Global agricultural markets are experiencing what many consider a historic rally, characterized by a contango structure where deferred contracts trade at premiums while nearby contracts sit at discounts. This unusual configuration suggests that bulls and bears may essentially be the same participants, as the market oscillates between elevated valuations and forward-looking narratives. The most challenging aspect of research is no longer gathering information, but rather selecting and organizing it once acquired. Raw materials are merely unrefined ore; it is the careful selection and arrangement that reveals the artistry of analysis. Evidence is inherently constructed—researchers decide which data to seek, how to record it, and how to present it.

As a fundamental-focused agricultural research institution, we assess current price levels—US soybeans at 1,350 cents, US corn at 550 cents, and international raw sugar at 20 cents—as approaching what could reasonably be considered the ceiling. Geopolitical tensions involving Ukraine and Russia, weather developments including potential El Niño conditions, and rising energy, fertilizer, and pesticide costs stemming from Middle East shipping disruptions have combined to create a comprehensively bullish narrative. However, it is unreasonable to discuss narratives while ignoring valuation metrics. On the ceiling side, following the inventory-to-sales ratio pricing framework, current prices no longer support additional long positioning. On the narrative side, geopolitical factors, weather concerns, and relatively low agricultural-to-industrial price ratios provide ammunition for bullish conviction. This tension represents the core issue at hand.

Where the Crowding Begins

The current rally traces its origins to February 2026, when cotton's non-commercial positioning in overseas markets first shifted from net short to net long. By mid-April, cotton had reached its highest seasonal net long level in five years. From there, bullish sentiment progressively spread across other commodities. US soybean oil and cotton have been the strongest bullish vehicles this year, with soybeans, corn, wheat, and raw sugar taking over the baton after May. According to the latest CFTC data, sugar fund net longs swung from approximately -55,000 contracts to +181,000 contracts within three months, corn net longs increased by roughly 150,000 contracts, and cotton and coffee saw simultaneous additions to long positions—bullish sentiment has climbed to its highest level since February 2022, when the Russia-Ukraine conflict began.

Domestic futures markets in China have also experienced a fresh wave of activity. Most agricultural product contracts have seen open interest reach new highs. Hog futures surged from previous levels of around 100,000-200,000 contracts to 500,000 contracts—a landmark development. Soybeans, corn starch, red dates, and peanuts have also recorded significant market participation growth. This reflects rising speculation ratios and serves as a direct indicator of market consensus and crowded long positioning. However, it must be emphasized that crowding alone cannot directly indicate either the start of a new narrative or the formation of a top—we must still combine this with fundamental realities when making long-cycle positioning decisions.

Why Corn Anchors Global Agricultural Pricing

In our baseline projections, overseas corn serves as the anchor for global agricultural pricing for three reasons: production volume, trade scale, and liquidity. Corn ranks first globally in crop production at approximately 1.3 billion tons, matches wheat as the largest trade category, and leads significantly in futures daily trading volume at 440,000 contracts. We have sufficient evidence to consider corn as the stabilizing force in the long-only complex.

The Catalysts: North American Weather, Black Sea Disruptions, and Rising Costs

The most important drivers of this rally include North American weather patterns, El Niño expectations, and potential disruptions to Black Sea trade flows. On the Black Sea front, Ukrainian grain exports totaled only approximately 820,000 tons from August 1-26, compared to roughly five times that amount during normal logistical conditions—August exports effectively halved. More critically, disruptions at Black Sea ports escalated significantly in August: Ukrainian forces attacked grain export facilities at Novorossiysk port, while Russian retaliation damaged storage infrastructure around Odesa, resulting in reduced shipping lanes, suspended operations, and surging war insurance premiums. Under current export restrictions, both Russian and Ukrainian grain exports face enormous pressure. Russia accounts for approximately 20% of global wheat trade, while Ukraine contributes about 11% of global corn trade. Pre-conflict Ukrainian wheat export expectations of approximately 46 million tons have been revised down to around 30 million tons, representing 5-9% of global wheat production. Ukrainian corn export forecasts have been cut from 22 million tons to 14-19 million tons, representing 2-4% of global corn production. This disruption has effectively created a Black Sea supply shortage, forcing global buyers to seek alternative sources from the United States, Brazil, and Argentina. Consequently, US corn and soybean export competitiveness has improved significantly, providing CBOT grains with ample risk premiums.

Simultaneously, the Russia-Ukraine conflict and Middle East tensions have pushed up costs for crude oil, diesel, fertilizers, and shipping. Energy and fertilizers account for 60% or more of variable costs on US farms. Supply constraints on fertilizers, organic fungicides, and pesticides further pressure subsequent yield expectations—the rigid upward movement in costs provides another layer of support for agricultural prices.

