Grain markets show flour power
The CFTC's latest Commitment of Traders report shows commercial users of corn, beans and wheat have been big buyers.
By Andy Waldock, Commodity & Derivative Advisors
The grain markets are beginning to look like 2010 all over again.
The corn, bean, and wheat markets had substantial rallies and set all-time highs in 2008. The markets then formed a secondary peak in 2009 before drifting lower and building a base in the summer of 2010.
We could expect a similar outcome this year, looking at factors such as ending stocks and global demand. However, these have already been absorbed by the market. Instead we should look at the actions of the commercial traders.
The Commodity Futures Trading Commission (CFTC) publishes a weekly report covering the main participants in each market. These include small speculators, like ourselves, and commodity trading advisors (CTAs), who manage pools of money. The CFTC also tracks the actions of hedgers, who use the futures markets for their intended purpose of mitigating risk throughout the crop cycle.
A new category added over the last few years has been that of index traders, who manage money based on an exchange-traded fund like Teucrium Corn (CORN). Index traders simply track the movement of the underlying asset in their fund. Their actions are seen as adding volatility and speed to the market: They buy to match the index when it climbs and sell when it falls.
The CFTC report also covers commercial traders, who either produce or consume the underlying commodity. In the case of corn, this includes Fortune 500 companies like Monsanto (MON), Archer Daniels Midland (ADM), and ConAgra (CAG) on the production side and Pillsbury (GIS), McDonalds (MCD), and Kellogg's (K) on the end-user side.
We follow the commercial traders because of their market research capabilities. They have access to the best models and end-line estimates of market value. Therefore, they can identify when a market becomes significantly overvalued or undervalued.
This brings us to our current situation. All three primary grain markets suggest rallies based on the surge of accumulation by end-line users during the post-planting lulls. Fear in the grain markets comes in three phases, and each carries with it a built-in premium followed by a sell-off if the fear is unfounded. The first concern is planting fear. Provided the crops get in the ground on schedule, the market will gradually decline with a sigh of relief. The second concern is summer drought. Enough said. Finally, weather concerns arise around harvest time.
The commercial traders' net position has grown substantially throughout this spring. In fact, their aggregate purchases in the three markets were only eclipsed by their buying in 2010. This tells us two things. First, we are starting the season at prices that are generally viewed as undervalued by the end-line consumers. Second, there is significantly more fear of a future shortage than a surplus. Based on the commercial traders' predictive capabilities, we believe there is the possibility of a significant rally this summer if weather conditions are not perfect.
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