected]

Download Slide Show for charts and expanded details, Click Download Link

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