Story Highlights:
- The latest USDA report shows a problem with corn and soybeans.
- We can expect higher prices for both.
- An easy way to own ag commodities in this new bull market.
The latest U.S. Department of Agriculture crop report is out … and we’re buying. The crop report shows a problem with corn and soybeans. We can expect higher prices, particularly for corn, which is used for the gasoline additive ethanol. However, thawing relations with China will give soybean prices a boost too.
Agricultural commodities don’t care about slowing economic growth. They are ruled by other forces.
And right now, they are heading into a bull market — one that could give us double-digit returns into the fall.
Here’s what’s going on…
Farmers Are in for Another Rough Year
U.S. farmers had a tough 2018:
- The trade war with China has cost farmers the most so far. Soybeans took the largest hit. Exports to China fell nearly $9 billion — 81% — from 2018 to 2019.
- Weather-related crop losses last year added to the pain. The U.S. government pledged $28 billion in aid to farmers, mostly to supplement tariffs on agriculture.
This year doesn’t look much better. Continued flooding in the Midwest led to a late planting season. And the trade war with China weighed on farmers’ decisions of which crops to plant.
The Purdue University/CME Group Ag Economy Barometer measures farmers’ sentiment each month.
It reported in June that morale was at its lowest point since fall 2016.
However, a slight thaw in the trade war and receding floodwaters have buoyed farmers’ spirits lately.
The latest report shows a 24% increase in the last month, from 101 to 126. But, as you can see in the chart below, it’s below where it was the past two years at this time.
However, the damage may be done for 2019…
Smaller Crops and Poor Health
This spring was the wettest in decades. Record flooding left fields either underwater or too wet to plant until late into the spring. The latest USDA crop report shows the effect of the late planting.
The table below shows the status of each crop — how much was planted and how much sprouted (emerged).
That isn’t a perfect match to yield. But it means the odds are good that we will see less corn and soybeans this year.
As you can see, 2019 is well behind 2018 and the average. Sprouted soybeans are down 15% from last year.
The health of the crop is well below 2018 levels too.
Look at this chart of the corn crop comparison:
As you can see, there is a shift in the column heights. Gray means fair condition and yellow means good.
This year, we have more gray and less yellow. That means fields that were in good condition last year are in fair condition this year.
There is a noticeable uptick in poor (orange) and very poor (dark blue) conditions too.
In 2018, just 6% of the crop measured poor or very poor at this point in the growing season. This year, 12% of the crop measured poor or very poor. That’s a significant increase in crop risk.
An early frost could devastate these late plants. More severe weather, particularly rain, could also spell ruin. Farmers are hoping for things to return to normal — but one more bad break could severely limit this year’s crops.
That creates an opportunity.
Now Is the Time to Be Long Ag Commodities
Let’s put that data together — we had a late spring, which delayed planting. We have below-average crop health. So, supply will be lower this year. At the same time, we have a possible increase in demand if the China-U.S. trade war thaws.
All that points to a great time to be long agricultural commodities.
An easy way to play that trend is the Invesco DB Agriculture Fund (NYSE: DBA). It holds a basket of commodity futures, including corn, soybeans and cattle.
That’s a perfect grouping to take advantage of the bull market in agriculture that just kicked off.
Good investing,
Matt Badiali
Editor, Real Wealth Strategist