Ag Markets April 20, 2020
What would drive agriculture futures prices higher this week? What makes ag markets broadly bullish?
Let's review the four non-fundamental "M" drivers for agriculture futures:
Macro
Month (seasonals)
Market Structure
Momentum (CTAs)
Macro: The macro environment is currently neutral for agriculture futures. The recent stock market rally is good for risk sentiment, which is good for ag futures prices. On the other hand, energy markets are weak (WTI below $16/barrel) and the U.S. dollar is stubbornly strong, which is bad for ag futures. What would make the macro environment a positive input for ags? Stronger crude and a weaker U.S. dollar (esp vs BRL, ARS, CNY).
Month: Price seasonals turn positive for ag futures in May...this is the month we flag big U.S. planting / production issues. The spring low across the ag complex last year was May 10th, and on average the spring low is:
Corn = April 20th (today, see the chart of the week below)
Soybean meal = May 2nd
Chicago wheat = May 7th
Soybeans = May 10th
Market Structure: Hedge funds are extended short in corn, live cattle, cotton, robusta coffee, and feeder cattle and fund positioning is potentially a bullish input for these extended-short markets...the caveat is that we need a trigger, i.e., some fundamental or technical change to drive prices up and squeeze shorts.
Momentum: Momentum and trend-following CTA traders are short across most markets and are max short in corn, soybeans, soybean meal, lean hogs, and robusta coffee. CTAs have plenty of firepower to buy futures in these markets.
Bottom Line:
Price seasonals *will* turn more bullish for most ag markets over the coming weeks.
The macro environment *could* turn bullish, but needs help from stronger crude / weaker USD.
Market structure (the whole hedge fund pie) and Momentum CTA trader positioning (the most volatile slice of the pie) are bullish inputs *if* either seasonals (planting delays) or the macro (weaker USD) can provide a spark and get prices moving higher, squeezing shorts and incentivizing new longs.
For the macro environment this week we see global Purchasing Manager Index (PMI) manufacturing data, U.S. jobless claims (exp. +4.5mm) and plenty of Q1 earnings from big commodity names: Alcoa, BHP Group, Anglo American. There's also a $450B U.S. small business loan program in the pipeline.
Chart of the Week: Corn futures cross an important seasonal inflection point today, April 20th. Corn futures prices tend to rise in late April and May as traders build in a risk premium around U.S. planting and production. Corn prices bottomed out on May 10th last year (2019), then rallied +30% in five weeks.
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