Over the past two articles, we’ve talked about managed money (also referred to as “hedge funds” or “the funds”) and its impact on upward and downward movements of the market. Two key takeaways:

• Key takeaway #1: In aggregate, managed money tends to buy into a rising market and sell into a falling market while farmers, in aggregate, are net sellers in both rising and falling markets. This helps explain why markets tend to rise slowly (as farmer sales offset hedge fund demand and slow upward momentum) and fall quickly (as everyone is selling, accelerating a decline). (See July 2023’s Managed Money Part 1: What Has It Done for You Lately?)
• Key takeaway #2: When the funds, in aggregate, approach extreme long positions (about 300,000 to 400,000 contracts) or short positions (about 150,000 to 200,000 contracts), the market tends to be ripe for a directional change, as the funds begin looking to cement the gains in their positions. (See August 2023’s Managed Money Part 2: What Can It Do for You Now?)

This all raises the question – what happened with June’s meteoric rise in prices? Prices took off with the velocity like they were going down instead of up, and managed money was nowhere near an extreme position. In fact, June kind of makes you wonder if these takeaways really do hold water. Short answer? There were some really unusual events in June which actually reinforce the takeaways of the articles. Long answer? Read on.

 

Going back to where it all started – May of 2023

 

Think back to the end of May. Dry forecasts and a general lack of rain was beginning to lift the market, as weather premium was being added (although it was still early to be too concerned about the weather). Accordingly, sellers were offered an opportunity to take advantage of a market upswing, which equated to a 40 to 50-cent increase from the 491 May 18 low. Many farmers took advantage of that respectable rally and sold much, if not most, of their remaining old crop bushels.

Concerns about a drought started to intensify upon news from the Drought Monitor on May 30 (released June 1), warning us of increased dryness. The market rallied and sold off, likely on fund profit-taking ahead of the June 9 WASDE report.

Heading into June 9, crop conditions continued to worsen and weather forecasts called for continued hot and dry weather. The market, focused on the upcoming WASDE data, anticipated some cut in yield. However, the report itself bucked expectations, maintaining acreage and huge yield estimates of 181.5 bpa. In the meantime, available domestic supply was tight. Old crop basis was still strong, a big inverse between July and December contracts showed the lack of easy-to-originate corn in the countryside (premium to July). As for old crop supply, remember that a lot of what was readily available was sold back in May. And the weather continued to look bad. For traders, the sudden and intense tightening of supply looked like a great opportunity regardless of what the WASDE data said.

 

The market takes a sharp upturn – why, when bull markets usually rise slowly?

 

Around June 12, the market took off, rising 98 cents through June 21 – in merely 7 trading days. Sadly, not many farmers could take advantage of the rally with a stocks-to-usage ratio of only 10.6% in June. Not only had farmers sold old crop in May, they were worried that they wouldn’t have a crop to sell if the drought continued, so they held back from making sales. The sharp and short rally ended on June 21 upon news that GFS and EU weather maps confirmed moisture entering the scene and an improved overall weather pattern change.

 

 

This is a key point – unlike most rallies, farmers didn’t cool down rising prices (and the market) by feeding demand. To the contrary, farmers behaved quite differently than in most rallies because they didn’t sell into a rising market, much like hedge funds generally don’t buy in a falling market. The result was unfed demand and shooting prices. Bottom line – the rally didn’t behave like normal because farmers didn’t behave like normal.

 

Why a change in market momentum given managed money’s unimpressive long position?

 

Because of the tight supply, the funds only managed to increase their long positions by a rather nominal amount. Compare the weekly Commitment of Traders (COT) data release between June 13 and June 20, which encompasses all but the starting and ending days of the rally. On June 13, managed money was long by 2,145 contracts. By June 20, they had added 56,154 contracts, thus increasing their long position to 58,299 contracts. Were these additional contracts really enough on either end of the rally to trigger a directional change in the market? After all, as we talked about last month, you can anticipate a market change when the funds are in an extreme long (300,000 – 400,000 contracts) or short position (150,000 – 200,000 contracts), neither of which applied here.

Important point here – as we talked about last month, managed money net position is only a valuable indicator in a bull or bear market when positions are extremely long or short. As demonstrated in June, all bets are off when managed money is not at an extreme position. In other words, a bull or bear market can happen at any time; you only use managed money as an indicator for a change in direction when they are in position to unload an extremely weighted position.

 

Effective marketing is more than hindsight

 

When it comes to marketing, oftentimes we spend a fair amount of time explaining what already happened by isolating one or two indicators and discussing how they shaped what happened last week or last month. This helps us learn what affects the market for insight into future situations. Nonetheless, while we focused on a few indicators in this discussion, it’s important to know that you can’t anticipate the market in a vacuum by only looking at one or two indicators. Certainly, the explosive rally in June wouldn’t have made sense at the moment if you only focused on managed money without also noting other indicators like stocks-to-use ratio or the impact of the weather. To put it simply, it’s the interplay of the indicators that can help you make decisions about marketing; paying attention to only one or two is a recipe for going astray.

At Total Farm Marketing, every day we watch over 40 key indicators that we believe have the most bearing on the market – including historical and current patterns – to make sure that we are looking holistically at the marketing recommendations we make for you.

 

We’re here to help.

 

Do you have questions about managed money, key market indicators or our recommendations? We’re here to help. Give Total Farm Marketing a call at 800.334.9779.

 

 

 

 

 

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