Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
You can access both of our platforms from a single Saxo account.
Agriculture sector rally led by coffee, corn and cattle
Ole Hansen
Head of Commodity Strategy
Key points
- The agriculture sector is off to a strong start this January, with tight supply driving arabica coffee and cattle futures to fresh record highs, while corn trades near a 15-month high
- Ongoing momentum attracting a great deal of speculative buying, not least in corn which has seen the hedge fund long rise to a May 2022 high
- Cotton potentially ripe for a short-covering bounce after spending the past six months consolidating following a major slump during the first half of 2024
The agriculture sector is off to a strong start this January, with tight supply driving arabica coffee prices to fresh record highs. Corn's near non-stop rally since last October has seen it reach a 15-month high amid tightening US and global supplies. Overall, the Bloomberg Agriculture Total Return Index, which holds 75.3% of its exposure in six grains and oilseeds and 24.7% in three softs, is up 4.4% this month after managing a modest 3.4% gain last year.
In addition to these gains, the livestock sector is trading sharply higher amid record high futures prices for beef in Chicago. This is driven by tight supply due to a dwindling herd, a very cold January delaying the fattening process, and import restrictions on beef from Mexico amid disease controls.
Conversely, cotton has spent the past six months consolidating following a major slump during the first half of 2024. While the fundamental outlook remains challenging, it is worth noting that prices have stopped falling despite a near-record short position held by speculators.
Below table, shows managed money positions across the four agriculture commodities mentioned in this update. This data is published weekly by the US CFTC in their Commitment of Traders reports, and in our regular updates we watch positions and changes made by this group of traders as they tend to anticipate, accelerate, and amplify price changes that have been set in motion by fundamentals. Being followers of momentum, this strategy often sees this group of traders buy into strength and sell into weakness, meaning that they are often found holding the biggest long near the peak of a cycle or the biggest short position ahead of a through in the market.
Corn supported by export and ethanol demand, and lower 2024 production
Corn prices have rallied strongly over the past five months. Last week, the March futures contract traded in Chicago hit a 15-month high at USD 4.94 per bushel, marking a 37% rally from the August low. This ongoing rally, without major corrections, has seen continued buying from momentum-chasing hedge funds. This culminated in the week ending January 21, when the net long position hit a May 2022 high of 312,000 contracts.
The primary factors contributing to the rally have been tightening US and global supplies. The recent acceleration occurred after the US Department of Agriculture reduced US harvest estimates and the carryout, i.e., the amount of stock left in storage at the end of the current crop season, due to increased demand for ethanol and exports. From a technical perspective, some resistance is now lurking just below USD 5 per bushel, and followed by USD 5.10 per bushel, potentially pointing to some consolidation and perhaps a small correction towards the bottom of the established channel.
Arabica Coffee rally supported by tariff risks and low stocks
Arabica coffee prices continue to reach fresh record highs, driven by the prospect of a lower 2025/26 crop in Brazil, the world’s top producer. This following a 2024 that saw severe drought being followed by heavy rains, the combination of which damaged Brazil’s coffee crop to the extent that Conab, Brazil’s crop agency, this week lowered its 2025/26 production outlook for Arabica to 34.7 million bags, a 12% reduction from the previous season and the lowest since 2022. Additionally, the risk of tariffs on imports to the US has helped underpin prices, with the weekend spat against Colombia, a top three producer, supporting the rise seen on Monday.
The Arabica coffee futures contract traded in New York, which primarily sources its supply from Brazil and Colombia, has reached a fresh record at USD 3.64, an 86% increase over the past year. On a total return basis, taking the positive carry (backwardation) when rolling futures contracts into account, the gain is 108% during this time. Money managers hold an elevated long which will be held as long positive momentum can be maintained.
Cotton treads water with record spec short in focus
Following a major decline during the first half of last year, cotton has since stabilised within a wide range of USD 65 to 75 cents per pound, and currently a minimum break above 70 cents per pound is needed to change the negative outlook. Notably, managed money accounts have held a net short position for a record-breaking 39 weeks. As of the week ending January 21, this position reached nearly 48.4k contracts, potentially increasing the risk of short covering on a technical break to the upside.
The weakness has been driven by a combination of weak global demand and competition from synthetic fibers. Record-high production in Brazil has created a more competitive environment for U.S. producers, compounded by the strong dollar, which has made American cotton less competitive and reduced its market share.
Recent commodity articles:
27 Jan 2025: COT Report: Commodity buying extends to fourth week
24 Jan 2025: Commodities weekly: Trump tariff threats and energy agenda in focus
23 Jan 2025: Crude oil weakens amid tariff uncertainty
22 Jan 2025: Gold and silver see fresh gains as Trump 2.0 era begins
20 Jan 2025: COT Report: Elevated commodities longs face short-term risks
17 Jan 2025: Commodities weekly: Strong January rally pauses ahead of Trump
15 Jan 2025: Q1 2025 Commodity outlook: A bumpy road ahead calls for diversification
14 Jan 2025: COT Report: Hedge fund long jumps to 17-month high led by crude, gas and metals
13 Jan 2025: Crude oil rally amid winter demand and Russian sanctions
10 Jan 2025: Commodities weekly: Strong start to the year led by energy and metals
7 Jan 2025: COT Report: Managed money's year-end positioning in forex and commodities
20 Dec 2024: Silver's resurgence in 2024: A precious metal with an industrial edge
17 Dec 2024: Investors cash in: Gold and silver see year-end profit taking
17 Dec 2024: Podcast: A wild ride in 2025 awaits
16 Dec 2024: COT Report: Agriculture in demand; Traders lift bets against the euro
13 Dec 2024: Commodities weekly: The forward curve and impact on returns
10 Dec 2024: Brazil's coffee crisis pushes Arabica to all-time high
9 Dec 2024: COT Report: Speculators bought crude and gold: euro shorts reach 4-year peak
6 Dec 2024: Commodities weekly: Copper rises on China optimism; OPEC delay signals crude weakness
3 Dec 2024: COT: Mixed week in commodities as dollar buying continued
Podcasts:
29 Jan 2025: The DeepSeek winners emerge
27 Jan 2025: DeepSeeking missile strikes global markets
24 Jan 2025: Four days in, Trump continues to dominate headlines, but ...
20 Jan 2025: Trump 2.0 swings into action
17 Jan 2025: Brace for Monday, as a new era begins
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: The ride just got rougher
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
China Outlook: The choice between retaliation or de-escalation
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
Commodity Outlook: A bumpy road ahead calls for diversification
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX outlook: Tariffs drive USD strength, until...?
John J. Hardy
Chief Macro Strategist
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...