Time to glean profits from grains

Time to glean profits from grains ETF SecuritiesTime to glean profits from grains

Time to glean profits from grains, by Aneeka Gupta, Associate Director of Research

The 2018 price gains staged by wheat, corn and soybeans of 18%, 14% and 6% respectively (as of 18 May 2018), display a turnaround in the grains market that has, in the recent past, been plagued by weak prices due to rising inventories. In its first outlook for the 2018/19 (September/August) cycle, released on 10 May 2018, the US Department of Agriculture (USDA) was optimistic in its outlook for the grains market and this positive tone has recently been resonated in the futures market, with speculative positioning rising to its highest level since August 2017, according to commodity and futures trading commission data. Here’s a closer look at key agricultural commodity projections and the implications for investors.

Figure 1: Net positioning across grains turns positive

Source: USDA, Bloomberg, ETF Securities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Corn deficit

In the case of corn, USDA estimated a further deficit of 35.8 million tons on the global market in 2018/19. If realised, this would be the lowest level of corn ending stocks since the 2012/13 season, as demand is expected to outpace the expected production increase. With oil prices surging higher, more corn is being used for fuel production than traditional feed purposes in 2018, due to the price incentives offered by cheaper corn-based ethanol.

Lower projected yields and harvested acreage are expected to be a drag on the US crop, resulting in an estimated decline of nearly 600 million bushels from the previous harvest. However, combined corn exports from Ukraine and Russia in 2018/19 worth 265 million bushels are likely to increase competition for the US. The reduction in corn cultivation in China, after it already cut back its stocks in 2016/17 and 2017/18, is likely to contribute to a more pronounced decrease in global corn stocks.

Based on USDA’s projections, the decline in world corn ending stocks puts the world stocks-to-usage ratio at 14.5%, compared to 21.8% last year. This would mark the second-tightest world stocks-to-usage ratio for corn since the 1973/74 season, rendering the new corn crop vulnerable to adverse weather conditions. Corn prices are trading at historically low levels relative to the stocks-to-usage ratio and given that corn prices are known to exhibit the most pronounced negative correlation (0.55) to the stocks-to-usage ratio among all grains, we expect to see a significant catch up in corn prices, similar to that witnessed in 2010. However, as corn enters the prime growing season of June to September, it remains exposed to significant price pressure.

The latest USDA crop progress report showed this spring’s corn planting pace improving to 62%, close to the five-year average of 63%. Corn emergence also advanced to 28% as of mid-May, in line with the five-year average of 27%.

Figure 2: Corn prices lag tightening stocks-to-usage ratio

Source: USDA, Bloomberg, ETFSecurities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Soybean plantings to exceed corn plantings

Low agricultural commodity prices are resulting in a paradigm shift in the US towards increased production of soybeans in lieu of resource-intensive corn and wheat. USDA expects soybean plantings to exceed corn plantings in 2018 by the greatest level ever. Despite USDA projecting global soybean production to rise on the back of a recovery from the drought in Argentina, higher soybean crush and exports are expected to offset most of the rise, with global soybean ending stock estimates declining by 5.5 million tons.

After the announcement of punitive tariffs on US soybean imports by China, China’s 2018/19 soybean imports are projected to decline for the first time in 15 years. At the same time, China’s soybean acreage is set to be expanded by around 9%, according to sources from the Chinese Ministry of Agriculture. While this will contribute to production, China will only be producing approximately 12% of the amount of soybeans it consumes. Considering China’s rising soybean demand, we do not expect the current developments to interfere with the country’s import requirements and expect to see a resolution to the ongoing trade disputes.

Figure 3: Soybeans ending stocks

Source: USDA, Bloomberg, ETFSecurities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Tough conditions for winter wheat

Wheat remained the weak link in USDA’s latest report. Since the start of 2018, a large part of wheat’s upward price momentum can be attributed to reports of tough conditions for winter wheat crop in Kansas, the most important US growing state, and other key regions. As it stands, 50% of Kansas winter wheat, 68% of Oklahoma winter wheat and 60% of Texas winter wheat is in poor or very poor condition. Planting progress shows winter wheat was 36% headed, falling behind the five-year average pace of 41%. However, USDA surprised investors by projecting a 5% increase in US wheat production due to a strong rise in spring wheat, despite poor winter wheat conditions.

Despite the 15% decline projected for Russian wheat crop, global wheat stocks are expected to be only 2% short of the 2017/18 all-time high. However, world ending stocks for 2018/19 are estimated to be lower at 955 million bushels, a positive development, which if realised would mark a four-year low.

How to gain exposure to agricultural commodities

Due to the strong performance of the grains market in 2018, the Continuous Commodity Futures Price Index (CCI Index), which has a high allocation to grains and agricultural commodities (47%), has risen 3.27% (as of 18 May 2018).

