Todd's Take

I don't mean to scrape an old wound, but from an analytical point of view, Tuesday was by far the most interesting day this week. At one point early in the session, November soybeans were down 67 cents and December corn was down 17 1/4 cents. This came after President Donald Trump announced the night before that he was ready to move forward with another $200 billion of tariffs against China -- if China proceeds with its plans for new tariffs on July 6.

Corn and soybean prices had already been suffering since late May (pressured by good growing weather), which triggered selling among noncommercials caught heavily long and unprepared for the sharp declines that sliced through early June. In the case of soybeans, the panicked selling that came on Tuesday was understandable as trade relations with the world's largest buyer of soybeans immediately became more hostile.

For corn, the sharp drop seemed misplaced considering China doesn't buy enough corn from the U.S. to matter. However, Monday evening's announcement made investors jittery in several markets. Global stocks and nearly all commodities ended lower Tuesday, including corn. By the end of the session, November soybeans had rallied back to a 20 1/2-cent loss, while December corn ended down just 1 3/4 cents. For corn, at least, some fundamental justice had prevailed.

If we step back and take a larger view of this year's new-crop corn market, we still see plenty of bearish concerns on the table. DTN's Corn Condition Index, based on USDA's crop ratings, gave corn a score of 188 points Monday, the highest since 1994. The Corn Belt has seen generous rain amounts the past 30 days, too generous in some areas where fields are submerged.

The trend in December corn is clearly down as prices broke below their May low in early June and posted their lowest close in 2018 on Monday, before the president's announcement. The quick decline in June also caught noncommercials unprepared, holding some of their largest net-long positions in two years.

It is within corn's noncommercial CFTC data that I find this week's interesting riddle. Noncommercials typically exhibit trend-following behavior, meaning they usually go long when prices are rising and short when prices are falling. They are not necessarily good at it and often respond too late to key market turns, but that is their typical pattern.

This summer we see that trend-following behavior among noncommercials that are short corn -- their positions have increased as corn prices have fallen in June. Noncommercial longs in corn, however, are not playing that same game this summer.

A look at CFTC data for noncommercial longs shows the number of noncommercial longs increased early in 2018 to a peak of 629,940 in mid-March as the market became aware of Argentina's drought. The positions didn't change much the next couple months. After December prices peaked on May 29 and then fell lower, corn bulls stayed with the positions and even increased them to 655,972 contracts, their most bullish level on record as of June 12.

Looking at the net-long position of 286,650 noncommercials held on June 12 (and assuming it did not change much as of Tuesday, June 19, when prices took a 17-cent morning dive), we can roughly say that noncommercials sat through a $900 million loss since late May (63 1/4 cents x 5,000 bushels x 286,650 contracts on June 12). Friday's CFTC data will show if any net longs were abandoned by Tuesday's close, but judging from past behavior, there may not have been much change. Again, that is not typical behavior for traders not in the business of handling physical corn.

We can only guess from here what kind of investor, or investors, are behind such a large, rigid bet on the long side of corn. I suspect they were initially motivated by Argentina's drought and Brazil's dry weather. Perhaps they believe USDA's estimate of a 38-million-metric-ton drop (1.5 billion bushels) in 2018-19 world ending corn stocks will eventually prove them right.

Whatever their motives, as long as they sit on those large long positions, they're not as bearish for corn prices in the near term as we would normally see from typical noncommercial behavior. However, those record long positions will have to be liquidated eventually, and for the sake of U.S. producers, I hope it's not at harvest.

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

Follow him on Twitter @ToddHultman

(BE/AG)

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