Domestic Realities: K-Shaped Divergence Under Demand Negative Feedback

Pricing domestic agricultural commodities based on overseas markets requires acknowledging a set of fundamental domestic characteristics—declining demand and negative feedback loops. This year, China's deep-processing corn consumption has fallen by at least 5% year-on-year, and apparent consumption of 24-degree palm oil has dropped from a previous monthly average of 350,000 tons to below 200,000 tons. Under weak demand conditions, domestic agricultural product inventories are generally elevated: soybean import inventories have reached multi-year highs, peanut oil inventories are up more than 10% year-on-year, corn starch inventories sit at five-year seasonal highs, and domestic sugar industrial inventories have surged approximately 98% year-on-year (reaching about 4.49 million tons as of June 2026 versus approximately 2.26 million tons a year earlier).

We observe a critical divergence—this is not a K-shaped split where industrial commodities outperform agricultural commodities, but rather, within global agricultural products, overseas markets demonstrate stronger upward elasticity compared to domestic markets. This overseas sentiment spillover has driven several interesting spread structures. For palm oil, September imports once showed import profits of 400-500 RMB per ton, an extremely rare historical occurrence suggesting valuation pressure on domestic near-month contracts. For sugar, even at a 50% tariff, import costs of approximately 5,200-5,300 RMB per ton do not represent particularly low valuations. For cotton, the domestic-overseas price spread (3128B versus overseas cotton at 1% tariff) once reached 4,500 RMB per ton—though it has since narrowed, domestic valuations remain elevated relative to historical seasonal levels. Corn represents a relative exception: as US corn rose from 410 to 540 cents, domestic corn import profits continued to shrink, with import costs around 2,400 RMB per ton at the 1% quota tariff. But when systematically examining valuation percentiles alongside domestic inventory and demand scenarios, we understand that agricultural valuations domestically are not actually cheap. Corn's "relative cheapness" is more a function of internal-external spread structure than absolute valuation attractiveness.

Unexplored Upside: What Imaginative Scenarios Remain

Since valuations are no longer inexpensive, the next critical research step is to examine what fundamental factors might not yet be fully priced in, leaving room for bullish expression. This depends on forward-looking imagination. For US soybeans, ending stocks are currently estimated at approximately 320 million bushels. In our forecasting framework, upside surprises could come from both production declines and accelerated exports. Simply put: driven by biodiesel, US soybean crushing has historically stepped up—from approximately 2.45 billion bushels in 2025/26 to about 2.78 billion bushels this year (confirmed at 2.78 billion bushels in the USDA August 2026 report). This significant demand escalation means supply cannot afford any downward surprises. Additionally, with improving US-China trade agreement prospects, export expectations could be revised upward from the relatively negative 1.66 billion bushels to above 1.7 billion bushels. If all goes well, the 2026/27 US soybean balance sheet could see meaningful inventory drawdown, with ending stocks potentially falling to 170-210 million bushels. Should this materialize, valuations could approach 1,500 cents or higher.

For sugar, the key pricing logic involves two factors: excessive rainfall since Brazil's crushing season began has reduced processing volumes, and India's sugar production estimates continue to be revised downward. Due to ethanol diversion, Brazilian and Indian sugar production could fall significantly below 28 million tons, while Thailand's 2026/27 production is expected to decline approximately 15% to around 9.5 million tons. A recent catalyst for raw sugar has been India's decision to open an approximately one-month import window, with expectations of 1 million tons of imports, further tightening the global sugar balance sheet. Potentially underpriced factors include Brazilian ethanol—if ethanol benefits from stronger fossil energy prices, it could drive a trend toward lower sugar-ethanol ratios—and European beet sugar, where planting area contraction is relatively fixed and likely to persist for several years. As for India, 2026 southwest monsoon rainfall was approximately 13% below year-ago levels, significantly exceeding the 8% warning threshold. However, reduced rainfall in the current year can be partially offset by irrigation water, with the true production impact possibly delayed until 2027. Some institutions have already characterized this year's global balance as having a deficit of approximately 1 million tons, with bolder estimates raising next year's deficit to 2.5-3 million tons, leaving room for further upside in raw sugar narratives.

The remaining significant bullish logic points to El Niño. Should El Niño materialize, Southeast Asian countries including Indonesia and Malaysia (as well as Vietnam and Thailand) could face significantly reduced rainfall, and palm oil is the most production-sensitive crop to such conditions. Based on the 9-12 month lag effect of production reductions, if realized, Indonesian and Malaysian palm oil production for 2026/27 could decline by approximately 3.2 million tons and 800,000-1 million tons respectively, representing a combined year-on-year decline of nearly 4 million tons. Combined with demand-side policy: Indonesia's B50 mandatory blending takes effect July 1, 2026, with domestic palm oil feedstock demand rising from approximately 14 million tons under B40 to 17.5-18 million tons, representing incremental demand of about 1 million tons in the second half of 2026. With both supply and demand contracting, a structural deficit could emerge.

