Ag Markets January 18, 2021
/Ag Price Drivers This Week:
Hedge funds are record-long agriculture futures, with record length in corn.
Fundamental tailwinds: SA weather remains mixed, China has been buying despite higher prices, Russia's wheat export tax begins March 1st, last week's tight WASDE corn stocks.
Macro clouds are looming, including a stronger U.S. dollar and softer energy markets.
Macro:
The macroeconomic environment has lost some steam and is a neutral trading input for agriculture futures coming into this week. Inflation expectations remain firm (good for ags), but the U.S. dollar jumped to three-week highs, and energy markets are softer (bad for ags).
This is a big week for U.S. politics and central banks; focus is on Biden's inauguration, potential violence in D.C. & state capitols, Biden's $1.9T stimulus bill, new executive orders, and Trump's (delayed?) impeachment:
Today: Martin Luther King Jr. Day, U.S. markets closed
Tuesday: Yellen testifies before the Senate Banking Committee (watch USD)
Wednesday: Biden inauguration at ~noon EST, Brazil & Canada rate policy decisions
Thursday: ECB & BOJ policy decisions (watch USD), U.S. jobless claims, Philly Fed
Friday: U.S. home sales
Fund Positioning:
Funds are record long agriculture futures - roughly +1.12 million contracts across the ag complex - including a record net long position in corn and across the combined U.S. grain markets. Funds have rotated long bets out of oilseeds and into grains over the past month. The most 'expensive & overbought' markets across the ag complex are now corn, spring wheat, and kansas wheat.
Seasonals:
Price seasonals are positive this week across the ag complex..
Questions This Week:
What are the catalysts that could drive funds to liquidate their record length?
1.) More U.S. dollar strength. The U.S. dollar's downtrend has been a huge positive tailwind for ag futures over the past nine months. If the U.S. dollar begins to re-strengthen, it will drag ags lower. This is a BIG macro week and macro-ag correlations are still running hot (chart of the week below). Watch USD.
2.) Some change in the bullish fundamental narrative. With the Jan WASDE now behind us, watch cash markets, China buying, and signs of rationing. It's still too early for Brazil harvest pressure.
3.) #Reflation trades losing momentum. Last week's jobless claim numbers were higher and retail sales were lower...both pointing to a slower economic recovery and fewer growth-driven price pressures. Reflation trading is an early-January phenomenon...the flood of money into commodity inflation hedges will slow over the coming days. Watch gold, copper, and bitcoin...all three are setting back.
When do price seasonals turn bearish?
Seasonals start to turn after this week. You should have negative February seasonals on your radar. Seasonals will be a big threat to hedge fund positioning next month.
Chart of the Week: This is a BIG week for macro trading inputs, focused around Biden’s inauguration on Wednesday and new executive orders. Correlations between macro inputs and grain & oilseed markets are firmly positive - watch the U.S. dollar closely this week, esp versus BRL and CNY.
Note: We’ll discontinue this weekly ‘Ag Markets This Week’ post in February - if you’d likely to continue receiving this write-up going forward, ping us: insight@peaktradingresearch.com.
