Ag Markets June 1, 2020
/Agriculture markets cross an important seasonal threshold today:
Grain and oilseed prices tend to drop from June 1st to October 1st.
After June 1st, ag traders know enough about U.S. production prospects - planting progress, ground moisture, extended forecasts - to begin removing the price risk premium from corn, wheat, and soybeans.
For the corn market, we've seen prices drop from June 1st to October 1st in 3 of the past 3 years (chart of the week below), 6 of the past 7 years, and 14 of the past 17 years. It's a strong, consistent trend.
Last year, 2019, corn prices topped out on June 17th at $4.69/bushel (Dec contract) before dropping 81 cents (-17%) to $3.88/bushel by September 30th.
It's still a long growing season with plenty of time for bad weather to dent U.S. production (and funds hold a big short position in corn, which limits further downside selling) but the window for U.S. production problems is closing every day.
Bottom line: Price seasonals will be a headwind and negative trading input for the next four months.
Beyond negative price seasonals, agriculture markets see a positive mix of other non-fundamental factors:
Macro: Slightly positive for ags coming into this week. Trump's China conference on Friday removed the tail risk of quitting the Phase One trade deal and/or new sanctions. Today's combination of better risk sentiment + higher energy prices + weaker U.S. dollar = a great combo for ags. This is a busy data week: ISM Manufacturing surveys early in the week, ECB decision Thursday, May U.S. Nonfarm payrolls on Friday, exp. -8.0mm jobs, unemployment rate at 19.6%.
Market Structure: We've seen hedge fund selling outflows in seven of the past eight COT weeks; this weekend's COT report showed new fund shorts in corn, beans, meal, and bean oil. Fund positioning is a bullish trading input for extended-short markets like corn, soybean meal, cattle, and robusta coffee...especially if we see any bad U.S. midwest weather over the coming weeks.
Momentum traders: Like the broader market structure picture, momentum traders are short in aggregate, with big shorts in corn, chicago wheat, soybeans, meal, and coffee.
What Matters This Week:
Price seasonals are now a headwind for agriculture markets and will remain that way until early October. Ag markets see plenty of summer volatility over the coming weeks, but the price trend is generally lower.
Market structure is a bullish input as funds have gotten shorter over the past two months. Extended-short markets like corn have plenty of fund buying power *if* some trigger drives prices up and squeezes big short positions.
The macro mood is more positive this week. U.S. businesses are reopening and last week's drop in continuing jobless claims shows people are returning to work. George Floyd national protests are having a negative impact on USD (good for ags) but aren't impacting equities or energy markets for now.
Big Picture: Seasonals are now negative, but the macro environment has improved, and hedge funds are extended short in a few key markets, limiting downside.
Watch this week:
Will ag markets see seasonal short-selling flows in corn, beans, wheat?
U.S.- China tensions & tweets, can Chinese risk assets sustain upward momentum?
Big NFP jobs report this Friday, will U.S. dollar re-strengthen if data is better than expected?
Chart of the Week: Corn prices generally trend lower from June 1st - October 1st as traders gain more certainty around final U.S. production. We’ve seen this negative price trend in each of the past three years.
For a trial of our industry-leading agriculture research, reach out to us: insight@peaktradingresearch.com.
