Ag Markets December 21, 2020
Agriculture markets are riding upward momentum from last week's pro-inflation Fed policy statement, U.S. dollar weakness, Argentine soy workers strike, and South American weather uncertainty.
The 'macro matters' for agriculture futures in December and today the macro environment is a positive tailwind keeping hedge funds confidently long agriculture futures into calendar year-end.
Macro:
Last week the Fed announced it will continue QE purchases 'until substantial further progress has been made' in inflation and employment... a green light for higher inflation going forward, similar to the Fed's 'average inflation target' announcement from August.
This week's macro calendar is relatively light:
Monday: U.S. govt Covid stimulus bill vote, Tesla added to the S&P 500
Tuesday: U.S. consumer confidence, U.S. home sales
Wednesday: Jobless claims (climbing lately, +875k exp this week)
Thursday: U.S. Federal offices closed, CME early close
Friday: Christmas holiday
Fund Positioning:
Hedge funds are the longest they've ever been heading into a new calendar year (measured in contracts) and funds seem content to hold this massive length given the positive macro environment and tight global balance sheets.
Incredibly, 20 out of the 21 ag markets look 'expensive and overbought' versus data from the past 24 months (london cocoa is the only exception). Today funds are extended longest in kansas wheat, soybean meal, and canola seed. Chart of the week below.
Seasonals:
Price seasonals are mixed through the end of December before turning more broadly positive in January 2021. Robusta coffee futures have risen 11 out of the past 12 years for the 19 sessions starting Thursday.
Watch this week:
Fundamentals: Cumulative precipitation totals are catching up across Brazil and Argentina, but are still low enough to keep weather risk premiums across the soy complex (high futures, strong inverses). Strong export sales reports, the Argentine strikes (to be resolved this week?), and upcoming Russia taxes (now including soybeans) are additional bullish tailwinds.
Non-fundamentals: The macroeconomic environment matters in December and today agriculture traders see a lot of green lights: weak USD, higher inflation, strong energy & metals markets, strong equity markets, low volatility, and extremely easy financial conditions. There isn't much on the calendar this week - or through the end of the year - watch the path of the U.S. dollar (rebounding this morning) and watch price action in energy (crude down this morning).
Note: This is our final 'Ag Markets This Week' summary of 2020. Thank you for reading this year and enjoy a safe and happy holiday season!
Chart of the Week: 20 out of 21 agriculture markets look ‘expensive & overbought’ today…an incredible change versus six months ago, when most markets were ‘cheap & oversold’. Strong U.S. exports, South American weather uncertainty, and the Fed’s pro-inflation policy stance are keeping hedge funds confidently LONG into year-end.
