Ag Dichotomy

Varner Brothers

Thu, Mar 3, 2016, 8:30 AM

The major components of the CRB are all enjoying small to moderate, short term bull trends. The Ag sector remains in a downtrend, as cotton, wheat, corn, soy, rice, and sorghum are all headed south. Dichotomy exists in the overall CRB, but eventually all will pull together. Based on recent lows, here are some of the new bulls. In the metals, palladium +15%, silver +10%, copper +12%, gold +19%. Crude is higher by 31%, as are its derivatives. Cattle are +17%, hogs are +36%. In the softs, sugar is +44%, lumber +19%, OJ +10%. The SP is also on the near term bull ride, +10%.

Are the Ag markets late to the party, or are they perhaps a leading barometer and indicate that all other markets will soon turn and head lower? Specs have been, and are heavily short in Ags, as seen by recent COTs. The leading commodity currencies are also in short term positive trends, with the Canadian $ +9%, the Aussie $ +7%, and the Real +7%. Scanning through charts of the 6 row crops mentioned above, we dont see any sign of a bottom or typical reversal pattern. It is also generally accepted that carryouts can rise across the board for all crops. Cotton and corn have their own unique issue with destocking of Chinese inventory, so there is a general acceptance, or perhaps apathy, that ag markets can have any kind of bull trend.

Varner View

First, lets get the Chinese policy out for cotton and corn, then we will take another look at the market. The ICAC March numbers show little change, but they did chip away at the average annual A, now at 70c for the year. A +/- 7c swing implies 63c to 77c. That suggests futures from 57c to 71c. So if one believes in ICAC numbers and a 14c high to low this year, cotton is dead on the low. Their world carryout for new crop decreases 4.4 Mb. The ratio drops from 85.7% to 81.4%. This ratio is the lowest in 5 years, and is lower than the 12/13 year (87.1%) when futures traded from 69c to 94c. Hard to imagine.

Technicals

Reference the chart today of the DB AG Index, a cycle of 185 weeks, or about 43 months, occurred on time in Jan. This cycle last occurred July 2012, then Jan 2009, then June 2005. The cycle before that ideally would fit in Dec 2001, but the index began only 2 months prior and is not clear. However, looking at the Goldman CRB, it did make a major low in Nov/Dec 2001, so the cycle is accurate and can be identified back to 2001.