Much of successful trading, like economics, comes from making small changes that over time, affect the big picture. Today, we’ll discuss a marginal improvement to our Commitments of Traders swing trading calculations that improved performance across all of the markets we trade and that leads to big changes in the bottom line over time.
There are two deeply conflicting sides of the natural gas trade heading into late summer. On one hand, we’re coming off a record setting El Nino that is translating into a La Nina late summer/fall weather pattern. The post El Nino, La Nina weather pattern is already bringing the expected heat that comes with it but speculators want more. They want more heat and they want the hurricane season to be an active one. These are the two bullish components of a fundamentally weak natural gas market. Natural gas producers are selling forward production at their fastest rate since the fall of 2013. The question here becomes a bit more ambiguous as producer selling can have as much to do with selling forward supplies to raise cash as it can the their expectation of current market prices versus forward prices. We’ll look at weather patterns, seasonality and the commercial trader vs speculator balance in the market to determine a proper course of action heading into this market’s critical seasonal period.
A common question here would be, “What do gold and soybeans have to do with each other?” The short answer is that they are both the most speculatively overbought commodities we trade. The deeper answer is that both of these products come from the ground and the producers of these commodities have used this rally to lock in bonus money as there is no way they collectively subscribe to the inflation thesis suggesting structurally higher commodity prices in a near zero percent interest rate environment. Our experience has shown that the huge imbalance in positions between the commercial producers selling forward production and the speculators’ buying of anticipation typically resolves itself in the fundamental direction of the commercial traders’ collective prediction. The gold and soybeans rallies are about to find themselves lout of gas.
It’s one thing to hypothesize that a market is in a speculative bubble; it’s another to let the data write the story. According to the current Commitment of Traders report, large speculators just set e new net long record of 301,920 contracts. This eclipses their previous record of approximately 266,000 contracts set just this past May. We moved out to a weekly chart in order to provide some context for the current situation.
Cattle prices have been on a downward trend since the 2014 highs. August feeder cattle, as we’ll discuss specifically, are trading at $143 per hundred weight(cwt), last year they were at $194 and at $182 the year before that. Over the last ten years there have only been two significant periods under our current prices. We’ll examine the placement and marketing numbers as well as the choice vs select spread as it relates to the domestic demand we believe will drive prices seasonally higher through the end of the summer.
According to the weekly Commitment of Traders (COT) report issued by the Commodity Futures Trading Commission (CFTC), crude oil drillers have sold the most forward production since oil was trading at more than $100 per barrel. Considering that drillers are willing to sell just as much at half the price and that the recent rally to $50 per barrel has been purely speculative, how low will prices go once the speculators get forced out and the producers’ selling drives the market lower?
The farming industry in the United States has been under considerable pressure as the gains of years’ past were quickly washed away by modern technology and agronomy practices. The record prices achieved in soybeans just last year now seem like a lifetime ago to farmers who bought land and equipment based on the increasing average prices of corn, soybeans and wheat over the last decade. Today, we’ll take a long-term look at the soybean market and see what has farmers so anxious to sell.