Good, D. “Weekly Outlook: What Corn and Soybean Yield is the Market Trading?” farmdoc daily (6):149, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 8, 2016.
The USDA releases its planted acreage estimates on Tuesday, June 30th. This report typically sets the tone for the coming marketing year. David Hightower’s analysis has been posted to our site and we defer to him in terms of the fundamental supply and demand numbers. We’ll pick the individual markets apart through the actions of the commercial traders, the actual producers or end line users of these grain markets. Given the depressed levels many of the grain markets have been experiencing can this report actually do further damage?
Monday’s corn analysis for TraderPlanet couldn’t have been more timely. Our mechanical swing trading programs picked up the highs being made in the grains as a short selling opportunity that bore fruit right through yesterday’s exit. We discussed the Commitment of Traders report’s importance in determining resistance levels as defined by the commercial traders’ volume and execution prices.
Read, “Corn Rally Stalls Short of $4.”
Looks like we’re batting .500 for the week with a loss in the bond market being more than offset by the profits in corn. Meanwhile, our primary piece uncovered a nice pattern in the crude oil futures that we’re still waiting to take action on.
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The story in, Bonds Creeping Towards Lower Yields, which was published at TraderPlanet still holds. Commercial traders, while roughly neutral in their current position, have rapidly purchased more than 17,000 heading into this week’s trading. This buying should help the support around 140^00 hold as the market makes some type of run at the October highs.
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Tuesday’s corn futures trade for Equities.com combined classic Commitment of Traders’ analysis along with an inside bar trigger to enter the trade. Sometimes, it works like a champ. It’s a high percentage trade and it played out well.
Finally, our main piece required eyeballing more than 20 years’ worth of commercial trader activity in crude oil futures. In, “Time to Buy Crude Oil’s Decline” we discussed a very specific pattern that we’ve only found eight examples of in the crude oil futures. More importantly, this pattern’s predictive power has been quite strong. Read the full piece for details.
The bulk of my Commitment of Traders research has gone into creating COT Signals.
The corn futures market has rallied about 15% off of its lows while following its typical seasonal harvest pattern. We had some serious concerns about how oversold this market had become and wondered if it may even breach the $3.00 per bushel level. Obviously, the market hasn’t fallen below $3.00 and the market’s decline was fully supported by long hedgers looking for bargains below $3.60 per bushel. Long hedger support and the oversold nature of the market put us on the buy side for the recent rally which you can see on the chart below. However, as the market has rallied, so to have commercial traders’ expectations changed.
What a crazy week this has been! Nearly a 100 point range in the S&P 500 and more than a 4.5% range in bonds!
Quantitatively speaking it’s been a pretty quiet week in our trading. The cocoa trade we discussed in TraderPlanet has consolidated throughout the week. The consolidation does allow us to adjust our stops accordingly as well as provide an additional point to add on to the trade once it starts moving in our anticipated direction.
You can recap the details in, “Commitment of Traders Report Supports Cocoa.”
My favorite part of this business has always been analysis. Whether programming something in Tradestation, building a spreadsheet or good old pencil and paper. Years of hand drawing charts finally allowed their nuances to sink in despite my stubbornness. The result of this is that I still do a lot of manual scanning of markets. There are times when a line of code will alert me to certain criteria. Many times, however it’s the human eyeball that eventually begins to compare a current set of visual data points recognized from the past and can extrapolate that into a projected set of assumptions into the future. We’ve had our eye on the corn market’s decline towards $3.00 per bushel not so coincidentally timed with the October 10th USDA World Agriculture Supply and Demand (WASDE) report. In doing so, we’ve discovered a very particular type of behavior in the Commitment of Traders reports among the commercial trader category in corn futures this time of year. You can see the fully mechanical results of our approach in these equity curves.
The Commitment of Traders reports showed that commercial corn producers sold more than 350,000 contracts equal to 1,750,000,000 bushels or, about 12% of this year’s crop as estimated by the October 10th USDA WASDE report between February and April. The average price for these forward hedges was around $5.00 per bushel. The summer’s perfect weather has led to record production and this has caused the market to sell off all the way down to $3.20 per bushel. This sell off has brought out the consumption side of the commercial trader equation and our math suggests that they’re just getting warmed up as you can see on the chart below.
