Ag Markets August 10, 2020

Macro price action matters as we're entering a light data week ahead of Wednesday's WASDE report.

The supportive macro environment has propped up agriculture markets over the past month. Ag markets have benefited from strong risk-on sentiment, a weak U.S. dollar, and firm energy markets.

On Friday we saw what happens when that positive macro support is removed. The U.S. dollar strengthened +0.7% on better-than-expected NFP job numbers and wheat dropped -1.1%, beans -1.2%, cotton -3.8%, sugar no. 11 -2.1%. A reminder that USD up = ags down.

Price seasonals are broadly negative in August and September and hedge funds have added new long positions over the past six COT weeks. Extended-long and seasonally-negative markets like canola seed, feeder cattle, arabica coffee, robusta coffee, and sugar no. 11 look vulnerable if the macro mood worsens and the U.S. dollar recovers.

Note: Negative price seasonals, big production numbers, and negative carry are reasons why agriculture futures haven't kept up with equities. The ags vs equities ratio is making new all-time lows this morning (chart below).

On the calendar this week:

Wednesday: WASDE report, U.S. CPI inflation (exp +0.3%)

Thursday: Jobless claims data (exp +1.1mm) and continuing claims (exp 15.8mm)

Friday: U.S. retail sales, Chinese retail sales and industrial production

There's also questions regarding the legality and efficacy of Trump's stimulus executive order, headlines around Chinese app and IP bans, and U.S. Covid-19 cases breaking 5 million. Over the past month more U.S. Covid cases = weaker USD.

What matters this week:

The questions for agriculture traders:

Beyond Wednesday's WASDE volatility - can the macro environment hold up ag markets against the weight of negative seasonals and increasingly stretched fund positioning?

How much damage could a strong dollar do to ag futures...especially for overbought markets like canola seed, feeder cattle, sugar, and robusta coffee, sugar?

Watch this week:

Macro price action matters. Watch the path of the U.S. dollar and watch how Chinese markets (A-shares and CNY) react to Chinese data on Friday.

Chart of the Week: Equities have rallied more than agriculture futures over the past five months, pushing the ags vs equities ratio to new all-time lows this morning.

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