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Funds liquidate wheat positions

There has been evidence for a few months that index funds were pulling money out of the commodity market space, and more reports of that kind of activity surfaced recently. Tiring of usually buying the carry and hoping for long term uptrends to make up the difference – and failing – several large fund managers are throwing in the towel. 

While some may bemoan the loss of volume, read that the exchanges, the commodity markets may well be better off without the elephants in the swimming pool. Too many markets simply were not big enough to handle the waves of trading that too easily pushed prices well beyond what would be considered reasonable moves. Just because you see a lot of ‘volume’ in a market, doesn’t necessarily mean that there is a lot of ‘liquidity’, a common misinterpretation. 

The wheat market is an excellent example of this type of price action. Time and again, big moves on the open or close were largely due to funds slapping huge orders into the market, trying to establish or liquidate positions that were just too big for the market to absorb. The cash markets refused to follow along, thus creating the artificial basis spreads, most notably in the Chicago futures. The exchanges knew this, but didn’t want to give up the volume of trades – being publicly traded companies their commitment was to profits, not necessarily market integrity. 

The inverse correlation between commodities and equities was lost as well, as index funds trade commodities through the equity markets. Now where one went, so did the other – creating frustration among fund managers who sought hedges in one space versus another but couldn’t find them.

Wheat markets spent the holiday shortened week succumbing to waves of selling. Harvest pressure, rains in the northern Plains and Canadian Prairies, light rains in southern Russia, a sharply higher dollar, and financial market woes were just too much for a market that had seen a sharp rally just three weeks earlier on the fear of weather problems in the Black Sea.

While the Black Sea region is still suffering, the light rains in the key dry pocket of southern Russia were enough to stall the price rally and the worldwide economic issues led to widespread liquidation of several markets, including grains. 

Back to the fundamentals… harvest is rolling rapidly along, now well into Kansas – a record early start for them. Yields and quality have a wide range, but it appears so far that the far southwest again had a disappointing year – particularly after what looked like a good crop just a month ago. South central Kansas is reporting good yields and quality, especially for those regions that got late rains. Those that went without the rains when it was hot just a few weeks ago saw a notable drop in production over the last month.

Export sales were disappointing last week for all three major crops. Wheat sales were only 320,000 MT, less than the low end of estimates. The marketing year is virtually wrapped up, and it looks like exports sales are slightly higher than USDA’s latest estimate. Corn and soybean export sales were also below their range of estimates. The strong dollar is partly to blame, along with a general slowdown in economic activity.

With the drop in world wheat production this year and expected large increase in corn production, it appears that buyers are beginning to shift their purchasing programs as well. This week there were reports of feed manufacturers returning to the traditional ratio of corn in their mixes, rather than the larger amount of wheat they’ve been using for the last couple of years. 

As we head into the key months of June and July, weather will be the main focus of the markets, but the volatile financial markets will have tremendous influence as well. The negative attitudes have a widespread dampening effect on most markets – except the safe US treasuries.

That said, however, the longer range forecasts suggest a dry June and July for the central Plains and western Midwest, along with plenty of heat. Obviously, this isn’t what crops need as we head into the critical growth stages. It wouldn’t take much stress to turn the market, considering we’ve already seen stress in the south and southeast. Russia isn’t out of the woods yet, either; and China is apparently seeing its dry region of the northern North China Plain expand into the south. 

The markets may be under a lot of pressure at the moment, but things can change fast this time of year.

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This publication is strictly the opinion of its writer and is intended solely for informative purposes. It is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named.  Information is obtained from sources believed to be reliable, but is in no way guaranteed.  Futures and options trading always involve risk of loss. Past performance is not indicative of future results.

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