Perspective: Midday Commentary, 02/02/2016

Tuesday, February 02, 2016


February 2 – The grain and oilseed sector is attempting to differentiate itself from the broader commodity sector this week. Crude oil remains more than 4% lower on the day, although West Texas Intermediate is back above $30 after hitting a low of $29.81 per barrel earlier this morning. That generally has the funds short the broader commodity sector, but the Ags are trying to break free. We saw signs of this on Monday when the grain and oilseed markets tried to hold against broader selling. Today they’re actually pushing modestly higher in the face of selling in the outside markets.


The grains frequently get thrown in the same mindset of “weak economy equals weak demand” that we would expect from commodities like copper and crude oil, but that’s typically not the case. Demand in the grain and oilseed market remains strong, although not necessarily for that of U.S. origin due to currency exchange rates. Our projections for the 2016-17 marketing year show declining global stocks of corn and soybeans assuming normal weather, albeit with ample U.S. supplies. This year’s transition from a record El Nino toward La Nina doesn’t necessarily mean that we will have a short crop, but it does raise risks at a time when the funds had been heavily short the sector. As such, we’re seeing some repositioning ahead of the growing season, which is pushing corn and soybean prices to six-week highs, tripping chart signals that encourages more short-covering in the process.


Commodity Weather Group notes that sea surface temperatures off the coast of the Baja of California have unexpectedly started to cool, although remaining above normal at this point. There are only two years that match this pattern combined with a moderate to strong El Nino in decline along with above normal readings in the Indian Ocean and a developing cool pool in the North Pacific – 1987 & 2010. Both years saw moderately above normal Midwest temperatures in the summer, which continues to consistently show up in the forecast. Both saw dryness focused more toward the South and East. The 2010 Midwest summer was wet. The 1987 Midwest summer had a wet bias, but with some dry pockets, which will need to watch.

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