The distinctive feature of the CCI Index is its lower volatility, relative to other commodity indices, due to its lower weighting to the volatile energy sector. Additionally, index positions gravitate towards the near six months of the forward curve, thereby reducing volatility and mitigating negative roll yield. Unlike the major commodity indices, the CCI Index rebalances daily to keep weightings constant.

Figure 4: Cumulative contribution to spot return – year to date

Source: USDA, Bloomberg, ETF Securities. Past performance is not indicative of future results. You cannot invest directly in an Index.

Positive contributors to the spot return this year have been energy, grains and cocoa, as per the chart. For investors looking to gain exposure to grains and agricultural commodities, the CCI Index offers diversified exposure to commodities while maintaining a tilt to grain and agricultural commodities.

Related products

  • + ETFS 1x Daily Short Grains
  • + ETFS 2x Daily Long Grain

Aneeka Gupta, Equity & Commodities Strategist at ETF Securities

Aneeka Gupta is an Equity & Commodities Strategist at ETF Securities. Aneeka has 10 years of experience working as a Research Analyst across a wide range of asset classes. In her current role she is responsible for conducting analysis for all in-house commodity and macro publications and assisting the sales team with client queries around products and markets. Prior to ETF Securities, Aneeka worked as an Equity Sales Trader at Sunrise Brokers across US and Pan European Exchanges. Before that she worked as an Equity Derivatives Sales Manager at Mashreq Bank in Dubai.

Aneeka holds a Bsc in Mathematics from the University of Delhi and a Masters in Mathematics from Oxford University and is also a CFA Charterholder.

Disclaimer

This material is prepared by WisdomTree and its affiliates and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date of production and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by WisdomTree, nor any affiliate, nor any of their officers, employees or agents. Reliance upon information in this material is at the sole discretion of the reader. Past performance is not a reliable indicator of future performance.

Trump got China right…but for the wrong reasons

Trump got China right…but for the wrong reasons

The Renminbi is being manipulated, but Trump has it wrong: Chinese policymakers are helping stabilise the currency. The Renminbi is one of the least volatile global currencies as a result. Trump got China right…but for the wrong reasons. Chinese policymakers intervene in currency markets to keep the currency within a +/- 2% band from the close of the previous day’s closing rate. This process either generates foreign exchange reserves (if it sells Chinese currencies) or reduces reserves (if it supports the Renminbi). Foreign exchange reserves have fallen under the US$3tn level for the first time in six years, after peaking at US$3.99tn in June 2014. January’s US$12bn decline in foreign reserves could have been worse. Excluding valuation effects the decline would have been closer to US$40bn. The weakening of the Renminbi during 2016 prompted domestic investors and savers to look abroad in order to not lose purchasing power and boost investment returns in the face of the strong US Dollar. There are signs of a turnaround: the Renminbi has strengthened during 2017, likely assisting in reducing capital outflows. In addition to greater capital controls, the People’s Bank of China has increased rates on short-term repos for the first time since 2013, helping motivate more investors to keep currency in mainland China. The domestic outlook appears to be also helping, with our modified ‘Li Keqiang Index’ showing more stable growth in China over the past year. Estimates suggest that currency outflows have continued unabated since early 2015, totalling US$1.7tn over the period. Stemming the outflow of capital is a critical issue for Chinese authorities – a currency collapse could occur if China liberalises currency controls too fast, forcing the currency sharply lower and exacerbating capital outflows. Indeed, President Trump would be well served to improve Sino-US relations and support the Chinese efforts to stabilise its currency. With only the nascent signs of inflation appearing on a global level, a Chinese currency collapse could spark a new wave of global deflation, something the developed world does not need right now.

Martin Arnold, Global FX & Commodity Strategist at ETF Securities

Martin Arnold joined ETF Securities as a research analyst in 2009 and was promoted to Global FX & Commodity Strategist in 2014. Martin has a wealth of experience in strategy and economics with his most recent role formulating an FX strategy at an independent research consultancy. Martin has a strong background in macroeconomics and financial analysis – gained both at the Reserve Bank of Australia and in the private commercial banking sector – and experience covering a range of asset classes including equities and bonds. Martin holds a Bachelor of Economics from the University of New South Wales (Australia), a Master of Commerce from the University of Wollongong (Australia) and attained a Graduate Diploma of Applied Finance and Investment from the Securities Institute of Australia.

The ECB: To infinity and beyond?

The ECB: To infinity and beyond?

Co-author: Martin Arnold – FX & Macro Strategist The ECB: To infinity and beyond?

We believe the ECB decision to extend its Asset Purchase Programme (APP) while reducing the monthly amount by EUR20bn is extremely prudent and forward looking, reflecting rising inflation risks on the back of higher oil prices and the increasing prospect of higher fiscal spending next year. What’s more we believe the ECB is applying a precautionary approach to the potential inflationist risks associated to the rise of populist parties in Europe.With over 70% (by GDP) of the Eurozone having scheduled elections in 2017/18, political uncertainty is likely to keep gains for the Euro limited. Such political uncertainty, and in the absence of genuine economic reform, is also likely to force the ECB to do more in terms of yield curve management in order to buttress failing banks.

