GRAIN FUTURES ARE and always will be affected by outside investments such as managed money funds. With the sheer size of the portfolios managed money funds carry, they have the ability to swing a big stick when it comes to pushing prices higher or lower in the grain market depending on the fund managers motivation and perspective each day.
What is managed money? Managed money funds are funds that investors have placed with qualified managers and institutions. One manager can decide where millions of dollars are invested. Throughout 2017, we saw some major peaks and valleys in the grain futures market. Sometimes the peaks and valleys are easy to justify, other times there seems to be no common sense or logic to it. Although the futures market can appear like it’s a twilight zone and figuring out direction of grain prices can seem like “mission impossible”, it is important to monitor the major players that give momentum to grain futures pushing them higher or lower.
Throughout the 2017 marketing year, managed money funds carried large positions in the futures market. The funds either had a significant long or short position. This depends on whether they are whipping the bull run and expecting the market to go higher, adding to their long position, or letting the bears feast and destroy grain futures pulling them lower and stimulating a move to a short position. This is due in part to fund managers liking or disliking the fundamental news reported and it drives corn, soybean, and wheat prices up or down harder and faster than a rented mule, pushing them in either direction because they feel the market will continue to strengthen or depress. Whatever their motivation is each day or week, it can have a significant impact on grain prices.
Corn, soybean, and wheat price graphs showcase the recent relationship between the managed money fund position and futures prices. This demonstrates how the managed money entering into your grain marketplace has either benefited or hurt your bottom line. As you can see, there are significant correlations to grain prices and the managed money long and short positions.
HOW DO I FIND OUT WHAT THE CURRENT FUND POSITION IS?
The Commitment of Traders (CoT) report lists the net positions of each classification of traders including the commercials, managed money, speculators, passive index funds, and small traders. This report is released weekly by the U.S. Commodities Futures Trading Commission (CFTC) and is available online and can be found on their website.
HOW CAN I USE THIS INFORMATION AND WHAT SHOULD I WATCH FOR MOVING FORWARD?
Managed money funds will continue to move the grain market and none of us will be able to fully predict the direction they will take grain prices. For grain operations, some pieces of the puzzle to keep in mind are possibilities and probabilities. What is the funds current position? What is the trend? For example, if the funds are running a large net short position in the corn market and corn futures are making new contract lows or near the low, this could be an indication of the market potentially nearing the bottom and as we all know, prices can’t go in the same direction forever. If you step aside and look at that picture, funds are near a record short position and corn is near a record contract low in this scenario — from a futures perspective one might consider to either be on the sidelines or wait for a reversal in the market. If the funds decided to short cover and buy back their corn position, this brings demand into the market and can drive prices higher. As you can see in the corn graph, if the funds were to buy back their short of the 200,000 plus corn contracts, that’s over one billion bushels of corn to buy!
FUNDS AFFECTING GRAIN PRICES IN THE BIN
Managed money funds taking long and short positions ultimately affect the price of grain in your bin. From a basis perspective, this can have positive or negative effects. If the funds have a large short position and futures prices are low, this gives potential for the basis to appreciate as the basis is used as a flat price corrector. Don’t forget, the flat price of grain is made up of futures + basis and basis is a combination of forex, supply and demand, and transportation costs to the market you are looking at. Vice versa, if the funds are carrying a long position in the market, this could have negative effects on basis, as the futures prices are higher than the flat price needs to be for willing sellers to price their grain into the marketplace.
The market is a constant evolving beast and everyone is the captain of their own ship. It’s key to know what you are doing and why. If one can make a plan, stick to it and be ready to morph or adapt to fast moving market conditions, this will ultimately lead to success!
The Westland Corporation is a grain brokerage and market insight firm that is agriculturally driven and focused. The Westland Report is an in-depth daily market analysis which provides readers with a quick and concise look at the factors that are affecting their grain prices. •