Money Flow

What’s Happened…

There are many participants that make up a market. Small speculators try to make money buying or selling futures or options. Typically, these traders may trade one or more contracts; not usually the largest segment of market participants. Larger speculators could be individuals with access to large sums of money or are, most commonly, investment firms seeking returns for their investors. These are considered professional investors, like hedge funds and asset managers. Their open contract positions at the daily close meet or exceed the Commodity Futures Trading Commission (CFTC) reporting threshold for a specific market. Because they cross this limit, their brokerage firms must report their exact positions daily to the CFTC. 

These positions are published in the Commitment of Traders report each Friday by the CFTC, displaying data through the previous Tuesday. This report informs who market participants are and the level to which they are net long or net short. For row crop commodities, the trend of buyers or sellers entering or exiting the market can give clues to the overall market sentiment.

Why this is Important…

Knowing who is in the market and to what extent can help determine if a market trend is becoming over-extended. As an example, if participants are at historically high or low levels, the market may be vulnerable to a change in direction. The most recent CFTC report indicated a record net long corn fund position by money managers. This suggests that investment dollars believe the corn market is worth owning and they do so by buying futures and call options.  

Yet, being aware of the flow of money is critical. Are funds adding or reducing positions? If the funds are adding positions and the market price of a commodity is higher (such as in the corn market recently), it signals a momentum for higher prices. If funds appear to be reducing positions, this may signal a potential change in trend. For a farmer, this may be a signal to sell. 

If an exodus occurs, a swift move in the future’s price could be experienced. In other words, if funds in mass exit their long positions, they do so by selling contracts. If large volumes of sell orders hit the market at one time, this could push prices significantly lower as they search for buy orders.

What can you do about it?

The first thing you can do is to make yourself aware of who is in the market and to what extent. Your advisor will likely monitor this and can keep you informed. The second is to be prepared for change. A price rally that takes weeks or months can experience a rapid decline, often faster and lower than might be expected. How might this affect the bottom line to your farm operation? Here too, your advisor may be able to help guide you as to when to pull the trigger on cash sales or hedges. The key is a pre-planned executable strategy when market signals dictate. Early awareness in the change of money flow can keep you ahead of the game.

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 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.

Author

Bryan Doherty