Both external and internal factors have been exerting pressures on the ECB to extend its quantitative easing. While the bond rout that followed the victory of Trump led more Eurozone government bond yields to exceed the deposit facility rate (-0.4%) – the minimum rate to be eligible for the ECB’s APP – increasing the amount of bonds available for purchase, the changes over the APP technical aspects (namely, widening the maturity range from 2yr-30yr to 1yr-30yr and accepting bonds yielding below the deposit rate) reveal the ECB’s concern that the bond rout could reverse.

After extending its QE policy until December 2017 and broadening the base of assets the central bank can buy, the ECB has further enhanced its commitment to supporting growth in order to engender inflationary pressures. Although the inflation picture has improved, there is significant uncertainty, and the ECB is likely to continue to use different stimulus measures to help boost demand, putting further downward pressure on the Euro.

Although late to the QE party, the ECB has shown a strong desire to strengthen the transmission mechanism that would allow the ‘easy money’ to get to the real economy, by buttressing bank balance sheets. In this way, yield curve targeting, like the Bank of Japan can further support bank balance sheets by steepening yield curves, and help funding get to the areas of the economy that need it most.


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Morgane Delledonne, Fixed Income Strategist at ETF Securities

Morgane Delledonne joined ETF Securities as Fixed Income Strategist in 2016. Morgane has an extensive experience in Monetary policy, Fixed Income Markets and Macroeconomics gained at the French Treasury’s Office in Washington DC and most recently in her role as Macroeconomist and Strategist at Pictet&Cie in Geneva. Morgane holds a Bachelor of Applied Mathematics from the University of Nice Sophia Antipolis (France), a Master of Economics and Finance Engineering and a Master of Economic Diagnosis from the University of Paris Dauphine (France).

Misplaced hopes create opportunity

Misplaced hopes create opportunity

ETF Securities FX Weekly – Misplaced hopes create opportunity

Weekly currency investment views from ETF Securities

Misplaced hopes create opportunity

Summary

Oil prices have rebounded recently over speculation of an output freeze by major producers.

Market hopes appear misplaced and near term disappointment will likely lead to a correction in the coming month.

This presents a tactical opportunity to short the CAD and NOK, which currently sit at multi month highs against major currency counterparts

Download investment view (.pdf)

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).

This communication is only targeted at qualified or professional investors.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction.  No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

Quarterly Outlook – Two Roads Diverged…

Quarterly Outlook – Two Roads Diverged…

Quarterly Outlook – Two Roads Diverged… We are pleased to introduce the inaugural issue of the Roubini-ETF Securities Quarterly Outlook, a macroeconomic publication jointly authored by Roubini Global Economics, a leading independent global research house, and ETF Securities Research.

The concept of a ”global” recovery is dead and buried. After the initial coordinated policy response in 2009 led to a synchronised recovery, by 2011 new crises and recessions were hitting vulnerable countries, while rampant credit boosted China and aggressive easing helped the U.S. fend off deleveraging. Heading into 2015, this divergence will continue, with the U.S. leading the way.

Decoupling and monetary policy divergence. Monetary policy from the world’s largest central banks will diverge, driven by the differing economic outcomes, with the U.S. outperforming the world’s other growth engines.

Europe faces a challenging year. The so-called ”haggard grandmother” of the world economy is failing to realize even its dismally low growth potential, and deflation will bring quantitative easing soon.

China’s ”new normal” means a complicated balance of stimulus and reform. China continues to face a difficult trade-off between reform and growth. A slow move toward reforms to improve the institutional quality of the financial sector implies that sub-7% growth looks like a realistic scenario for this year. Too much stimulus would bring near-term upside, but complicate the picture for 2016. Reforms like deposit liberalization will bring a needed rebalancing of growth.

Download the complete report (.pdf)

In response to investor demand we are trialling this approach during the first half of 2015 with the intent on turning this into a long-term collaboration.

For more information contact:

ETF Securities Research team
ETF Securities (UK) Limited
T +44 (0) 207 448 4336
E info@etfsecurities.com

Important Information

This communication has been provided by ETF Securities (UK) Limited (”ETFS UK”). ETFS UK is authorised and regulated by the United Kingdom Financial Conduct Authority (the ”FCA”).

This communication is only targeted at qualified or professional investors.

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective, officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.

While this communication is made by ETFS UK, certain content has been produced and provided for ETFS UK by Roubini Global Economics, LLC (”RGE”). RGE is an independent, unaffiliated third party to ETFS UK. No forwarding, reprinting, republication or any other redistribution of this content is permissible without the express consent of RGE and ETFS UK. RGE and ETFS UK reserve the right to enforce their respective copyrights and pursue any such other action as they deem appropriate in respect of any such unauthorised use, republication or redistribution of this communication.