Agriculture markets are facing non-fundamental headwinds as we enter February. The macroeconomic environment is negative, price seasonals turn more bearish, and hedge funds are overextended long in a few key markets against these more negative price drivers.

The macro environment is firmly negative and last week was a second week where most of the macro drivers that matter most for agriculture commodities turned lower. Broad risk sentiment is negative, energy and metals momentum is downward, inflation expectations are lower. China's equity and fx markets are re-opening lower today, with A-shares down ~10%.

Price seasonals turn more negative this month, especially for the wheat and sugar markets...both of which look overbought with Friday's COT showing record long positions in both Chicago wheat and white sugar.  

Market structure still looks like a bearish input, even with prices falling and funds likely selling ~100k contracts through the end of last week. There are still plenty of agriculture markets where funds are extended long vs data from the past 24 months: sugar #11, white sugar, Chicago wheat, arabica coffee, bean oil, cocoa, and matif rapeseed. Risks are skewed to the downside for these markets if macro volatility drives traders to trim big long positions.

What Matters This Week:

Risks are again skewed to the downside for our agriculture markets with non-fundamental factor alignment across the macroeconomic environment, seasonal price trends, and market structure. Hedge funds added big new longs over the past four months and those positions look vulnerable today, especially with the negative macro mood.  

Coronavirus and China market volatility will be an investor focus this week. In the U.S. we have Iowa caucuses and ISM manufacturing data today, Trump's state of the union Tuesday night, and U.S. Nonfarm payrolls Friday (+160k jobs exp). Argentina meets with the IMF to discuss credit lines Wednesday.

The U.S. job numbers Friday (14:30 GVA, 7:30am Chicago) will likely be the biggest macro risk and U.S. dollar data point this week. A strong jobs report would drive USD back towards multi-month highs...another macro headwind for our markets. 

Like last week, be cautious with long futures positions in this environment, esp in overbought markets like sugar, Chicago wheat, cocoa, and bean oil. These markets still look like great short candidates for hedge funds looking to express a bearish macro theme.

Chart of the week: Despite the firmly negative macroeconomic tone over the past two weeks and broad commodity selling, there are still plenty of agriculture markets that look overbought (fund positioning skewed long) and expensive (prices above the 24-month average) today.

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