Market Matters Blog

Fear of Commitments

(DTN chart by Darin Newsom)

I was sitting at my desk last Friday afternoon, doing some work when the latest CFTC Commitments of Traders report was released. From the next cubicle I heard DTN Analyst Todd Hultman say, "Wow! This isn't going to be good. Noncommercials moved to a large net-long in corn." Todd was right. As Monday's 4 1/4 cent sell-off showed the corn market had a fear of commitments, or in this case, commitments of traders showing much above a flat corn position.

First some background: What is the CFTC Commitments of Traders report? This is a set(s) of numbers released each Friday by the U.S. Commodity Futures Trading Commission that breaks out open futures and options positions held at the close of business the previous Tuesday in a variety of trader categories.

Each commodity's report includes Disaggregated Futures Only, Disaggregated Futures and Options, Legacy futures, and Legacy Futures and Options; all with both a long format and a short format. I'm sure there are other forms of the Commitments report, but those are the ones most often discussed.

For simplicity, I look at the legacy, futures only, short format. While not absolutely clear on what is or isn't a commercial or noncommercial trader, it gives us a rough idea of what each group holds. Others have made the argument for the increased categories of traders of the disaggregate futures, but as the old saying goes, you can't teach an old dog new tricks. So I'll stick with what I know until something I can tell is better comes along.

Those of you familiar with DTN's Six Factors methodology know the importance I put on noncommercial activity. To me it determines trend of the futures markets. And to apply Newton's First Law of Motion to Markets: A trending market will stay in that trend until acted upon by an outside force (more often than not a chance in noncommercial activity).

For the better part of 2016, noncommercial traders have held a net-short futures position (more contracts sold than bought) in corn. This has ebbed and flowed, with the ebbing resulting in rallies and the flows sell-offs (see attached chart). As recently as September 6, the noncommercial net-short had grown to 61,230 contracts, a substantial position that still paled in comparison to the net-short 100,176 contracts from March 7.

However, since September 6, the number has generally been growing smaller, corresponding with a rally in the December futures contract from $3.15 1/2 (August 31) to $3.45 1/2 on Tuesday, October 11. Regarding the latter, the report the following Friday showed noncommercial traders had trimmed their net-short futures position to a scant 636 contracts.

From that Tuesday's close, Dec corn rallied to settle at $3.53 3/4 on Tuesday, October 18. The 8-cent plus rally in the futures market implied noncommercial traders had fully covered their net-short holdings, making the question one of just how large a net-long they might have built. As it turned out the switch was to a net-long of 52,533 contracts, the largest net-long since 72,060 contracts from July 26.

So why the bearish reaction Monday? For starters, the market is still dealing with endless bearish headlines of record U.S. production. Monday afternoon's weekly Crop Progress report from NASS pegged harvest at 61% completed, meaning some new-crop bushels are likely being put on the market. More importantly, market volatility was calculated at 28% at Friday's close, down from the recent high of 30.8% from late August, put still implying a great deal of risk. Noncommercial traders aren't fond of high volatility, with the factor usually leading to a round of position squaring.

Tuesday saw the market stabilize, the Dec contract closing 1 cent higher for the day at $3.49 1/4. However, compared to the previous Tuesday close of $3.53 3/4 the contract was 4 1/2 cents lower. Therefore it could be assumed that this coming Friday's CFTC position update would show noncommercial traders reducing their net-long holdings, possibly cutting it back to near 30,000 contracts. This could prove to be a more comfortable level, particularly if market volatility continues to decline.

To track my thoughts on the markets throughout the day, follow me on\Darin Newsom



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