While many of the agricultural markets are finding increasing acreage on a global basis thus decreasing U.S. domination, the corn market is still the primary domain of the U.S. agricultural markets. As such, the Chicago Mercantile Exchange Group’s corn futures contract is the primary hedging tool. As such, the actions of this market’s biggest players are tracked on a weekly basis by the Commodity Futures Trading Commission’s, Commitment of Traders (COT) report. Here’s how to use this report to determine market bias in advance of major governmental agricultural reports by the USDA and World Agriculture Board. While the illustration is based on the current events of the corn market, the methodology is robust across many commodity markets.
Corn growers, short hedgers sell their crops forward to lock in production revenues while corn users, long hedgers like feedlots, use the futures market to lock in the input prices necessary for their business model. These two groups represent the commercial traders in the corn futures markets. The short hedgers step in to sell the market forward when the futures appear over valued compared to the crops they can deliver thus providing resistance to the market. Meanwhile, long hedgers step in to buy future inputs at advantageous prices thus providing support for the corn futures. The commercial long positions minus the commercial short positions equals the net commercial position in the third pane of the chart below.
We’ve identified both the April and August USDA Supply and Demand Reports while September’s was just issued on the 11th. The build in the net position clearly puts momentum on the positive side through this spring. Granted, the commercial long hedgers’ purchases may have been early ahead of this year’s growth cycle but the price action confirms they experienced less than $.20 of negative movement before the market finally caught a summer bid. Furthermore, the aggressive selling by corn producers on the summer rally was a clear indication that they individually thought their crops were in better shape than the USDA was giving them credit for collectively. They sold more than 320,000 contracts in just four weeks ahead of the August Supply and Demand Report. We covered this in detail in, “COT Report Shows Major Selling Ahead of USDA Reports.”
Recently, commercial long hedgers have been stepping in to shore up the bid above $3.60 per bushel once again. We’ve seen net buying in five out of the last six weeks. This has pushed commercial trader momentum back to the buy side ahead the market’s reports. Furthermore, recent corn market weakness has created an oversold situation on our short-term market momentum trigger. The recent rally was enough to trigger a COT Buy signal ahead of the reports. As always, a protective stop was placed at the recent swing low of $3.605 in the December futures contract. It’s always nerve wracking taking a position ahead of a major market report. We’ve found over the years that siding with the commercial traders puts us on the correct side of the market’s reaction more often than not.
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