Ag Markets September 14, 2020
The fundamentally bullish tailwinds of lower production prospects and strong Chinese buying interest continue to prop up agriculture markets against non-fundamental headwinds, especially extended-long hedge fund positioning.
A quick review of the three main non-fundamental trading inputs coming into this week:
#1 Hedge fund positioning remains a *very* negative trading input looking forward:
Funds have bought ag futures in ten of the past eleven COT reports on a combination of a weaker USD, higher inflation #s, derecho damage, dry soybean weather, and China buying.
Non-commercial traders are ~+530k cks net long today = the longest since February 2017.
Canola seed (z-score of +3.5) and soybeans (z-score of +3.4) stand out as extremely overbought. See our chart of the week below.
#2 Price seasonals are a broadly negative trading input, especially for soybeans, bean oil, and meal.
September is usually the most seasonally negative month for the soy complex. This year soys have seen a strong counter-seasonal rally on dry weather.
The seasonal low for the entire ag complex is September 27th = two weeks from now.
#3 The macro environment is a neutral trading input for ag futures; the focus this week is on central bank decisions and currency moves:
Bad for ags: Crude oil is at three-month lows, inflation soft, SPX off all-time highs, USD firmer.
Good for ags: BRL and CNY are firm versus USD, industrial metals are up.
Coming up this week:
Tuesday: U.S. Empire manufacturing data.
Wednesday: Fed policy decision and Powell press conference (watch USD), Brazil policy decision (watch BRL), and U.S. retail sales.
Thursday: Bank of Japan policy decision, Bank of England policy decision, weekly U.S. jobless claims, U.S. housing starts.
What matters this week:
Fund positioning is the biggest red flag for agriculture futures this week; funds are long across the ag complex and the bull needs to be fed: lower production #s or more China business.
Seasonals are also negative for the oilseed complex, but there's a lot more green looking forward...first for corn, wheat, and sugar this week...then *everything* is green in October.
The question for agriculture traders this week:
Will china sales and/or dry U.S./Brazil weather feed the soy market bull and keep hedge fund long positions confident and shorts disinterested?
Watch this week:
On the fundamental side, watch the pace of China sales versus signs of ramped up farmer selling (corn just closed above its 200-day moving average for the first time in 13 months...).
Macro focus is on central banks and how USD, BRL, GBP, and EUR all react to different policy decisions this week. Keep it simple and watch the dollar. USD up = ags down.
Chart of the Week: Dry weather and strong Chinese buying have driven hedge fund traders to pile on long bets in soybean and canola seed futures. We see positioning z-scores of +3.5 less than 0.5% of the time.
For a trial of our industry-leading agriculture research, reach out to us: insight@peaktradingresearch.com.
