Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Commodity Strategy
Summary: The grain market will turn to grain fundamentals from the macro economic developments later today when the US Department of Agriculture releases its Prospective planting 2020 report. Market surveys are looking for a bigger acreage allocation to corn and soybeans while wheat may settle for the lowest acreage on record.
What is our trading focus?
The turmoil in global markets this past month have also impacted the agriculture sector. Grain and oil-seed futures together with cotton have seen elevated volatility with the impact of the Covid-19 being felt differently, depending on whether supply or demand has been the focus. Hoarding of wheat from stay at home consumers lifted wheat prices while pent up buying demand from China supported soy-meal buying towards livestock feed.
At the bottom of the table we see the negative spill over effect of the collapse in oil prices. Ethanol production accounts for around 39% of US corn demand and with gasoline prices and demand falling that trade has been negatively impacted. Cotton has also been hit as the cost of synthetic fibers, made from oil related chemicals, has fallen while clothes sales around the world has taken a major hit.
Later today however the attention will, at least temporary, turn from macro-economic developments to crop fundamentals. At 16:00 GMT the US Department of Agriculture will release its prospective planting report for 2020. The report will show how US farmers intend to allocate their acreage between the different crops.
Surveys carried out by Reuters and Bloomberg both point to an increase in the corn acreage to a seven-year high while the soybean acreage is expected to hit the 3rd largest ever. The acreage allocated to wheat meanwhile is expected to drop to a record low below 45 million acre. Thereby continuing a forty year trend of lower acreage being allocated to wheat. This as competition from other regions, especially Europe, the Black Sea and Australia have shifted the focus towards soybeans due to Chinese demand and corn due to the mentioned ethanol production.
Recent developments may alter the these initial projections and leave the market response a bit more calm than seen in the past. From a speculative perspective wheat is the most vulnerable to a bearish outcome given the current price level and the recent buying. Corn and soybeans meanwhile both lingers near the bottom of their trading ranges and could find support should the acreage turn out lower than expected.