Ag Markets May 25, 2020
/Agriculture markets see mixed non-fundamental trading signals coming into this holiday-shortened week.
Seasonals: The seasonally bullish spring window is closing fast. May price seasonals are strongly positive but June seasonals turn more bearish as traders see extended weather forecasts and assign a lower risk premium to U.S. production estimates.
Macro: Positive risk sentiment faded on Friday when China abandoned their formal GDP target (A-shares down -1.9%) and the U.S. dollar strengthened on flight-to-safety flows, a headwind for agriculture futures. This week is quiet for scheduled data and central bank decisions; we'll see weekly U.S. jobless claims (exp. +2.1mm) on Thursday.
Market Structure: We've seen hedge fund selling outflows in six of the past seven weeks COT weeks; this weekend's COT report showed new fund shorts in corn, chicago wheat, kansas wheat (record managed money selling), soybeans, and meal. Fund positioning is a bullish trading input for stretched-short markets like spring wheat (record short), corn, cattle, meal, and robusta coffee.
Momentum traders: Like the broader market structure picture, momentum traders are short in aggregate, with big shorts in kansas wheat, soybeans, meal, and arabica coffee.
What Matters This Week:
Price seasonals turn more bearish after this week - that's a big change for our markets. Massive carryouts and hiccup-free U.S. planting have kept a lid on prices over the past weeks - we have not seen a seasonal rally like May 2019. It's still a long growing season (~90% of corn's yield determined in July), but the window for production problems is closing every day.
Although seasonals are less of a bullish input looking forward, market structure is becoming more of a bullish input as funds have gotten shorter over the past two months. Extended-short markets like spring wheat and corn have plenty of fund buying power *if* some fundamental (summer heat?) or non-fundamental (weaker USD?) trigger drives prices up and washes out shorts.
The macro environment remains a big x-factor for our markets and changes day-to-day with crude oil and the U.S. dollar.
Watch this week:
Can agriculture futures get a final seasonal push higher into June?
Price action in crude oil and ethanol, esp for energy-linked corn, bean oil, and sugar.
How the macro environment responds to escalating U.S.-China tensions, esp for China A-shares and CNYfx...both of which are highly correlated to ag futures.
Chart of the Week: Hedge funds have sold agriculture futures in six of the past seven weeks on a combination of bearish fundamentals and negative macro headwinds. Hedge funds have gotten comfortably short in markets like spring wheat, corn, cattle, and soybean meal. Spring wheat has record-short hedge fund positioning, with a positioning z-score of -2.12, the most negative across the ag complex.
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