Ag Markets April 27, 2020

The macroeconomic environment has been the #1 non-fundamental driver for agriculture futures over the past three months, with lower crude oil, lower inflation/growth expectations, and a stronger U.S. dollar pushing the ag complex to new 2020 lows today. The BCOM Ag Index is down -16.2% YTD. 

On the macro front, this week agriculture investors will be focusing on:

  • Covid-19 curve-flattening progress and timelines to reopen global economies

  • Q1 earnings from big commodity names: BP, Shell, Exxon, Chevron, CAT, Glencore

  • Price action in energy markets after the WTI May contract expired negative last Monday

  • Additional central bank stimulus measures: BoJ today, Fed Wednesday, ECB Thursday

Price seasonals become a more positive price driver in the coming weeks as we get deeper into U.S. corn and soybean planting and traders add a risk premium to most ag markets. Basis 10yrs of front-contract prices, the spring seasonal low for corn was April 20th, last Monday, and coming up we have: 

  • Soybean meal = May 2nd (this coming Saturday)

  • Chicago wheat = May 7th (next week Thursday)

  • Soybeans = May 10th 

This weekend's COT positioning report showed new macro-driven short positions in corn, soybeans, bean oil, and sugar #11...all markets connected to crude oil prices via ethanol or biodiesel. Hedge fund traders have record-small long bets in Sugar #11 for a fifth consecutive week (chart below).

Our internal models show that momentum CTA traders, the most volatile slice of the overall hedge fund pie, are extended short. This extended-short positioning will matter if we see some macro or seasonal price driver that forces short covering, esp. for markets like corn, cattle, and bean oil.

What Matters for Ag Futures This Week:

The macro environment has been the #1 non-fundamental driver for agriculture futures but seasonals might soon take the #1 spot: this is the time of year when we see real threats to U.S. production. The seasonal low for the ag complex last year was May 10th, after which agriculture prices ripped higher on midwest flooding and lost acres.

The macro mood has improved over the past few trading sessions, with higher stock markets (good for risk sentiment) and firmer energy markets (good for ags). The U.S. dollar hit three-week highs last Friday but has backed off since. More USD weakness would help lift ag prices this week, esp if crude can hold > $20/bl.

Watch this week:

  • Progress on Covid curve flattening and concrete plans to open economies

  • Central bank policy tweaks (ECB optimism would push USD lower)

  • U.S. jobless claim #s on Thursday at 14:30 GVA, 7:30am Chicago; exp +3.5mm new claims

  • Any U.S. planting delays that suggest we've marked the seasonal low for the ag complex

Chart of the Week: The macroeconomic environment has been a significant headwind for sugar prices - especially lower energy prices (sugar is used to make ethanol) and a weaker Brazilian real. This weekend’s COT positioning report showed hedge funds have record-small long positions in sugar #11 futures for a fifth consecutive week. Sugar futures prices are at 12-year lows today.

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

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Ag Markets April 20, 2020