JP Morgan said it maintained a “bullish outlook across the grain complex” despite the increase in China-US trade tensions, which the bank said, while hitting investor sentiment, had not changed supply and demand fundamentals.
The bank acknowledged that US President Donald Trump’s decision last week to extend imports tariffs to a further $300bn of Chinese goods had “jarred” investor sentiment.
“Trump’s tariff bomb could not have come at a worse time for agri commodity markets,” coming when prices had already suffered a decline on the removal of much of the premium which had been injected on worries over the impact on US crops of an unusually wet spring.
However, the bank retained an upbeat outlook on grain prices, terming as “stark” the “divergence between bullish grain market fundamentals and precipitous futures market weakness”.
‘Maintain a bullish outlook’
“Fundamentals have not changed,” JP Morgan analyst Tracey Allen said, viewing the tariffs has making little difference to US ag export prospects to China – given that they were already poor, limiting the impact of any further retaliatory tariffs by Beijing.
“US agri exports are already largely locked out of China
“With already negligible flows of US agri products to state owned [importers] and very small purchases from private buyers in China at present, any potential retaliatory hike in China’s import tariffs for US products would have a minimal impact on US agri product export flows to China.”
While acknowledging that longer-term demand for US ags “remains in question”, Ms Allen added that “we maintain a bullish outlook across the grain complex”.
The bank recommended investors go long on the spread between March 2020 corn futures, and the March 2021 lot, which would stand to revive if prospects indeed worsen for supplies from the forthcoming harvest.
Since swelling to a high of $0.44 ¾ a bushel in mid-June, the spread has collapsed back into negative territory, by some $0.03 a bushel as of Monday.
Such weakness was “last observed in mid-May, before the extent of US production challenges was widely appreciated”.
JP Morgan also recommended a March 2020 options spread “to express our constructive view across the complex and take advantage of suppressed volatility”.
Wheat prices “will continue to move in tandem” with corn prices in Chicago, JP Morgan said.