Ag Markets February 17, 2020

We're entering another week where the macroeconomic environment will be the most important non-fundamental driver for agriculture prices.

The macro mood improved into the end of last week: Chinese stock markets and currency markets benefited from liquidity support and global energy markets rebounded, which had positive knock-on effects for inflation expectations.

US Dollar strength remains a big headwind for agriculture futures markets and this morning DXY is matching levels not seen since early October. 

Markets are closed for US Presidents' Day today, but later in the week we see a few second-tier data points - Empire Manufacturing (Tues), PPI Inflation (Wed), Philly Fed (Thurs) - as well as earnings from Glencore (Tues) and Wilmar (Thurs). On the fundamental side we have the USDA Ag outlook forum starting Thurs.

Price seasonals are negative looking forward. This is the time of year when traders are comfortable removing a price risk premium around South American production. The normalized seasonal line for our 13 agriculture markets accelerates lower in late February (chart of the week below).

Market structure still looks like a broadly bearish input (funds are long), even after two weeks of COT report outflows. Today we estimate hedge funds are ~116k contracts net short the 13 agriculture markets in the CFTC supplemental report, still *above* the 24-month average of -239k contracts. Last year at this time funds started selling towards a record net short position of almost a million contracts by mid-May.

What Matters This Week:

The macro environment remains fluid and we've seen our macro rating bounce between negative and neutral over the past month, mostly driven by China / energy / currency moves. Keep watching CNY and Chinese A-shares as well as the US dollar index, especially vs the Brazilian real and Argentine peso. 

Negative price seasonals are a headwind and will weigh on our markets over the coming weeks.

Markets with fundamental stories and massive fund long interest (arabica coffee, chicago wheat, white sugar, cocoa) stand out as expensive and overbought. If the macro mood worsens again, these markets look vulnerable...especially against the backdrop of negative price seasonals.  

Chart of the Week: We’re entering a period of the year when agriculture traders are comfortable removing a price risk premium around South American production. Futures prices tend to accelerate lower in late February. We saw this last year when funds started selling towards a record net short position by mid-May.

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