Commercial corn traders have played this year’s market like the veteran traders they are. They collectively sold more than 370,000 contracts during planting season and have now come in as active buyers in the corn futures. recently repurchasing more than 120,000 contracts.
We discuss the impacts of the commercial corn traders via the CFTC’s Commitment of Traders report in this morning’s feature for Equities.com in , “Corn Market Finding Support.”
You can see other examples of our recently published analysis at COTSignals.com Recent Trades. You can also sign up for a FREE 30 day trial at COTSignals Signup and have our nightly worksheet delivered straight to your email.
We also walked through the same scenario in the soybean market for TraderPlanet, yesterday in Global Food Dynamics Impact U.S. Grains: Soybeans at a Turning Point?
The 2013 United States’ corn crop started off with predictions of being the largest ever. This was primarily due to the USDA acreage report issued on June 28th that showed 97.4 million acres planted for corn. This was the highest acreage allotted to corn since 1936 and also marked the fifth consecutive year of acreage gains for corn. This caused December corn futures (this year’s crop) to fall 9% in the next few trading sessions. Even though the market is now trading even lower than it was then, I think there are signs pointing to a bottom in this market. End line users should take advantage of the lowest prices we’ve seen in over a year.
Record planted acreage along with trend line yields would produce the largest corn crop in history. However, the University of Illinois pointed out as recently as last week that the USDA’s planting intentions report of June 28th won’t materialize the way the market initially reacted. The Fighting Illini pointed towards the prevented plantings number to support their argument that corn acreage may be more than 8 million acres less than originally forecasted. This is primarily due to the lateness of this year’s plantings. Furthermore, they comment on the currently declining characteristics of the corn crop condition, which may impact yields if pollination doesn’t get the weather it needs.
We often talk about a market’s, “fear premium.” Fear premium is the market participants’ disproportional concern of the market moving one direction instead of the other. Fear premium in the grain markets is always on the high side. Call options, which make money when the market goes up are always more expensive than put options in the grain markets. The difference between the current market price and the price of a put and a call option equally distant from the current price is 0 in an unbiased market. However, call options currently have a built in fear premium of approximately 30%. Therefore, the markets’ participants are 30% more concerned about prices moving higher by $.50 per bushel than the market falling by another $.50 per bushel.
End line users of corn have been stocking up on futures contracts with abandon. This is another good way of determining the underlying value of a market. The Commodity Futures Trading Commission issues it Commitment of Traders Report every week. The report tracks the market’s largest traders and categorizes them according their type of trading. Primarily, we look at three groups of traders – speculators, index funds and finally, commercial traders. We focus on the commercial trader category. It is our belief that those who produce the good and those who sell the good have the best understanding of a market’s value. Farmers, as a collective, ought to know what a fair price is for the corn they’re growing just as cereal producers or, cattle feeders should know what a fair price to pay is. End line commercial traders have built up a record position on the market’s decline. Clearly, they are willing to lock in as much of their future input needs as they’re bank accounts and storage facilities will afford them.
End line users of corn understand that even if we do end up with record acreage and good yields, we’ll still barely budge the global ending stocks number. The world currently stands at about 70 day’s worth of grain supplies. This is not just corn but an index tracked by AgriMoney that includes rice and wheat. The point of the chart published by AgriMoney is that peak production relative consumption has shifted to a deficit trend over the last 20 years. It has dwindled from 130 day’s supply in the mid 1980’s to our current level of 70 days. All things considered, this year’s US harvest could add about four days to the world’s supplies. This is hardly a drop in the bucket.
There’s no question that corn prices have been declining since the June 28th USDA acreage report and the next major report isn’t due out until August 12th. This leaves the market with time to trade its way through pollination and the trend to continue lower. However, the record net short position in managed money cannot continue to profit from corn’s decline for much longer. The market can only trade so low relative to its fundamental value. Commercial traders clearly see this market entering their value area. We’ll side with them and be on the lookout for a reversal in prices. Most importantly, we’re approaching prices that leave no more room for bearish surprises, therefore, the path of least resistance will soon turn higher.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.