The Role of The US Dollar Index on the Grain Complex

The US Dollar & Commodity Pricing

As commodity buyers, it is important to keep an eye on the price of the U.S. Dollar.  This is because “usually” there is a strong inverse correlation between the U.S. dollar and the price of commodities.  Logically, if the U.S. dollar is strong, it makes commodities priced in U.S. dollars more expensive relative to competing products worldwide.  Conversely, a weak dollar makes U.S. commodities more attractive and in demand.

US Dollar Index vs. CRB Index
The U.S. Dollar Index and the cash CRB index generally has an inverse relationship

The State of the U.S. Dollar

The dollar is in an intermediate uptrend.  Expectations are for further rally to complete wave C of II.  However, this may be the final up sequence for some time.  Current price projections are for the wave to finish in the 99.50-100.50 range.  That should complete the wave II correction higher and set the stage for a weaker U.S. Dollar.  With the June contract at $97.34, there is a small potential upside in comparison to the potential down move when the wave is complete.

US Dollar Index intermediate uptrend
The Dollar Index will likely continue its intermediate uptrend into the 99.50-100.50 range, then correct downward.

Forecasting the Grain Complex from a Buyer's Perspective

If were to apply this forecast to the grain markets, we would expect further pressure on the downside for a short period and length; then, an easing of strong dollar pressure and ultimately a tail wind to the grain markets as a falling dollar supports U.S. commodity prices.

That being said, I’m not sure it is worth the wait (or risk) for a buyer to be patient.  Looking at 10-year histories of Corn, Soybeans, and Wheat, you can see that current price levels are in the 10th, 4th, 11th percentiles, respectively.  So, where’s the reward in waiting?  Why risk missing out on value when the reward you get if you are correct is so little in comparison to the pain you experience if the unexpected occurs and the market psychology changes?

Adding to the risk to the upside are the large speculative fund positions.  As of Friday’s CFTC report, large specs are currently short a net 334,000 corn contracts (a record), short a net 146,000 soybean contracts, and a net 104,000 SRW Wheat contracts.  In aggregate, large speculative funds are net short 585,000 (a record) grain contracts.  This is a recipe for a violent trend change to the upside as funds buy back their short contracts and reverse positions to go long the markets once a bullish story develops.

Actionable Steps for Buyers

You can see with the Trilateral Bullish Sentiment Index, current levels have pushed all 3 markets into their buy zones.

the risk of missing the value the market is offering, it is an easy decision to procure your ingredients through 2019 and part of 2020.  If one was to lock in their prices throughout 2019 and the market did make new lows, they should sleep like a baby because that is good risk-management.  On the other hand, if the greedy (or complacent buyer) waited and the story changed…..there wouldn’t be much sleeping going on….of course, we all know what happened to the chicken that tried to get that last kernel in front of the ax-wielding,  hungry farmer.