Canada Markets

Investors Reduce Appetite for Holding Long Wheat Positions

Cliff Jamieson
By  Cliff Jamieson , Canadian Grains Analyst
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The blue bars on this chart represent the net-futures position held by noncommercial traders (investors) of spring wheat on the Minneapolis Grain Exchange, as measured in the number of contracts on the secondary vertical axis on the right. The red line represents the continuous MGEX red spring future price as measured on the primary vertical axis on the left, in dollars per bushel. Most recent data, as of July 2, reflect a move to a net-short position. (DTN graphic by Nick Scalise)

Commodity Futures Trading Commission (CFTC) data released its weekly Commitment of Traders report Monday which reflects the positions held as of July 2. The report provides another reminder of the alarming trend of the noncommercial market participants, or investors, either reducing their bullish bets on commodities or increasing their net-short or bearish positions in the market.

The market position taken by this group cannot be taken lightly and in fact, makes up one of the six factors in DTN's Six Factors approach to analyzing markets and determining pricing signals. Trends in the market positions held by investors are charted and followed weekly for signs of changes in the behavior of this group. By adding a continuous price line, as shown in red on the attached chart, we see the significance in the trend of noncommercial holdings and the impact it has on price. The correlation function on ProphetX calculates a correlation coefficient of .635, which means that the trends seen in the holdings of investors can be used to explain 63.5% of the movement in price.

As of July 2, as seen on the attached chart within the circle on the lower right, the holdings of the noncommercial traders moved to a net-short position of 446 contracts from a net-long position of 846 contracts the previous week. Small net-short positions also existed over three weeks from late March to early April. Prior to that, there was one week in November 2008 when investor positions dipped to a net-short position, while a good portion of 2005 saw the investor class with a net-short position, or in other words, betting on lower prices.

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This trend is also seen in the other classes of wheat, with investors holding a net-short position of 8,994 HRW contracts, the fourth consecutive week of net-short position holdings, while the Chicago SRW contract, the most active wheat contract, saw investors net-short position increase to 45,530 contracts, the 29th consecutive week where investors held a net-short position.

The lower study on the attached chart shows the impact of volatility on the decisions made by investors. Investors tend to avoid volatility in their investments choices due to the potential for volatile markets to eat into expected returns. The volatility study shows how volatility reached a high of 42.22 in June 2011, fell to a low of 21.99 in April 2012, then reached a high of 32.61 in July 2012 in conjunction with the U.S. Midwest drought. These swings in volatility have had a bearing on the holdings on the commodity investor.

Commodity investors are also burdened with the speculation surrounding the ongoing government stimulus spending that is taking place around the world, and more importantly, when it might end. Markets are jittery with the mere suggestion that governments may end the billions of dollars that are thrown into the economy on a monthly basis to revive ailing economies, from Europe to Japan to the United States, which is affecting the grains like all other commodities as investors place funds where they feel is the safest bet given the uncertainty in the marketplace.

Commodity price movement is very much at the mercy of this class of investor and it may be difficult to imagine a significant price hike without the resurgence of investor buying.

Cliff Jamieson can be reached at cliff.jamieson@telventdtn.com

(ES)

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