MARKETS: Monday Check-in

FX: The US Dollar leapt last week. The gains weighed on US$ commodity prices. The response demonstrated that prices are, for now, unusually sensitive to currencies. The simple valuation effect probably does not fully capture the impact of the reversal. The greenback’s gains were large enough to raise doubts about its lower near-term trend. A presumed US Dollar decline had been a supportive factor for prices. In particular, the trend was a defence against new lows for US$ prices. Without it, the barrier to new lows is weaker. For now, most will likely view the greenback’s gains as temporary: an un-zag rather than a zig. But, currency markets are fickle, so best to avoid presuming the US Dollar will restart its downward trend.

Energy: Oil prices had a volatile week. The oil futures curve restored the backwardation to the recent ‘normal’. So, no pressure on investors’ commodity allocations from this source.

Rates: The US Federal Reserve left interest rates unchanged this week. And, the market has begun to question a cut in September. Market expectations of carrying costs are thus higher, and so a negative for calendar spreads.

Crop
Several weather worries hang over the coarse grain markets. For the most part, those worries are still a while away from translating into materially lower crop forecasts. Moreover, likely very large crops in the US and Brazil limit the impact of pockets of yield loss. Crop damage would need to become much more widespread to nudge prospective supply from neutral. And, with the weather horizon beyond mid-August, the chances of such events are fading. Perhaps only Russia and Ukraine’s dryness is potentially large enough to ‘move the needle’.

SnD
Production continues as the dominant issue for coarse grain prices. That influence will fade deeper into August. Beyond, supply timing will take on greater importance.

The timing has a wrinkle this season. Brazil’s second corn harvest has been delayed, an echo of the late soybean planting that preceded it. That delay has several consequences. Now, the US is exporting more corn than usual, filling in the gap left by late Brazil corn. The consequence, though, is that Brazil will likely have unusually large corn inventories deep into calendar 2025. A time when northern summer harvests also hit the market. And, a short while later, southern winter supply comes along too. The likely consequence is longer carry periods and deeper calendar discounts. The market is unclear on the extent of this supply shunt. Brazil’s corn production is still a matter of debate. Updated official estimates, due mid-August, are an opportunity for clarification.

Markets
Corn’s open interest jumped last week. The majority came from new spread positions. The investor short, again almost unchanged last Tuesday, is still large enough to be influential but nowhere near extreme. Both physicals and investors have the capacity for larger positions.

Momentum metrics still suggest lower prices are the path of least resistance. Both long-cycle and short-cycle momentum remain weak. Counter-momentum is not yet signalling a bounce because the price falls have been slow.

The View
The coarse grain market prices are, most likely, to trade in a low range. Marginal new lows for prices last week seem unlikely to be the end of the falls. The US Dollar’s reversal from recent lows likely caused a chunk of that fall. The market is yet to price the full impact of large crops in Brazil and the US. So, we expect new lows for prices, but that is US-Dollar conditional.

Crop
Oilseed markets already have a number of crop issues to track. Now, as the weather horizon stretches well into August, we enter a critical period for oilseed crops. So, while these issues will not immediately translate into lower crop forecasts, that time is not far away. Dry sections of Canada’s Prairies are a particular source of support for canola.

SnD
The market still has a period of high production uncertainty. Trade, though, looms unusually large in market thinking. That presence is a Trade War consequence. We, and most others, expect the Trade War to largely result in trade diversion, not trade destruction. That diversion comes at a cost. For China, the smoothing afforded by large northern and southern crops is lost. And, because China is by far the largest bean importer, that loss has consequences for the market as a whole. The action we see is largely consistent with the diversion view. China reportedly sold a hefty amount of soybean oil to India last week. The sale is likely, in part, because China is processing well more beans than usual. The diversion is also influencing soybean basis. Price talk this past week still has China buying South American soybeans cheaper than tariff-adjusted US soybeans. For other buyers, though, South American beans are pricey compared to US beans. That differential is yet to translate into US forward export sales. So, some are worried whether these replacement buyers will show up.

Markets
The primacy of US soy oil demand continue to be reflected in spread-driven positions. Investors remain, in some combination, very heavily short soybean meal and heavily long soy oil. And those outright positions are part of spread structures. The long oil-short meal trade remains crowded. Thus these markets are vulnerable to a sharp reversal. But, there is no obvious catalyst for such a reversal at present. Investors also have a large – but not extreme – short position in soybeans.

Soybean futures long-cycle momentum continues to be ambiguous. Short-term momentum metrics are flagging a brief price bounce.