Managed Money Build-Up

 

What’s Happened…

Each week, the Commodity Futures Trading Commission (CFTC) releases its Commitment of Traders (COT) report. In a nutshell, this report outlines the active participants in the commodity markets. Typically, it provides an overview showing the number of contracts being traded by commercial firms, managed money (speculative funds), and small traders. Each commodity has specific thresholds that determine when an entity or individual reaches a reportable position level. 

 

Perhaps the most critical metric is the net position established by traders, followed closely by the report’s recent trend. Since midsummer, the net long position held by corn commodity managers has been steadily rising. This tells us that the speculative community and investors are anticipating rising corn prices. To capitalize on this, they buy into the marketplace, expecting to exit with a gain once prices climb higher.

 

Why this is Important…

A week-over-week increase in net long positions suggests that speculative interest is betting on declining crop supplies, increasing demand, or both. For instance, following the corn market’s recent growing season, traders have been buying more contracts under the assumption that declining weekly crop ratings and private surveys point toward a smaller harvest. Ultimately, tracking the historical context of managed money’s net long or short positions provides valuable insight into whether prices will continue moving in a specific direction. 

 

The most recent COT report indicated that managed money is net long over 400,000 corn contracts—a record high. This can be interpreted in two ways. First, it reflects a strong collective belief that prices will move higher, prompting investors to back that conviction with capital. Second, it could imply that managed money is overextended in the market and could quickly unwind its position. 

 

A sudden mass exodus could trigger a rapid decline in prices, akin to a herd of cattle rushing for a single gate all at once. Even if a friendly fundamental argument for higher prices exists, money managers will likely begin lightening their long positions at the first sign of price weakness. This can capitulate into additional selling, causing market movements to spiral quickly as heavy liquidation takes over.

 

What can you do about it?

Prepare for potential “what-if” scenarios. If a large build-up of speculative positions points toward smaller supplies, expect volatility to remain high at any given moment. Corn producers should operate under the bias that prices can drop much faster than they climbed. There is an old market saying: “Prices take the stairs up and the elevator down.” This highlights how the market takes time to factor in bullish news, but very little time to erase gains when speculative long positions exit in a quick manner. 

 

To protect against a sharp downward slide when long positions are near record highs, consider implementing one of three strategies: 

 

• Sell cash and purchase call options. 
• Purchase put options to establish a secure price floor while leaving upside potential unencumbered.
• Place futures sell stops on futures contracts so that if prices begin to slip, those stops trigger and automatically make you a seller of futures. 

 

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 rather than emotionally–charged responses to market moves, which are always dynamic. 

 

 

About the Author: With the wisdom of over 36 years at Total Farm Marketing and 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 markets and marketing tools, an excellent listener, and communicates with intent and clarity to ensure clients are comfortable with their 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.