Agriculture: Follow the Money

The futures markets are giving us further signs of speculative interest returning to the grains. The large speculators substantially increased their net long positions last week in corn, soybeans and wheat futures:

Traders are finding bullish support from multiple fundamental factors:

Reduced supply estimates: The USDA cut its U.S. ending stocks estimates for corn and wheat by roughly 2.2% each, while they cut soybeans a notable 11% from the March estimate. USDA also reduced the world carryover estimates for corn and soybeans, while adding a marginal increase for wheat.

Improving global demand: Weekly export sales came in above expectations once again for corn, continuing to build on recent strength. Soybeans sales cooled somewhat from their torrid pace in 2009, while wheat sales matched expectations. This latter point should be received as a victory for wheat given a weakening global demand picture and healthy global inventories.

Weather risks abound: After witnessing soybean prices move higher on steady South American drought throughout the winter, traders are closely monitoring the drought that is impeding wheat production in the southern US, while flooding and heavy rains delay corn and soybeans planting in the north. If we see the stormy weather persist, these delays could ultimately lead soybeans to gain acres at corn’s expense.

While the fundamentals continue to improve for the grains, the US dollar remains defiant to the Fed’s nuclear monetary policy. The dollar’s strength will work against further short-term upside in grain prices and suggests we may see a sideways trade persist until the dollar breaks down.