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Tied to equities

Agriculture.com Staff 05/22/2009 @ 11:29am

If you overlay a soybean futures chart on a Dow Jones Industrial futures chart, you would see both markets bottomed in early March and have moved upward the last two months. Both charts look nearly identical. During that time frame, the Commitment of Traders report also indicated a pattern of increased non-commercial buying. So what does it mean?

Non-commercials are market participants that, due to their size, have to report the number of contracts they are holding. Non-commercials could be large speculators or hedge funds which are looking for investment opportunities. A stark increase in non-commercial buying since the first week of March has occurred. The long position for non-commercial contracts has increased from just over 5,000 to over 115,000, or a net increase of over 110,000. A commercial firm may be a large company such as Cargill or ADM, which is considered commercial because they utilize the commodity for which they are holding contracts. Commercial contracts have trended in the opposite direction of non-commercials with net short positions. Commercial firms are likely short because when they buy soybeans from farmers, they will hedge by selling futures if they do not have a ready buyer for the cash beans. They are hedging their ownership of beans.

Non-commercials, or speculative interests buy believing prices will rally. The trend of increased non-commercial buying would suggest a belief that prices can move higher. Yet, it may also indicate a market that is vulnerable to rapid liquidation. One only has to look at last year's collapse in soybean prices, in part due to liquidation of long positions by non-commercial traders.

The concern is that price trends can quickly change direction. Heavy liquidation could take away two or three months of rally in two or three weeks. Make sure you are measuring the value of what the market is currently offering you as well as who the players are. If non-commercials are consistent buyers, allow the trend to move upward in your favor. Follow it with a stop (trigger order) to sell if prices falter. Also, reward higher prices by making forward sales. Consider PUTS to establish a price floor yet allow the topside open for further advance. Bottom line, be prepared for an abrupt end to the soybean rally.

It may be coincidental that investors are entering into the commodity markets at the same time the stock market is rebounding, but not likely. If equities falter, there could be a quick exodus in long commodities contracts. Be prepared before this happens.

If you have questions, comments or would like help implementing a strategy for soybeans this year, contact Bryan Doherty at Top Farmer, 1-800-TOP-FARM ext. 129.

If you overlay a soybean futures chart on a Dow Jones Industrial futures chart, you would see both markets bottomed in early March and have moved upward the last two months. Both charts look nearly identical. During that time frame, the Commitment of Traders report also indicated a pattern of increased non-commercial buying. So what does it mean?

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