TOP FARMER WEEKLY PERSPECTIVE 5/29/20 BY BRYAN DOHERTY
Managed Money Betting on Big Crops
A fast start to the planting season and a lack-luster export market has prices for row crops trading mostly sideways over the last month and weaker since the beginning of the year. When price trends develop, they typically move in a direction for some time. Often this trend will invite managed money which follows the trend. Consequently, with row crop prices down, managed money (also known as funds) have been on the sell side. The potential for big crops has managed funds net short, anticipating end users will only buy as needed.
As the season progresses, managed money will determine whether to add short positions or exit. Each week, the CFTC (Commodity Futures Trading Commission) releases their Commitment of Traders Report, a report indicating who is in the marketplace and whether they are net long or short. When investors reach a certain size of contracts, the CFTC requires reporting. Each Friday, the report is released and shows positions through the previous Tuesday. The most recent report indicated funds were net short just over 245,000 contracts, an increase from 214,000 the prior week. Historically, this is a substantial position and indicates the market trend for the price of corn is either sideways or lower. It may also represent fund managers’ confidence in planting progress this spring as well as expectations for high yield and increasing carryout.
Soybeans, on the other hand, have experienced a net long fund position, yet it, too, lost ground from the prior week. Managed money is estimated net long 12,064 contracts versus 32,465 the week prior. With soybean planting off to a fast start at 65% complete compared to the five-year average of 55%, combined with a slow export market and increased tensions with China, fund money is moving out of longs. If weather stays good, expect they could go net short. It is likely the near-term concern over US/China relations is the biggest reason why money may be headed to the sidelines.
The same story can be said for wheat. Funds have been net long wheat on prospects of dry weather in Europe and the Black Sea region, not to mention the western Plains. Yet, the most recent USDA report indicated near-record projected world carryout. Consequently, with COVID-19 subsiding, the idea that countries will hang on to inventory as a food source is waning. Funds are now net short 16,476 contracts as compared to long near 3,000 contracts last week, and over 70,000 long in February. Harvest is quickly approaching, which may also be reason for funds to move from long to short.
Managed money isn’t always right, though it is often reflective of fundamental factors affecting a price trend. In the case of row crops this year, ample world supplies and a lack of new favorable news in an environment of established price downtrends is problematic for producers. When sellers are short and making money, it may be said it is easy to add to positions, thus creating extra pressure on prices. We are, however, at a time of the year where weather becomes the most dominant factor for row crop production, both domestically and throughout the Northern Hemisphere. If weather were to be somewhat questionable or less than ideal, it may not take long for funds to rapidly cover short positions.
Therefore, the best strategy at this time might be for buyers of commodities to purchase call options and establish a price ceiling, while leaving the downside open if prices depreciate. If prices rally, you will have managed your risk. For grain producers, a strategy could be to purchase call options now so that, if prices rally, you can be a seller with confidence, knowing you have re-ownership in place. Large inventories suggest that when price rallies do occur, and the supportive news evaporates, prices could fall apart quickly. Therefore, it may be paramount to establish predetermined sell orders to have in place and allow them to be triggered, since your call options are already covering these sales. Price rallies should also be viewed as an opportunity to buy puts, which can establish a price floor, while leaving grain unpriced that you don’t intend to deliver at harvest.
Commodity markets are always unpredictable and dynamic. Currently, funds are short. In a matter of months, the picture could look entirely different. By having knowledge of the Commitment of Traders Report and the build-up of positions by funds, this may more readily help you establish good marketing habits and use tools to shift risk and take advantage of opportunities. There is plenty of growing season ahead and the odds are good things will change. Are you prepared?
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
Author
Bryan Doherty