Current agricultural demand is typically tied to policy, with Indonesia's B50 and the US biodiesel bill serving as two major pillars. The EPA's Renewable Fuel Standard (RFS) finalized on March 27, 2026 specifies 2026 biomass-based diesel volumes (including SRE reallocation) at 9.107 billion RINs, rising to 9.20 billion RINs in 2027; advanced biofuels at 1.110 billion and 1.132 billion RINs respectively; and total renewable fuels at 2.681 billion RINs for 2026 and 2.702 billion for 2027. Even with some production increases, RIN inventories could be rapidly compressed from approximately 960 million gallons at end-2025 to near 200 million gallons, approaching minimum operating buffer depletion. Under this driver, biomass-based diesel production increases significantly, US soybean oil inventories fall to five-year lower bounds, and non-commercial net longs in US soybean oil have remained at seasonal highs since 2026. Even at full capacity, achieving annual targets would require monthly average production of approximately 916 million gallons in 2026 (991 million in 2027), far exceeding the 2023-2025 monthly averages of 572/655/714 million gallons. The only month approaching target pace in the entire observation period was December 2024 (approximately 906 million gallons). With actual production in the first half of 2026 running low, remaining months would need monthly output near 1.15 billion gallons—more than 20% above the highest single month historically. Feasible solutions include increasing small refinery exemptions or accelerating biodiesel imports—with RIN prices rising rapidly, imported blending does offer profit margins. Overall, the US biodiesel bill's support for vegetable oil demand is a crucial element, making the soybean oil balance sheet full of "imagination."

Another consistently tracked demand outlet is India. In July 2026, we finally observed significant year-on-year anomalous growth in Indian vegetable oil imports, with monthly apparent imports finally exceeding 1.5 million tons. Combined with India's month-end inventory at a moderate-low position around 2 million tons, further import demand could be stimulated. Collectively, this represents a market with upward elasticity that has not yet been fully priced.

Historical Lessons: Substantial Production Shortfalls Are Prerequisites for Systematic Rallies

Our overall assessment is that current bullish sentiment has reached relatively extreme levels. Reviewing major agricultural rallies over the past six to seven decades—the 1972-73 global wheat shortfall combined with Soviet buying spree, the 1988 North American drought, the 1995 US production decline, the 2007 first biofuel expansion alongside low inventories, the 2012 US drought with Russian dryness, and the post-2020 global inflation with the Russia-Ukraine conflict—the preliminary conclusion is that agricultural price surges must see "substantial anomalous production declines." Geopolitical narratives alone, or inflation narratives alone, are insufficient to constitute systematic upside. This is precisely why grand narratives ultimately get repriced. Recent rallies also follow this pattern: 2020 (China corn production decline plus national reserve destocking finale plus post-African swine fever pork impulse), 2021-2022 (Russia-Ukraine conflict plus La Niña plus palm oil export ban, with CBOT corn briefly breaking $8 and soybeans exceeding $17), the second half of 2023 (global rice export restrictions), and 2024 (successive West African production declines from weather, with cocoa up 180% and coffee up about 70% that year). Notably, all previous upward moves were supported by ample "production shortfall facts"—but this year, we find that production shortfalls are not so evident.

Our key valuation methodology uses inventory-to-sales ratios of major producing or exporting countries as explanatory variables to establish pricing simulations for futures composite indices (quarterly OLS valuation models). Using the latest supply-demand data to derive "model-fitted prices" as fair values, then comparing actual prices against fitted prices measures valuation deviations. Research conclusions: the current market has embedded relatively obvious weather supply risk premiums in sugar, palm oil, and cotton; grains, particularly corn, have reacted more weakly. The most overvalued commodities, in order, are ICE raw sugar, domestic cotton, domestic sugar, and palm oil.

