Ag Markets August 17, 2020
/Hedge funds hold big long bets in agriculture futures, especially oilseeds and softs.
Funds have been on a buying spree for seven of the past eight weeks on a combination of:
Supportive macro environment (inflation up, USD down)
Chinese cargo demand and positive risk sentiment (A-shares up)
Last week's WASDE bounce
Iowa storm damage
Momentum trader buying
Today non-commercial hedge fund traders are the longest they've been in agriculture futures since January (chart of the week below).
This extended-long positioning matters, especially if some fundamental trigger (e.g. farmer selling) or non-fundamental trigger (e.g. strong USD) pushes prices lower and forces new longs to liquidate in markets like canola seed, robusta coffee, bean oil, and soybeans.
On the calendar this week:
Monday: Democratic convention starts in Milwaukee, Empire manufacturing data, crop ratings (Iowa #derecho damage).
Tuesday: U.S. housing starts data.
Wednesday: FOMC meeting minutes from the July 29th meeting.
Thursday: Weekly U.S. jobless and continuing claims data, Philly Fed data, Biden Dem nomination.
Friday: U.S., Eurozone, and U.K. PMI manufacturing data
Members of the U.S. House (and possibly the Senate) are returning to Washington D.C. early to address postal service funding. Investors are also watching the pace of U.S. Covid-19 infections, especially with more students heading back to school. Over the past two months more U.S. Covid cases vs other major currency nations = weaker USD = a positive driver for agriculture futures.
What matters this week:
Hedge funds are the longest they've been in six months and there are now ten agriculture futures markets that look expensive & overbought versus data from the past 24 months.
What keeps new longs confident and keeps prices elevated?
Positive macro (inflation up, USD down), China buying and Chinese risk sentiment (A-shares are testing cycle highs this morning), lower crop conditions today, dryer weather.
What could force new longs to liquidate, driving prices lower?
Negative macro (risk-off trading, USD up), better-than-expected crop conditions, confidence that the late-August & September seasonal trend is intact, farmer selling, CTA liquidations.
Ag markets have plenty of fundamental and non-fundamental crosscurrents to contend with this week. Big picture: funds are long (including momentum CTAs) and seasonals are negative for the next five weeks. These are both bearish trading inputs, esp if momentum slows and/or the macro environment sets back (e.g. stronger USD).
Chart of the Week: Today hedge funds hold big long bets in agriculture futures, playing for higher prices. These traders are the longest they’ve been since late January, before the big Covid-19 macro washout.
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