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Keep An Eye On Money Flow, Analyst Says
Probably since the beginning of bartering, people have searched for advantages when either buying or selling products or goods. Fast forward to the world we live in today, and you see an economic environment that is made up of buyers and sellers, all looking for an advantage.
In the central marketplaces (exchanges), where price discovery occurs, a search for an advantage to outguess future price moves is a constant feature defining the world of trading. In reality, there isn’t any one correct way to “outguess” future price movement. Yet, there may be good reason for awareness of market technical factors (charts) and fundamental factors (supply and demand) to better prepare for potential price changes. An important item is knowledge of the players in the markets, and how they are positioned.
The Commodity Futures Trading Commission releases a weekly report titled Commitment of Traders. This report is released on a Friday, indicating who the players are in the futures and options markets through the previous Tuesday. This report brings awareness to the number of net longs (buyers) or net shorts (sellers) there are in a group of market participants. This information may be helpful in determining if a market could experience a change in price direction. Large position holders who are investors are called managed money. Commercial firms are grain elevators and other large users of grain. Both the managed money and commercials are typically the largest position holders. Smaller traders and hedgers are also quantified, yet market participants usually monitor what the big players are doing when trying to anticipate future changes.
Managed money can move in and out of the market quickly. Knowing that managed money held record short corn futures positions this winter at over 230,000, one would assume they will not add to their short positions. With corn futures trading near $3.50 per bushel, and below the cost of production, farmer selling would likely be termed as light. After favorable USDA reports and weather uncertainty in South America, managed money quickly reversed positions in a matter of weeks, eventually building to a long positon over 230,000 contracts.
Managed money may purchase contracts for any number of reasons. Typically, they do so on either technical signals (chart), macro-fundamental reasons, or both. In any case, corn quickly changed from an investment to be sold to one that should be bought. Historically, other than in weather-shortened crop years (2010 through 2012), the managed money has not been long more than 230,000 contracts. This implies that prices may be not able to move much higher, as new additional managed money may be difficult to come by because investors may believe the market is vulnerable to a price break if money managers exit their long positions. On the other hand, it may indicate a changing mindset in the investment community, as money could be moving from equities (which, by some accounts, have been overvalued) and into commodities. This is especially true for corn, where it may yet be considered undervalued.
The Commitment of Traders report also indicates commercial firms are net short over 300,000 contracts. What this likely suggests is that farmers are selling corn to elevators who, in turn, will hedge futures if they don’t have a ready buyer for the corn sold to them by the farmer. Therefore, the buildup of net short positions implies aggressive farmer selling, and a likely reason why corn prices (despite big managed money buying) have recently stagnated. Bottom line, the analysis would suggest that a setback in price is likely, due to strong farmer selling and managed money already very long. If behind on cash sales, consider getting current.
Having some sense of money flow in the futures market may help in the timing of sales or purchases. This is one more tool in your marketing toolbox that can provide insight and help steer decision-making.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARM Ext 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
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Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Hypothetical performance results have many inherent limitations. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Reproduction of this information without prior written permission is prohibited. This material has been prepared by a sales or trading employee or agent of Stewart-Peterson and is, or is in the nature of, a solicitation. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Stewart-Peterson. Stewart-Peterson refers to Stewart-Peterson Group Inc. and Stewart-Peterson Inc. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with both companies. Accordingly this email is sent on behalf of the company or companies providing the services discussed in the email.