Todd's Take

We already knew that noncommercial traders were heavily bearish in Chicago wheat in April, but after the spot price fell to a new contract low near $4.00, traders pushed even more chips on the table. Friday's Commitments of Traders Report from the CFTC showed noncommercials net short 130,036 contracts of Chicago wheat as of April 25, the biggest bearish bet by traders on record. And that was right before last weekend's snow and heavy rains damaged winter wheat crops.

On the other side of the table, the firms that are actually engaged in some form of wheat business called traders' bets and increased net longs to 122,534 contracts, the largest show of support by commercials for Chicago wheat on record. By the size of the bets, both sides appeared pretty sure of themselves, but once again, recent events proved confidence isn't everything.

There is one flaw in this poker analogy that needs explanation and that is to recognize when commercials go long in wheat, it does not necessarily mean that they are betting on prices going higher. It does not carry the same meaning as when noncommercials go long.

Because commercials also deal in physical wheat supplies, going long on the futures board may mean that they are hedging a commitment, or that they have a profitable outlet lined up for the wheat futures that they bought. In either case, commercial net longs tend to happen when wheat prices are cheap enough to offer the advantage of good economic value. Commercial buying doesn't necessarily mean commercials think wheat prices are going higher, but it is a valuable tip, which suggests support is near.

Another point to remember in this poker-like standoff is that commercials have staying power while noncommercials do not. Because the commercial futures positions that we do see are often coupled with physical positions that we don't see, they are typically well prepared to sit through adverse price moves. It is rare to see commercials bail out of futures positions when prices go against them, but the same cannot be said for noncommercials.

As a good example of this, you may recall that I wrote about a similar standoff in Chicago wheat on Jan. 12, 2016, in an article titled, "All In" (at http://bit.ly/… for subscribers only). At that time, noncommercials were also holding a record net-short position, and given how wheat prices traded lower the rest of the year, you might have assumed they came out ahead in 2016.

A closer look shows noncommercial traders probably lost money in spite of lower wheat prices in 2016. On Jan. 5, traders were net short 88,670 contracts at a Chicago spot price of $4.61. Fast forward to June 7, and we see a spot price of $5.09 and net shorts liquidated down to 48,894 contracts.

Prices slid lower after early June and traders built net short positions back up, this time to 113,320 by Oct. 4 when the spot price was $3.95. Those short positions were looking good when wheat prices dropped lower to the first of December, but instead of taking profits at the low, traders stayed short and gradually covered positions as prices subsequently rallied higher. By Feb. 21, 2017, the spot price had rebounded to $4.36 and net shorts were down to 8,327 contracts.

While trend-following noncommercials were busy making wrong turns in 2016, value-oriented commercials were mirroring their every move. As usual, commercials were patiently adding to net longs as prices went lower and lifting positions as prices went higher.

For commercials, Monday turned into another day of cashing noncommercial checks after last weekend's snow and heavy rains sent July Chicago wheat up 23 3/4 cents. For the rest of the week, I am looking forward to hearing crop tour reports from DTN Crops Technology Editor Pam Smith.

Friday's record holding of 122,534 commercial net longs may not signal the absolute bottom of this year's wheat prices, but given last weekend's weather and commercials' knack for recognizing value, it certainly makes a strong case for the start of higher wheat prices in 2017.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow Todd Hultman on Twitter @ToddHultman1

(BAS/SK)

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