Managed Money Buying Corn
What’s Happened….
There are many participants in the commodity markets. There may be hedgers who sell the commodities they produce, hedgers who need to purchase commodities, and traders. Traders may come in different sizes, from individuals who may trade a single contract to money managers who might trade thousands of contracts. Each week, the CFTC (Commodity Futures Trading Commission) publishes a report called the Commitment of Traders. This report breaks down participants in a particular market and categorizes them. One of the categories is managed money. This is considered money managed by large traders, and in some cases hedge funds. The market will pay attention to the money flow from managed money in order to gauge the sentiment of a commodity – is it bullish or bearish? In the corn market, the managed money position has gone from a net short position (sold) of near 250,000 contracts in midsummer to recently just over 228,000 contracts net long (bought), a large and noticeable swing in position and sentiment.
Why this is Important….
So, what has changed the minds of money managers to go from net short to net long? Are large traders anticipating a smaller yield on the January crop production report? Potentially, yet it is likely a combination of many items that have managed money aggressively buying. Demand has been on the rise, as was evident in the December WASDE (World Agricultural Supply and Demand Estimate) report, which indicated a surprisingly large increase in exports of an additional 150 million bushels annually combined with an additional 50 million annual increase in ethanol usage. The most recent USDA yield estimate is 183 bushels per acre, a record. Is it possible that estimated yield is too high? Some might believe so. Also adding uncertainty to the supply picture was a large portion of the crop that was harvested at a drier-than-normal moisture content, suggesting a potential loss in yield.
What can you do about it?
Having a working knowledge of who the players are in the marketplace can help develop strategy. As an example, with managed money on the long side of the market, corn producers should be concerned that prices could drop quickly if fund managers decide to exit and sell. Your strategy could be to make cash sales. If you want to stay in the market, consider buying call options. Call options have a risk that is fixed to the premium paid plus commission and fees.
On the other hand, if you are a buyer of corn for feed, note that managed money is making a bet that prices will move higher. Whether this is predicated on actual events such as increased usage or anticipating that weather conditions may adversely impact production remain unknown. It might be as simple as the idea that managed money may want to own a commodity that is considered a good value, used worldwide, and must be produced in large quantities in all major corn-producing countries each year. After two years of large world production, the odds of a third record crop might be viewed as slim. Whatever the reason, managed money has built a formidable long position. As an end user, recognize that the price trend may be turning higher, and securing actual cash corn or using a futures or options tool to offset risk may be prudent.
Find out what works for you….
Work with a professional to find the strategy or strategies that are best suited for your operation. Communication is important. Ask critical questions and garner a full comprehension of consequences and potential rewards before executing. The idea is to make good decisions for the operation and less emotionally charged responses to market moves, which are always dynamic.
About the Author:With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Examples of seasonal price moves or extreme market conditions are not meant to imply that such moves or conditions are common occurrences or likely to occur. Futures prices have already factored in the seasonal aspects of supply and demand. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation.
Author
Bryan Doherty