Ag Markets December 7, 2020

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South American weather and the positive macroeconomic environment are the main price drivers for agriculture futures ahead of Thursday's December WASDE report.

Macro:

Agriculture futures have seen a 'macro wish list' over the past week: Rising inflation expectations, a weaker U.S. dollar, strong BRL, firm energy & metals commodity markets, and new stock market highs.

Last week's setback across the ag complex was due to wetter SA weather spooking massive fund long positions, *not* a worsening macro environment. Macro investors are optimistic about this week's vaccine roll-outs and prospects for U.S. govt Covid stimulus. Record Covid-19 infections and new lockdowns aren't (for now) derailing the macro mood.

This is an important FX week, with three big central bank decisions:

Fund Positioning:

Friday's COT positioning report showed the second-largest week of hedge fund selling since April. Big picture: hedge funds remain extended long across the ag complex - esp in markets like canola seeds, kansas wheat, corn, and soybean meal. This fund positioning is a bearish trading input looking forward... the bulls need to be fed.

Seasonals:

Price seasonals are mixed over the coming weeks before turning more broadly positive into the new calendar year. Price patterns worth noting this week:

  • Live cattle futures have risen 16 out of 16 years for the 14 sessions starting Wednesday (chart of the week below).

  • Feeder cattle futures have risen 11 out of 12 years for the 17 sessions starting Wednesday.

Watch this week:

Fundamentals: Central and southern Brazil is getting moisture but Argentina remains dry. With fund positioning at nosebleed levels, better SA weather will continue to drive sharp pullbacks. Thursday's WASDE corn and soybean export numbers are the focus through the end of the week.

Non-fundamentals: The macroeconomic environment matters in December. This is the month when correlations are highest between macro indices and agriculture futures. Watch the path of the U.S. dollar versus BRL, CAD, and EUR, and watch this week's CPI and PPI inflation data. Inflation breakevens are at 18-month highs today, a bullish tailwind for commodities broadly.

Chart of the Week: Live Cattle has a compelling price pattern starting this week: April live cattle futures have risen 16 out of 16 years for the 14 sessions starting Wednesday. It's rare to see 100% hit rate trades lasting 12+ years.

For a trial of our industry-leading quantitative agriculture research, reach out to us: insight@peaktradingresearch.com.

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