Dome of Death

Last night, the US reported weekly sales of roughly 1Mmt of wheat, including sales to China and South Korea.  This is a big volume in anyone’s language, especially when the trade were expecting sales in the range of 200-500kmt.  It is good news for a commodity that has seen slow demand at a time when there are concerns around a hunger crisis.  Yet the market closed lower 15c/bu.

The second example I’d use is the US weather.  The forecasts for the next 15 days calls for hot and dry conditions as corn enters the critical pollination stage.  The key areas of Nebraska, Iowa and Illinois (circled) look to remain dry with above average temperatures.  Market analysts call this the Dome of Death, representing a meteorologically stable high pressure system. Corn is super important to the wider ag commodity markets as it is the cheapest feed source, but also vital in renewable energy mandates. With tightening global stocks, the US weather is poorly timed with a heatwave in Europe as well as supply issues in Ukraine fuelling fears of demand rationing.  Historically, this should be enough to spur a market rally.  Yet the market continues to come under pressure.

It appears to be a case of macro-economic concerns dwarfing the fundamental drivers of the ag markets.  In the case of wheat, the open interest – a measure of the volume of active trades at any one time – is at very low numbers.  The lack of liquidity in the market is distorting ‘normal’ market movement and allowing outside factors  – in this case the negative macro-economic sentiment – to drive the bus. 

It has becomes difficult to trust a market that appears to be shrugging off some solidly bullish influences.  The cash market and the futures market appear to have come to an amicable settlement and gone their own ways.  Cash appears to be holding up resolutely in the face of a falling futures market and gives some hope that the fundamentals will prevail.