Canada Markets

Now that the corn market appears to be taking risks to global production seriously (from the prolonged closure of the Strait of Hormuz), it's worth taking time to see what market participants who may drive an extended leg higher are doing.

Given their ability to move prices significantly, it's worth a review of the two prominent groups in question, as identified by the Commodity Futures Trading Commission (CFTC).

Managed-money traders are purely speculators with one goal -- to profit from a move in a futures market. They just want to be on the right side of a trend and don't really care whether that is higher or lower. They are commonly referred to as trend-following funds given their strategy of focusing on big picture trends and adding to positions that are turning out to be correct. They are the group that reminds you of the old game of musical chairs. Everyone (on the correct side) is happy until the music stops and the panic for chairs begins (exiting the positions in this case). This group has appeared to be altering their process over the past few years, possibly due to the increase in AI use, now trying to quietly build a large position ahead of a major market move. Then exaggerate the move while adding to their holdings, benefiting the original position greatly. This can be seen in mid-2020, mid-2024 and in the early days of the Iran war on the accompanying chart (in blue).

Commodity index traders are more interested in passive ownership of commodities as a hedge against inflation. With inflation being such a likely outcome of the Iran war, with striking similarities to the inflationary cycle of the 1970s, they also appear to be buying these cheaper grains and oilseeds ahead of a larger potential move.

Over the past three months, the two groups combined have gone from net long only 226,236 corn futures and options contracts to 680,974 contracts as of the March 23 peak. The 454,738 contracts they added to their position meant they bought 2.274 billion bushels (bb) of corn over that period -- with the price barely moving, some might argue. And they are not wrong. But if the recent pattern is continued, that may simply foreshadow a strong push higher now. With plenty of reason given the fertilizer issues facing the world and an extremely tight global corn ending stocks-to-use ratio of 9.64% when China is excluded (as even the USDA is doing thanks to unreliable data). Complacency by consumers in the recent past may add to the volatility ahead, but that's for another day.

Their combined, record net-long position was set in the early days of the Russian invasion of Ukraine at 865,391 corn futures and options contracts. Given the pullback seen in late March and early April, they are currently only net-long 551,836 contracts as of the April 21 cutoff (in blue on the accompanying chart). That suggests the two largest categories of traders could still add 313,555 contracts or 1.568 bb to their long position before setting a new record. This would likely provide the fuel required for a prolonged rally in corn, which tends to lift all boats.

I welcome feedback along with any suggestions for future blogs. My daily comments can be found in Plains, Prairies Opening Comments and Plains, Prairies Quick Takes on DTN products.

Mitch Miller can be reached at mitchmiller.dtn@gmail.com

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