Is the Corn Managed Money Betting the Wrong Way?
Since the beginning of the year, managed money (funds) went from net long 75,000 contracts of corn futures to a record-short position of 257,965 (reported in the March 15 Commodity Futures Trading Commission Commitment of Traders report.)
This is a significant turnover of contracts and the largest short position since 2006. The turnover in position may have been the catalyst that contributed to a $0.25 setback in futures.
As prices started their drop, they likely were adding short positions, which further pressed prices lower. In essence, they continued to sell, adding pressure and creating an environment with a lack of waiting buyers. With funds now so short and prices near contract lows, the opportunity to own at a time of year when prices usually do not trend downward could be an opportunity for both buyer and producer.
Let’s start with end users. Buyers have an opportunity to secure inventory at what is currently a much lower price than most analysts were anticipating for this time of year.
All uncertainty with producing this year’s crop are in front of the market. Inventories are tighter than a year ago, and a potentially late spring due to wet and cool weather are fundamental factors supporting price recovery.
Speculative money has a tendency to trade trends, and when technical indicators pointed weaker, aggressive selling pushed prices downward.
End users need to recognize that managed money can change direction rapidly. A comparable net short position occurred in early March 2016, when funds were short nearly 230,000 contracts. It did not take long for fund managers to make an about-face, reverse short positions, and go net long (buy) over 250,000 contracts by June.
My point is to secure inventory when prices are weak.
From a producer’s perspective, with funds significantly short at this time of year, it is a time to hold off on sales and prepare for a price recovery. While there is no guarantee funds will move out of their short positions or that prices will rally, there is no strong economic incentive to be a seller at current price levels. Be patient.
A rule of thumb is to sell old crop when prices recover 10% to 15% off of their harvest low. On May futures, this would equate to a range between $4.00 and $4.18. On new crop (December futures), this would equate to a range between $4.21 and $4.40.
The key, however, is to recognize if it is a short-covering rally only. (That is, funds exiting short positions and not buying new.) In a short-covering rally, prices could run out of steam very quickly once positions are exited. The key to taking advantage of such a rally is to have target points in place. When the market rallies, orders are triggered without question. Sell cash grain into strength.
For corn you expect to grow in the year ahead, be proactive in buying call options. Call options are less expensive when prices are dropping and can be the catalyst to disciplined selling.
As prices recover, the temptation to hold off on sales increases. This temptation usually comes from the media that provides reasons for prices to continue to recover. Avoid the temptation. Have targets in place and allow orders to get filled. These disciplined sales are now covered with calls so that, if prices continue upward, you have retained ownership.
When analyzing a market, there are many variables that can come into play. It’s said that timing is everything. The market does not move on the calendar.
Knowing where managed money is positioned can be a good guide, or tool, to utilize in your analytical toolbox. Choose the right tool for the right time. While there is no guarantee that prices will rally, there are a number of indicators suggesting that a rally could be on the horizon.
This author’s opinion is that managed funds have bet the wrong way and are far too short.