Are Funds Overextended? – Blue Line Ag Hedge
Are Funds Overextended?
Are funds overextended in their short corn position ahead of key growing seasons for Brazil and the United States? Let’s take a look at how prices responded when Funds were heavily short.
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Funds were net buyers of roughly 45k contracts through February 27th, 35.5k of that was short covering as seen in the table below. That ended the eight-week streak of selling from Funds, who still hold a historically large net short position to the tune of 295,258 contracts.
Looking back to the old record short position in 2019 we see funds were short roughly 322k contracts as of 4/23/2019. By June 25th, they flipped to be net long roughly 188k contracts. The rally during that time frame amounted to roughly $1.00 in the futures price. We show you this not to offer false hope, but to remind you that things do change, and they can change on a dime due to either an underlying shift in fundamentals or just a rise in uncertainty. The latter generally set’s up for an opportunity as you can see it did in 2019 where prices eventually set back into the end of 2019 and start of 2020. Having a plan in place with price targets in mind could be more important this year than any of the last 5-years.
Where could this year’s uncertainty come from?
It could come from a lot of different directions, but the one that sticks out to us right now is Brazilian corn production as their second crop could be threatened by drought conditions (see graphic below of Brazilian crop calendar, top producing corn regions, and soil moisture map). The average analyst estimate for Brazilian corn production in this week’s WASDE report comes in at 121.95 MMT. This would be down 2.05 MMT from last month’s report and down sharply from last year’s 137.00 MMT. We will continue working hard to keep clients updated with the latest developments.
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On the date of publication, Oliver Sloup did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Disclosure Policy here.
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