What Determines Whether the Rally Crosses Two Quarters

Statistical analysis of 25 pulse events from 1990 to 2026 (36 years) yields clear conclusions: in high-inventory environments (elevated inventory-to-sales ratios), upward pulses see prices almost entirely retrace gains within 12 months. Conversely, agricultural products in low-inventory environments that experience upward price pulses still deliver approximately 5% positive returns 12 months later. Applying this framework to current supply positioning: US corn's inventory-to-sales ratio sits at approximately the 62nd historical percentile, while soybeans sit at about the 32nd percentile. We further derive two testable judgments. First, the necessary condition for multi-year rallies: all six instances of multi-year corn and soybean rallies in the past 60 years (1972-75, 1988-89, 1995-96, 2005-08, 2010-12, 2020-23) occurred exclusively during windows of substantive global or US production shortfalls. In contrast, rallies during supply-glut periods almost entirely retraced within two quarters. Second, the threshold effect of beginning inventories: quantitative analysis shows that if US corn's beginning inventory-to-sales ratio is below 40% during rally periods, gains can persist for approximately 11 months; if above 40%, gains rarely exceed 5 months. Applying current conditions—US corn inventory-to-sales estimated around 51% and soybeans around 11%—the balance sheets sit at moderately neutral levels, not satisfying the "substantial production shortfall" precondition, suggesting the necessary condition for upside beyond two quarters has not yet been achieved.

Regarding potential El Niño pricing space: the leading indicators lie not in sea surface temperatures themselves, but in the thermal reserves below and wind field coupling. The equatorial Pacific subsurface temperature index is the most important leading variable—it typically leads the Nino3.4 index by several months. In July 2026, its anomaly reached +10 degrees Celsius at certain depths, indicating substantial warm water accumulation in the eastern equatorial Pacific from 0-300 meters, providing ample thermal foundation for subsequent surface warming. Meanwhile, the ocean's vertical structure is shifting: the thermocline is significantly deepening, cold water upwelling is suppressed, waiting for the right moment to release toward the surface. Low-level wind fields and atmospheric coupling serve as amplifiers for intensity escalation. Persistent westerly wind anomalies in the equatorial Pacific, with some areas experiencing trade wind reversals, extend from the western equatorial Pacific to the central-eastern Pacific, forming a typical positive feedback loop: weakened trade winds deepen the eastern thermocline, impede cold water upwelling, further warm the sea surface, and in turn strengthen atmospheric responses. As of late August, the BoM-measured relative Nino3.4 index reached +2.45 degrees Celsius (week of August 30), far exceeding the +0.80 degree threshold, placing conditions at "super El Niño" levels. The IRI-measured traditional Nino3.4 touched +2.7 degrees Celsius in the week of August 12, with a July monthly average of +2.03 degrees—an extremely steep warming slope. The most critical synchronous indicator is the Nino1+2 region (off South America's coast, where El Niño signals first appear): July monthly averages reached +2.9 degrees, August weekly readings rose to +3.2 degrees, with localized weekly readings touching +4.1 degrees. At the probability level, NOAA CPC assesses over 90% probability of a super event in the Northern Hemisphere autumn-winter, with a 69% cumulative probability of RONI exceeding +2.5 degrees from October to December—surpassing all historical events since 1950—with peak intensity expected around November.

The positive IOD combines with El Niño to create a "double ocean resonance" affecting Southeast Asia and southeastern Australia. The physical mechanism of positive IOD involves cooler eastern Indian Ocean temperatures and warmer western Indian Ocean, causing descending air and suppressed convection over Sumatra and Kalimantan in Indonesia, thereby amplifying El Niño's drought effects in the region. BoM data shows the IOD index previously touched the +0.40 degree positive threshold for three consecutive weeks, peaking at +0.41 degrees. The quantified impact of combined scenarios: neutral IOD with moderate El Niño provides an amplification factor of approximately 1.0x; super El Niño with positive IOD can reach 1.5-2.0x. In terms of commodity impact assessment, plotting ENSO sensitivity on the horizontal axis and cost plus substitution demand exposure from high fertilizer prices, energy prices, biofuel demand alternatives, and fertilizer-energy shares of variable planting costs on the vertical axis—with bubble sizes representing maximum price movements during the February-June 2022 period and the 2015-2016 and 2023-2024 ENSO windows—results show cocoa positioned furthest right with the largest bubble, indicating strongest ENSO sensitivity and historical price response. Palm oil, sugar, robusta coffee, and rice sit in the upper-right quadrant as commodities with dual exposure to weather sensitivity and energy/fertilizer/biofuel or cost structure support. Soybean oil ranks highest on the vertical axis, reflecting strong biofuel plus fertilizer-energy attributes. Wheat is highlighted separately in red, emphasizing its price response during geopolitical supply chain disruption windows. Soybeans, soybean oil, corn, wheat, rapeseed/canola oil, arabica coffee, and cotton sit to the left or center-left, indicating less extreme ENSO yield impacts compared to tropical cash crops, though soybean oil, corn, and wheat score higher on cost and substitution demand dimensions, with prices transmitting through cost and substitution channels. The overall conclusion: if a strong El Niño combines with energy, fertilizer, or biofuel demand pressures, the commodities most likely to amplify are cocoa, coffee, sugar, palm oil, and soybean oil—those with dual weather plus cost or substitution demand exposure.