This Week in Ag (August 2)

Softer tone post Fed announcement and a more moderate weather outlook:

Fundamental

It was a down week for row crops, with corn, soy, wheat and cotton all on the decline.

Weather remains the primary fundamental focus. In the rearview mirror, it has clearly been hot and dry.  Weekly condition scores declined by 3-5% in corn, soy and cotton. The percentage of area under drought increased to 59% for corn and 53% for soy and the weekly crop bulletin reported less than an inch of rain for the week across the central corn belt (SW Minnesota, Wisconsin, Ohio and Indiana fared slightly better), along with high temps of 90-100+ across the entire Central US.

None of that is particularly bearish, but the market seems focused on the road ahead where Tuesday's 6-10 day outlook showed a below-normal temperature outlook dipping as far south as Kansas, with an above-normal rainfall outlook across the entire grain belt.

Technical

Technicals are adding to the softer tone.

The recent downturn has produced a corn moving-average cross as of Tuesday’s close. Soy and wheat moving averages remain positive but are converging. Cotton posted a major bear reversal, trading down below 84 cents only days after posting a calendar-year high of 88.39. While all these markets have moved lower, none has tipped into oversold territory based on relative strength indicators.  

A look at the most recent Commitment of Traders report might help explain some of the recent price action. For the period ending July 25, all markets showed another week-on-week increase in net managed money long positions. That increase seems to now be providing some of the juice that is currently being squeezed out of the markets. Will look to the COT this Friday for confirmation of that.

Macro

As expected, the Fed implemented a 25 basis-point increase in interest rates. Fed commentary around the announcement was dovish and was favorably received by financial markets, with a ‘soft landing’ outcome seeming to be the more predominantly held viewpoint.  

From a commodity perspective, the impact of that is two-fold. If inflation is moderating, then owning commodities as a hedge makes less sense. At the same time, robust growth forecasts to support strong demand are not yet in place.  

In the absence of either of these tailwinds, it appears commodity markets must make their own way without an external boost. The potential bullish flag in the mix is the continued strength in petroleum markets. With US crude prices topping $80 per barrel this week, look for oil markets to provide some psychological and potentially fundamental support to ag markets.

Trading strategy is based on the author's views and analysis as of the date of first publication. From time to time the author's views may change due to new information or evolving market conditions. Any major updates to the author's views will be published separately in the author's weekly commentary or a new deep dive.

This content is for educational purposes only and is NOT financial advice. Before acting on any information you must consult with your financial advisor.