Grains: The Sector Has One Bullish Factor

• Noncommercial traders (funds) held a net-short futures in the major Grain and Oilseed markets as of Tuesday, January 9.
• Since then corn, soybeans, and Chicago wheat have all seen continued pressure indicating funds were continuing to sell.
• This could lead to a round of short covering for no other reason than wanting to move money to other longer-tern investment markets.

There has been a lot of discussion about the Grains sector since last Friday’s data dump by USDA. Amid all the wailing, gnashing of teeth, and rending of garments by perma-bulls, not to mention the coddling of this group being done by the majority of the industry that tells them what they want to hear rather than what they need to hear, it is easy to find a bullish factor for the 5 major markets (corn, soybeans, 3 wheat futures classes). That factor is the net-short futures position held by noncommercial traders (funds), last reported in the CFTC Legacy/Futures Only Commitments of Traders (CoT) report.

I guess I could’ve strung that out a bit to make it more dramatic. Oh well. 

Before we go on, let me AGAIN explain why I continue to use the legacy/futures only edition rather than lining up like a lemming to go over the cliff of “disaggregated futures and options” with the rest of the industry.

• Newton’s First Law of Motion applied to markets: A trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial activity.
  • Which led to Newsom’s Market Rule #1: Don’t get crossways with the trend. If you do, you are fighting against the funds.
• Commitments of Traders reports by themselves are not that important, acting as confirmation of what we already see happening with trends in futures. Given this, we might as well give it a KISS (Keep It Simple Stupid) of approval.
• Option traders trade for a number of reasons rather than being bullish or bearish. Therefore, including their position only clouds the picture.

I know as soon as I post this, the response will be, “Yeah but DISAGGREGATED sounds like an important word!” Okay. You be you; I’ll be me.

With that out of the way, let’s look at the three major Chicago grain and oilseed markets. 

Corn (CZH24): Last Friday’s CoT report showed funds had increased their net-short futures position to 173,033 contracts, putting it within sight of the record large net-short position of 235,013 contracts from the week of June 9, 2020. Why might this be bullish? 

• Fundamentally the market is still neutral, generally speaking.
  • National average basis is running between the previous 5-year average and 5-year low weekly closes.
  • Futures spreads are covering a neutral level of calculated full commercial carry (cfcc).
• Therefore, funds don’t have a fundamental reason to create a new record large net-short futures position.
• On the other hand, with outside markets more attractive as investments opportunities during 2024, funds could look at covering some of their net-short corn futures position.

Soybeans (ZSH24): The latest CoT report showed funds had increased their net-short futures position in soybeans to 38,049 contracts. From Tuesday-to-Tuesday March soybeans lost another 45 cents or so as the issue extended its downtrend to a low of $12.03. Based on Newton’s First Law of Motion we can see funds have increased their net-short futures position, possibly beyond the 46,627 contracts from the week of September 10, 2019. As with corn there are two key reasons funds could start covering some of this position: 

• Fundamentally the market remains neutral (national average basis) to bullish (the May-July futures spread continues to cover less than 33% cfcc).
• There are more attractive markets for longer-term investment money, even in the oilseed subsector. Soybean meal’s forward curve remains inverted indicating a more bullish real fundamental situation.

Chicago (SRW) Wheat (ZWH24): I have a more difficult time making a bullish case for Chicago wheat due to its continued bearish real fundamentals. Last Friday’s national average basis calculation came in at 61.25 cents under March futures as compared to the previous 5-year low weekly close for the same week of 40.25 cents under March. All while the nearby Chicago futures contract has dropped nearly 75 cents since early January, putting it in the lower end ($5.92) of March wheat’s previous 5-year trading range from $4.47 to $13.75. Usually when futures are weak, basis tends to run strong. Unless fundamentally there is no reason to do so. Recall last September saw the CME institute its Variable Storage Rate policy for Chicago SRW wheat. That doesn’t happen with a fundamentally bullish market. Anyway, last Friday’s CoT report showed funds holding a net-short futures position in Chicago wheat of 33,390 contracts. This was a long way from the recent position of 97,204 contracts meaning there is room for more selling. How is this bullish? It isn’t, unless funds decide they simply don’t want to be in wheat. 

I can understand that logic. 

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