Kub's Den

Which is stronger -- fear or optimism? This question is sometimes presented as a choice between either fear or "greed," but let's not use negative, judgmental words. A grain market speculator who sees potential for higher-priced corn and takes futures positions to profit from that speculation isn't necessarily being "greedy" -- at least no more so than a grain producer who plants seed in the ground and leaves the crop unhedged, anticipating higher prices in the future. They're just doing their job. Whether or not their optimism will be rewarded, time will tell.

As late-planting headlines have saturated the ag commodities space, bullish ideas have unsurprisingly taken hold of the grain markets and new-crop corn futures prices skyrocketed more than 90 cents through the last half of May. Let me clarify: It's not just late planting, but really, truly, super-duper, alarmingly late planting.

The nation's corn is only two-thirds planted, as of June 2, when we would typically expect the task to be virtually complete. Illinois, the No. 2 producer of U.S. corn, still has less than half its corn planted and continues to experience flooding. Presumably, any speculators who are looking to profit on the movement of corn prices this spring are currently looking in an upward direction.

However, recall that the "managed money" speculators in the corn market started out the month of May 2019 with record-large net-short futures positions -- a profoundly bearish outlook that made sense in a world with over 2 billion bushels of ending stocks for the current marketing year and ending stocks for 2019-20 forecast to be about 20% more massive than that. Now, however, a remarkable shift in mood has occurred. How much of the 90-cent jump should be ascribed to panicky short covering, getting the speculators out of dangerous, previously held bearish positions (fear)? And how much should be ascribed to traders establishing fresh, voraciously bullish positions (optimism)?

Short covering has indeed taken place. Since the continuous corn futures chart hit a low on May 13, "managed money" speculators have gone from holding 483,382 short futures positions to holding only 256,106 short futures positions last Tuesday. That's a frantic pace of over 25,000 short futures contracts being closed out per trading session (by buying offsetting long futures contracts). Note, however, that this segment of the market was still net-short in corn futures in the latest Commitments of Traders report from the CFTC. They may still have more short covering left to do.

Looking at the total open interest in corn futures traded in the Chicago Board of Trade, we would get the idea that yes, most of the recent price rally was driven more by fear (short covering) than by optimism. Total open interest in corn futures is presently lower than it was in April, suggesting traders have done more closing out of old positions than opening up of new positions. But that's the total open interest for all corn futures contracts, including the old-crop contracts (July and September), which still represent this current marketing year and its 2-billion-plus bushels of carryout.

If, instead, we isolate only the open interest held in the December futures contract -- which directly represents the prospects of this late-planted/unplanted 2019 crop -- the story is entirely different; optimism has won out over fear. Open interest for this contract alone has surged from 336,000 contracts on May 13 to 486,000 by June 4. That quantity by itself isn't unusual. At the start of June in the past five years, open interest for new-crop December corn futures has been 549,000 (in 2018); 302,000 (in 2017); 355,000 (in 2016); 356,000 (in 2015); and 428,000 (in 2014).

Note that this open interest represents all categories of traders, including the commercial traders (bona fide hedgers) who, yes, have been rapidly building up new long futures positions over the past three weeks in anticipation of a short crop, but who have even more rapidly been hedging with hundreds of thousands of fresh short positions to lock in these higher prices. The Commitments of Traders report shows the "producer/merchant/processor/user" population has been establishing about 32,000 fresh short positions per session while the speculators were frantically buying out of their old ones.

Open interest in corn futures is typically about twice the open interest in soybean futures. After the rally of the past three weeks, the December corn contract's open interest has surged to 2.4 times the November soybean contract's open interest. It's very normal for open interest in the December contract to grow larger as the calendar year goes on, up until early September when the contracts either get rolled forward (by speculators hoping for long-term price movements) or closed out to offset the physical delivery of the new crop of corn that arrives during the harvest timeframe. Seeing the December 2019 contract's sudden surge in open interest, in contrast to its usual orderly buildup, is noteworthy.

But that's not to say it's already reached its limit at the present 486,000 positions. For reference, open interest in the December 2012 corn futures contract was as large as 645,000 positions on Aug. 10, 2012, the date of the corn market's all-time high ($8.43 3/4). Corn's open interest didn't fully top out until two-and-a-half weeks later: Aug. 28, 2012, with 720,000 futures positions. There's no reason to believe that this year's corn market must behave in a similar way, or that it would necessarily be limited by any historical records. But if we're just curious about the scale of the bullishness that's already popped up in the past few weeks, it seems clear there's still plenty of opportunity for traders to express either optimism or fear -- or both.

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.

(BE/AG)

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