On the cusp
Jan 03, 2018
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While markets are hesitating just a bit this morning, we have tried to extend the New Year rally for the second day in the grain and soy markets. Potential damage in winter wheat and ongoing concerns about the dry conditions in Argentina have been cited as prime reasons, but fund short covering would appear to be providing the dominant buying. It is estimated that yesterday they purchased 8,000 contracts of corn, 3,000 beans, and 6,000 wheat.
The Argentine government has finally made good on the pledge to lower export taxes on soy products, which currently stands at 30%. This was one of the key pledges that President Marci made on the road to election back in 2015, but the reality of a revenue-starved nation has evidently delayed implementation. In turn, the nation's farmers have done their best to restrain from making sales in anticipation. The initial cut amounts to just ½%, but are scheduled monthly until the soy tax is reduced from the current 30% to 18% and 30% to 15% for bean products.
As I noted yesterday, the U.S. Dollar has begun the year under pressure, extending a break that really began in early November of last year. While we have yet to violate key levels of support at the 91 level, momentum appears to be with the bear. Of course, there is no assurance that a break down in the dollar will translate to strength in commodities but a glance at the comparison chart between the dollar and the CRB index would appear to suggest the relationship is more than casual. Realistically for the past two years now, both the dollar and the commodity index have been tracking in large sideways patterns, and both currently sit right on the cusp of breakouts (dollar lower and commodities higher). If successful, by no means would this instantly translate into a rally in all commodity groups but I do believe it would herald a new flow of money into the sector and a certain portion of that would be looking for the bargain basement value deals, i.e., ag markets.
T-minus 9 days until the final crop production report and ideally funds will continue to liquidate short position between now and then.