Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The multi-year downtrend in grains is no more
Ole Hansen
Head of Commodity Strategy
Summary: US crops have witnessed a strong quarter led by soybeans in response to record demand from China and adverse weather in the U.S. lowering the yield outlook. As a result the Bloomberg Grains Index has broken the downtrend going all the way back to 2012.
What is our trading focus?
CBOT Soybeans - SOYBEANSNOV20
CBOT Corn - CORNDEC20
CBOT Wheat - WHEATDEC20
AIGG:xlon - WisdomTree Grains ETX (UCITS eligible)
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The grain market rally which during the current quarter has lifted the Bloomberg Grains Subindex by 10% is showing signs of consolidation. Soybeans which reached the highest level since April 2018 on Monday has together with both corn and wheat been drifting lower as the stronger dollar reduces the competitiveness off US farm products on the global export market.
Since July a record amount of soybeans and corn has been sold to China after the country’s own production was reduced by month of torrential rain. Adding to this a deteriorating yield outlook for U.S. crops after adverse August weather and the outlook for further gains look promising over the coming months.
The WisdomTree Gains ETC (Ticker: AIGG:xlon and UCITS eligible) is designed to track the Bloomberg Grains Subindex Total Return. An elevated contango due to excess production has seen the index trade within a downtrend since 2012. As per the chart, the recent rally has triggered a breakout with the next level of interest to confirm it being $3, the January high.
Bulging stocks from a continued rise in production in recent years helped keep the forward curves in a state of contango where the spot futures contract trades lower than the next. It meant that passive long only investors were facing headwinds from negative roll yields.
The rally during the past two months, especially in soybeans have flattened the forward curves and sharply reduced the mentioned headwind. The average one-year roll cost using Bloomberg Commodity subindexes of corn, wheat and soybeans has during the past month collapsed to just -1%, the lowest since 2014.
Since July, continued strong demand from China for corn and especially soybeans together with local weather worries have given prices a solid boost. Thereby hurting speculators betting on negative roll yields and record production to support lower prices. Especially in corn which up until recently was the most shorted commodity. Currently, the biggest seasonal net-long in many years could potentially be threatened by harvest-friendly U.S. weather boosting supplies of soybeans and corn over the coming weeks.
Overall however the direction from here is likely to be determined by the dollar and continued Chinese buying. While a period of consolidation may be warranted we may have seen developments strong enough in recent months to put the grain market on a firmer footing.
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