- We thought we would take a look at why everyone is scratching their head (amongst other body parts) in an attempt to work out exactly what is happening, particularly in CBOT markets – and the general lack of activity therein. Our thoughts are as follows:
- Managed money (aka funds) net positions, net of options and adjusted for index funds in ‘000 contracts:
| Change | Approx cost of purchases (million US$) | ||||||
| 31-Dec-13 | 31-Mar-14 | Contracts | Million mt | ||||
| Wheat | -104 | -4 | 100 | 14 | 3,500 | ||
| Corn | -164 | 159 | 323 | 41 | 7,500 | ||
| Soybeans | 117 | 142 | 25 | 4 | 2,000 | ||
| Soybean meal | 30 | 33 | 3 | 0 | 150 | ||
| Soybean oil | -55 | -2 | 53 | 1,250 | |||
| Hogs | 50 | 101 | 51 | 2,000 | |||
| Cattle | 89 | 136 | 47 | 2,500 | |||
| 18,900 | |||||||
This is ignoring sugar, cocoa. Cotton etc. The total value of spec purchases in 2014 so far is close to $20 billion, and this ignores the leverage gained using futures contracts!
| USDA’s US and World Corn Stocks | ||||||||
| Dec-13 | Jan-14 | Feb-14 | Mar-14 | |||||
| US (million bu) | 1,800 | 1,600 | 1,500 | 1,450 | The long held bear picture has been progressively eroded | |||
| World (million mt) | 163 | 160 | 159 | 158 | ||||
- Funds began the year with massive shorts in corn and wheat.
- Both stocks and bonds lost their financial appeal, and funds looked for better value and returns elsewhere – commodities!
- The longer term bearish picture for corn just got pushed further and further back, and bullish news stayed up front, particularly as the USDA reduced corn supplies month on month – see above.
- Both Chinese and EU consumers got caught heavily short on pricing spot soybean and meal contracts.
- US export data on soybeans increasingly argued that the US would run out of soybeans.
- Fears of a block on Black Sea wheat and corn shipments added to the funds’ desire to be long.
- The bottom line – a massive influx of money into markets that, as recently as end 2013, were essentially abandoned by the spec community.
- Looking forward:
If Monday’s USDA stock numbers were wrong, we won’t know until June, by which time it will be too late to trade old crop.
The market wants to believe “cold, wet and late plantings” right now.
The onus is on the bears to prove trend yields or better on acres as forecast. The bulls have the upper hand right now, and are reluctant to let go.
- We are hugely frustrated at the continuing market inverse, which goes against the logic of longer term global stock rebuild, however we must not lose sight of the fact that the market is always right. It is not clever to continue to predict the end of the world, one day it will happen!
- For what it is worth, the technical picture right now (on corn and soybeans) calls for a slight elevation in price levels – but does suggest these markets are tired, the term being an “exhaustion top”, and ripe for a long term trend reversal – where have we heard that before? The longer term fundamentals are in complete agreement – unless we see a significant, damaging, climate event, which looks unlikely at the moment.