By Todd Hultman
Anyone who reads DTN market analysis knows by now that we pay a lot of attention to weekly CFTC data, which tells us how noncommercial traders and commercial firms are positioned in the futures markets. Knowing how these two groups look at markets differently, and typically oppose each other, yields numerous market clues throughout the year that can provide valuable tips as to where prices are headed.
We can't say one group is always right or wrong, as both sides have pros and cons, but understanding the context of the market makes these clues valuable.
For example, during the ethanol boom of late 2006 until 2012, noncommercial traders poured large sums of new investment money into grains and drove prices to record highs, especially when drought added to the market's bullishness. At extraordinary times like these, the flow of noncommercial money becomes the dominant driver of prices.
In more normal times of surplus, as we have seen since 2013, keeping an eye on commercial activity has become important. Commercial firms aren't super-human, but when the market is in surplus, they have at least two advantages over speculative traders worth noting.
First, commercial grain companies know demand better than anyone else. Before USDA releases its weekly export data, commercial firms already know how well grain is moving, who is buying it, and how much. They do not know the whole story, but they are on the pulse of the market.
Second, commercials take positions based on actual economic value, not on some prediction of where they think the market is headed. Just because commercials are long on the futures board, for example, does not necessarily mean they are bullish about future prices. They are simply taking advantage of opportunities to move grain at a profit, using a combination of cash and futures commitments.
The irony of this, however, is by not predicting where the market is headed, commercials tend to buy low and sell high and end up giving us important market clues about a contract's economic value. Last year saw several examples of valuable commercial tips at work.
The year's most impressive commercial performance happened in corn, starting with a modest short position from mid-February to early March when Dec 2017 corn was challenging $4.00 a bushel. Positions then changed to net long from late March to late May when prices were chopping around $3.80 to $3.95.
In a nimble series of moves, better than any gypsy fortune teller could have pulled off, commercials that were net long Dec corn on May 30 at $3.86 turned net short on June 13 at $3.99, and back to net long on June 27 at $3.77 1/2. They then went more heavily net short on July 11 at $4.14, and stayed net short until September 12 when Dec prices were $3.51 1/2.
Commercials have remained net long in corn since September 12, losing some of that predictive glitter the past few months as spot prices have crawled lower, but time will tell if higher prices are yet to appear in corn's future.
Other grains also showed valuable tips from commercial positions. In the case of soybeans, there was no better clue this year than when commercials put on their largest net-long position of the year on June 27, just two days before the U.S. Drought Monitor showed increased drought conditions heading into Iowa. November 2017 soybean futures prices surged from $9.17 1/2 on June 27 to over $10 by the time commercials turned net short three weeks later.
In the case of Chicago wheat, commercials are typically long when wheat prices are cheap. However, we have to note that commercials put on their largest net-long position of the year on April 25 and stayed net long until July 3, catching a drought-related rally that took July wheat prices up over a dollar a bushel.
As seen in the corn example above, not every futures position commercials put on in 2017 turned out to be a golden ticket for those wanting to piggyback trades, and we can't say everything commercials do in 2018 will have the Midas touch either. By a wide margin, however, commercials earned the Crystal Ball Award for the fifth consecutive year and solidified their place as an important part of DTN's Six Factors Market Strategies.
Todd Hultman can be reached at Todd.Hultman@dtn.com.
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