Ag Markets August 31, 2020

Agriculture futures face strong crosscurrents coming into this week: bullish fundamentals (U.S. drought) and a supportive macro environment have driven hedge funds to add to extended-long positions and lifted prices against the negative August & September seasonal trend.

The macro environment is a positive trading input for agriculture futures coming into this week:

• Last Thursday Fed chairman Powell announced that the Fed will adopt an "average inflation target" and will be more willing to let inflation run above the Fed's 2.0% target going forward.

• Powell's announcement weakened USD and lifted inflation expectations through the end of last week, a positive boost for ag prices. 

• Index funds bought another +16k contracts of agriculture futures last week, chasing the inflation trend (chart of the week below).

Hedge fund positioning is an increasingly negative trading input looking forward: 

• Friday's COT positioning report showed +112k contracts of aggregate fund buying, the fourth largest inflow week of 2020. Funds have bought ag futures in nine of the past ten weeks.

• Non-commercial traders are the longest they've been since May 2018, when Trump's China tariffs were first put in place.

• Canola seed, soybeans, and robusta coffee are the most overbought markets across the ag complex (z-scores > +2.5).

• CTA momentum traders are the longest they've been in 2020. Momentum traders in corn are the longest they've been since the prevent plant move in July 2019.

Price seasonals are a negative trading input, but we're nearing some important inflection points:

• The seasonal low for each grain and oilseed market basis the past 10 years:

  • Corn: August 29th (two days ago)

  • Chicago wheat: September 2nd (this Wednesday)

  • Soybeans: September 27th

  • Soybean Oil: September 27th (before the annual low November 17th)

  • Soybean Meal: October 2nd

• The seasonal low for the entire ag complex is September 27th; there is still time for prices to settle lower, especially in the oilseed complex...a lot of which will depend on weather and next week's big WASDE report. 

What matters this week:

Agriculture markets have a strong fundamental story and hedge funds have gotten long, including CTA momentum traders. Traders are focusing on crop conditions, crop tours, china buying, and weather maps to gauge how tight this year's corn and bean SNDs can get. Non-fundamental inputs have taken a back seat (especially seasonality) after enjoying a great run since the prevent plant flooding 14 months ago.

The questions for agriculture traders this week:

Is midwest soybean and corn damage bad enough and the macro inflation story strong enough to justify this price run-up and hedge fund length?

How much further can we stretch the fund positioning rubber band...especially against September seasonals (the most *negative* month for soybeans)? 

Watch this week:

On the fundamental side, tonight's crop condition scores, crop tour feedback, and China sales will move markets ahead of next Friday's WASDE report.

Macro focus is on U.S. job numbers: ADP Wednesday, jobless claims Thursday, NFP Friday. The next Fed meeting is in two weeks, September 15-16th. Markets are in risk-on mode, look to see if a weaker USD and higher inflation expectations can continue to support commodities this week.

Chart of the Week: Inflation matters for agriculture markets. Index fund investment in agriculture futures has moved in lockstep with inflation expectations over the past four months. Today agriculture markets have both a fundamental story (U.S. midwest drought) *and* an inflation story (new Fed inflation target policies)…a bullish combination.

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