The actions of the non-commercial traders, or investors, make up just one of the six factors utilized by DTN to analyze markets. The investor trade adds volume to the market, enhances liquidity and can act as a driving force behind the market's momentum.
Each Friday, the Commodity Futures Trading Commission in the United States releases their Commitments of Traders report, which breaks down the open interest for various commodities as of the previous Tuesday, and breaks this data down by commercial traders, or hedgers, and non-commercial traders, who are also referred to as large speculators.
The six-factors approach captures the views of the commercial side of the industry by following futures spreads, or the difference between consecutive trading months, as the actions of this group tends to take place over a number of months into the future. The relationship between consecutive futures trading months represents their actions and overall view of the market. Strengthening spreads indicate a level of bullishness within the group of commercial traders, while weakening spreads suggest a bearish tone to the market.
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The views of the non-commercial trader are obtained from the weekly CFTC Commitments of Traders report, specifically the net position held. The attached chart shows the net-position held by speculative investors as seen by the blue histogram bars, which represents the number of contacts held as measured on the right-hand y-axis. Bars above zero represent a net-long position, while bars below zero represent a net-short position.
In order to show the significance of the actions of this group, the weekly continuous soybean chart has been over-laid, represented by the red bars. It's interesting to see the trend in futures prices when plotted against the trend in holdings of the investor class. The blue bars indicate the most recent high in the net-long position held by investors of 260,433 contracts, reached in early July of 2012 during the heat of the U.S. Midwest drought. As one can see, non-commercial traders have been reducing their net-long position ever since to the most recent data indicating a net-long position of 77,567 contracts.
The significance of this move is the effect on price. ProphetX calculates the correlation, or degree of relatedness, between these two data series as being .661, which would suggest that 66% of the moves in one series can be explained by moves in the other. This builds a solid-case for the investor-class participation in the commodity markets, despite the market volatility that comes as a result.
For Canadian producers, the reduction in the net-long position for soybeans also has implications for canola's price potential, as the trends in the soybean trade in terms of non-commercial investments are most likely duplicated in the canola market, which does not report positions to the CFTC. As well, price trends in soybeans also directly impact canola's price trends, so soybean weakness due to non-commercial participation will ultimately be felt in the canola market.
Cliff Jamieson can be reached at email@example.com
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