What's the Trade Watching? "Fundmanetals" or "Macros"
Mar 27, 2012
The 'Macros" and the importance of the "outside" markets, as many of you know, have had a huge influence on Agricultural prices as of late. If you think for one minute soybean prices would be at this level without the funds now holding an all-time record long position you are sadly mistaken. Yes, there is a bullish fundamental story, but "money-flow" in my opinion still trumps all.
I like to start the report each morning with the event or events that I believe have most influenced the trade. Certainly you do not believe the few funds woke up Monday morning and found out that South American soybean production had ran into a few stumbling blocks, or that some analyst who now thinks we may go to $14 or $15 per bushel in soybeans by late May is what moved the markets. My bet is the funds took a look at the renewed strength in the euro, some better than expected economic data out of Germany, talk that the EU would continue increasing and allocating more funds to the bailout, talk from Bernanke that "QE3" is still alive and that more quantitative easing maybe needed to help stabilize the US employment situation, essentially thoughts of higher inflation and a weaker US dollar caused many managers to tweak their portfolios and take on more "risk."
Understand when I say, "risk on," I mean the funds are looking to add to their current "risk assets." At any given time a fund may have a certain percentage of their entire value invested in the markets. Basically a percentage will be on the sideline in cash and a percentage invested and at work in the markets. "Risk on" simply means they are adding to their riskier assets. Taking money out of cash and putting it to work in the markets. "Risk Off" therefore means they are liquidating positions and moving more money to the sidelines and or back into cash.
Sure analyst can sit here now and tell me the "fundamental" data is what is moving soybean prices higher, but where were you in late December or early January when you were telling me the "fundamentals" were going to drive the US stock market lower, drive soybean price down below $9 and corn below $4. Following my logic, we have remained bullish the US stock market from the Dec lows. As for soybeans, all you have to do is look back at the previous reports. You will see on Dec 2nd I was conservatively bearish soybeans, by December 5th I became slightly more negative, and in fact, made a small cash sale down close to $11.60. However, by Dec 16th I had moved back to "neutral" soybeans, and by Dec 27th I was completely back to "bullish." At that point the traditional "fundamental" traders were telling me I was nuts. How about last year when corn prices topped $7.50 and I became bearish on the dynamics of the "outside" markets, tinkling the funds were starting to change their tune and were wanting to focus more on the European debt situation. While the "fundamentals" where still ragingly bullish, the market broke and broke hard. As one of my long time mentors has taught me "perception" is everything. The "fundamentals" can be wildly bullish, but if the people controlling the most volume perceive more downside risk than upside potential we are going to break regardless.
We all know that in today's world, many funds want to be invested in agriculture in some capacity. Therefore, when the "Risk On" bell is rung, the best bet on the Ag board right now looks to be long soybeans. Since many funds have been having good luck spreading soybeans against corn, we continue to see soybean prices rally and corn take a tumble on the "Risk On" type days. How long will this trend last...that I couldn't tell you, but I do know the funds tend to stick with whatever is working. Look at what they did when they started spreading crude oil against natural gas, they drove natural gas prices right into the cellar.
The "macros" and "outside markets" are often just as influential to price direction in the grains as planting numbers and weather. I know as a producer, you may have questions as to how this pertains to your farm and your marketing, especially ahead of Firday's USDA Report. You can sign-up here to receive a FREE trial of my Daily Grain and Livestock commentary in which you will get where I stand on cash sales and some strategies on how you can take advantage of "Money-Flow." Just click here -