Ag Markets September 7, 2020
Agriculture futures face non-fundamental headwinds ahead of Friday's WASDE report.
Hedge fund positioning is a *very* negative trading input looking forward:
Friday's COT positioning report showed +197k contracts of aggregate fund buying in ag futures, the second largest inflow week of 2020.
Funds have bought ag futures in nine of the past ten COT reports.
Non-commercial traders are ~+440k contracts net long = the longest since March 2018.
Soybeans (z-score of +3.3!), canola seed, and robusta coffee are the most overbought markets.
Price seasonals are a broadly negative trading input, especially for soybeans, bean oil, and meal.
The most seasonally-negative 21-day period of the year for soybeans started this past weekend, for bean oil it starts today.
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 (weather and WASDE permitting...).
Sugar is an exception; Sep is the most seasonally bullish month for SB and QW.
The macro environment is downgraded to a neutral trading input for ag futures coming into this week:
Bad for ags: Crude oil is lower, inflation soft, SPX off all-time highs, USD firmer.
Good for ags: BRL and CNY are holding recent gains versus USD, metals are up.
Coming up this week:
Today: U.S. Labor Day market holiday
Thursday: ECB meeting (week's biggest USD driver), weekly U.S. jobless claims and continuing claims data, PPI inflation data
Friday: CPI inflation data
What matters this week:
Fund positioning is the biggest red flag for agriculture futures this week - hedge funds are extended long across most agriculture markets.
The question for agriculture traders this week:
What will be the trigger that causes funds to cover big longs and add back short positions?
Tuesday's crop condition scores or Friday's WASDE china and/or yield #s?
Thursday's ECB meeting? (USD strength drives funds to cover longs)
Thursday & Friday's inflation data? (Softer inflation = lower index investment in ags)
September's seasonal gravity? The window is closing for additional soybean crop damage.
The hedge fund positioning rubber band is the most stretched it's been in 2.5 years; it will snap back and drive prices lower...it's not if, but when...
Watch this week:
On the fundamental side, watch tomorrow's crop condition scores ahead of Friday's big WASDE report. Macro focus is on the ECB Thursday (big USD driver) and inflation data.
Chart of the Week: Hedge funds are the longest they’ve been in agriculture markets since March 2018. This stretched positioning will matter for prices if some fundamental catalyst (e.g. Friday’s WASDE report) or non-fundamental catalyst (e.g. Thursday’s ECB policy changes) forces traders to liquidate big long positions all at once.
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