Kub's Den

Even today, while farmers and meteorologists and market analysts continue to fret about dry and hot weather during the 2017 corn growing season, and even after last Wednesday's fastest scurry of corn futures short-covering in recent memory, would it surprise you to learn that the "Managed Money" in the corn market is still leaning more bearish than bullish?

It depends how you count it, of course, but in the Commitments of Traders report released by the CFTC last Friday, speculators owned 254,414 long futures and options positions in the corn market (contracts they previously bought in the hopes that prices will rise in the future). But that quantity is still outweighed by their even larger mass of short futures and options positions: 272,343 contracts (previously sold in the hopes that prices will fall in the future).

So, overall, that still indicates a net-bearish outlook. On the whole, the group still believes prices will fall. Corn futures trading volume has been relatively light since the last CFTC reporting date, and prices have only trended lower since then, so it seems that the speculators' brief flash of bullish concern was short-lived.

It really was a stunning flash, though -- make no mistake about that. In the week from June 6 to June 13, 2017, speculators dumped 104,333 short futures positions and 4,962 short options positions in the corn market. They simultaneously took on 11,534 new, tentative bullish positions. This was the fastest weekly pace of position shifting that the corn market has seen this year.

On a single trading day -- last Wednesday, June 7 -- the market handled 2.3 times as many trades as it does during a more typical session. Yet, speculators had collected such a huge bulk of bearish short positions in the three months leading up to the weather scare that even last week's scramble to abandon short positions wasn't enough to bring the sector into net-long territory. It has now been 14 straight weeks (and there's likely a 15th straight week in the making) that speculators have leaned bearish in the corn market, ever since the middle of March.

Who are these speculators, and why does their collective opinion matter, anyway? When the CFTC collects data from the exchanges each week about how many trades were made and by whom, it classifies each trading account according to whether or not the account owners are "commercial" users of the futures and options markets.

An entity that uses futures and options to hedge its real, physical, commercial business in the commodity markets is placed in the "Producer/Merchant/Processor/User" category of business. But as for the speculators and Commodity Trading Advisors and hedge funds who are managing investors' money in search of profits, their activity is placed into the "Managed Money" category of business. (Some speculative activity may also leak into the "Swap Dealer" and "Spreading" and "Other Reportables" categories). These are useful traders to have around in the summer, when grain hedgers would like to be able to use the futures markets to lock in a price for the growing grain and remove one source of risk from their operations.

So it could go like this: Farmer Joe is worried the corn price will go down, so he sells a cash contract for 5,000 bushels of corn to the Springfield Elevator. The Springfield Elevator has just committed to buy 5,000 bu. of cash corn, which it offsets by selling one 5,000-bu. corn futures contract. Who's the counterparty to the futures contract? Well, it might be Speculator Steve, who buys a corn contract and hopes the price will go up.

Last week, when the population of speculative corn traders dumped all those previously sold corn futures contracts, that activity could be interpreted as representing 522 million bushels of physical corn. (It doesn't really work like that. Futures "bushels" can be bought and sold and rebought and resold without ever interacting with the existence of physical grain, but bear with me here).

If the speculators' futures activity showed they previously were comfortable selling 522 mb, but now all of a sudden no longer believed those 522 mb will be harvested and available to offset their short positions, that's a quantity we could directly tie into supply and demand. It might be showing us that last week, investors' judgement of the 2017 U.S. corn crop suddenly dropped from 14.065 billion bushels to 13.543 bb, perhaps due to a drop in yield potential, from 170.7 bushels per acre to 164.4 bpa. That's one way to look at it.

In any case, it's fascinating to see speculators change their outlooks for the corn market in tandem with their changing outlook for the drought-stressed spring wheat market. At the Minneapolis Grain Exchange, speculators have been buying up long futures and options contracts representing hard red spring wheat at a pace as fast as 4,282 new positions in the week from May 30 to June 6.

They've continued to buy since then, while the U.S. Drought Monitor continues to show broader and more severe pockets of drought across the country. Most interesting of all, speculators have completely and utterly abandoned any short futures and options positions in spring wheat. That is to say, they have had ZERO short positions for two straight weeks now. Not a single speculator believed on June 13 that spring wheat prices were going to move lower than $6.28 per bushel, and so far, they've been correct.

Here's a mystery, though: If dry and hot weather is bad for spring wheat, and bad for corn, isn't it also bad for soybeans? Why, then, does the "Managed Money" category of trader, as tracked by the CFTC, still own such an oppressive net-short position in soybean futures and options (163,367 short contracts versus 83,694 long contracts)? Or perhaps the question ought to be -- when will soybeans finally follow along?

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(ES/AG)

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