Ag Markets February 10, 2020

This is a big week for agriculture futures markets, with fundamental USDA data on Tuesday and an ever-changing macro environment marked by improved China sentiment (good for ags) but also a much stronger US dollar (bad for ags).

Last week we saw the macro mood stabilize with Chinese market liquidity injections and better-than-expected US manufacturing and employment data (NFP jobs at +225k vs +165k exp).

This week is quieter for planned macro events: Fed chair Jerome Powell sits for his semi-annual testimony before Congress tomorrow (plenty of questions around the US consumer and coronavirus) and we see Q4 GDP numbers from the U.K. (Tuesday) and Germany (Friday).

Prices seasonals are still fairly negative looking forward, especially for grains (including oats and rice) and the sugar markets. Prices tend to trend lower for a few key markets over the coming months.

Market structure still looks like a broadly bearish input, even after Friday's COT report showed the largest hedge fund outflows in six months. We're seeing a growing rift between markets with fundamental stories and new fund record-long interest (chicago wheat, sugar, cocoa) versus markets getting hit hard by negative coronavirus / china macro headlines (funds record short soybean meal, chart below). 

What Matters This Week:

We're entering another week where the macro environment will be the #1 non-fundamental driver for agriculture prices.

Keep watching Chinese sentiment barometers CNYUSD and A-shares as well as the US dollar index, especially vs the Brazilian real and Argentine Peso. Chinese capital markets have stabilized (good for risk sentiment and ags) but BRL and ARS are falling quickly vs USD (very bad for ags).

If the macro environment continues to improve (China up, USD down), soybean meal looks too oversold; if the macro environment worsens (China down, BRL further down), sugar looks too overbought.

The macro environment matters this week, especially once we get past WASDE numbers tomorrow. Watch Chinese markets, watch USD, watch BRL.

Chart of the Week: With China sentiment turning sharply lower on coronavirus headlines, this past Friday’s COT positioning report showed hedge fund traders put on record-large short bets in soybean meal futures, which drove soybean meal futures prices to new cycle lows last week. The macroeconomic environment has broad implications for our agriculture markets today.

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