Wheat Watch 2020
Looking to the first month of 2020, one of the biggest scheduled events is the expected signing of the Phase 1 trade agreement between the United States and China, which could occur as early as January 4.
While this may only represent a deescalation of tensions—as opposed to a true resolution of differences—global investors have been pushing asset prices higher on widespread optimism for that small degree of incremental progress.
As a result of the positive vibes emanating from trade war optimism, many of the commodities and securities that had been beaten up last year have experienced a significant rebound.
A great example is crude oil, which has broken back above $60/barrel in the wake of thawing relations between the U.S. and China. West Texas Intermediate had sagged into the low $50s per barrel last year when global growth projections were being ratcheted back due to trade war uncertainty.
Another infamous poster child of the trade war has been soybeans. At their low point in 2019, front month futures in the high volume agricultural commodity sunk to a 10-year low. Since Dec. 2, 2019, soybean prices have rallied impressively, rising from roughly $8.70/bushel all the way to $9.40/bushel. The current price is about 18% higher than the 10-year low observed in spring of 2019.
While some commodities and futures traders have probably already banked a tidy profit in soybeans, there may be additional places for traders to look when it comes to potential opportunities in 2020. Recently, reports have circulated that wheat may also be a big winner from the upcoming U.S.-China detente.
Wheat prices have rallied from roughly $5.00/bushel in mid-November to $5.50/bushel in late December—an impressive gain.
It’s believed that the Phase 1 agreement between the United States and China may compel the largest Asian consumer of agricultural commodities (China) to purchase more wheat from the United States going forward. While that won’t be known for certain until the exact details of the new agreement are released, the current price action in wheat indicates that at least a portion of the market believes fundamentals have shifted into a bullish posture.
If wheat quotas do get explicitly included in the Phase 1 deal, there may be additional reasons to be more bullish of wheat than soybeans in the near term.
In China, soybeans are often crushed into meal which is used to feed domestic pigs. China accounts for roughly half of the world’s total pork consumption on any given day, which theoretically means there exists strong demand in China for pig feed. This was one big reason why American soybean exports to China had gotten so extensive in the first place (before the trade war).
One complicating factor is the effect of the swine flu epidemic which has been raging through China since fall of 2018.
It’s currently estimated that roughly half the domestic pig herd in China has now been either killed by the disease or euthanized to prevent further spreading of it. While that reality has many potential ramifications, one definitive result is that there are currently many fewer pigs to feed in China. That in turn means there’s significantly less demand for soybean-based pig feed as well.
At the present time, the Chinese government is taking aggressive steps to rebuild their domestic herd. However, that won’t happen overnight. And while the Chinese will most certainly hold up their end of the trade war bargain, it’s doubtful they would import excess soybean supplies at a time when demand has slackened.
For this reason, investors and traders may want to look at other American agricultural commodities that could benefit from increasing Chinese demand—wheat being a prime example.
As a reminder, positions in wheat don’t necessarily need to be pure long or short positions, either. Futures traders can deploy calendar spreads in an individual product, or even deploy intramarket pairs trades in two different products that exhibit strong historical correlation and are in the same market sector (i.e. wheat and corn, gold and silver, etc.).
For a detailed overview of a sample wheat and corn futures pair, traders may want to review a previous episode of Closing the Gap: Futures Edition on the tastytrade financial network when scheduling allows.
In the meantime, it may be worthwhile adding soybean, wheat and corn futures to the watchlist. With the trade war narrative still developing, it’s likely that agricultural commodities will continue to exhibit heightened volatility in 2020. That may also translate to new opportunities in futures options as well.
Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of Luckbox, tastytrade or any affiliated companies. Readers can direct questions about topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.
