- The general hue and cry across the grain industry is that funds are solely responsible for the ongoing selloff in corn and soybeans.
- This idea ignores the reality of Newsom's Market Rule #6: Fundamentals win in the end.
- With that in mind, a look at market price and basis tells us commercial traders are also bearish.
(Cue intro music to the classic television program MythBusters)
“On this episode of MythBusters, one of the more popular urban legends in US grain markets will be put to the test. The myth: Watson (funds, noncommercial traders, algorithm-driven trading programs) is solely responsible for price movements in the markets. Who is your MythBuster? Darin Newsom (“Here comes chaos!” and “This won’t hurt a bit.”), with more than 35 years of market analysis experience.”
Welcome. As mentioned in the intro, it’s time to take a look at much of what passes for market commentary these days, starting everyone’s favorite subject – the role of funds. Like a litter box needing to be cleaned, social media is filled with the opinion that funds are the only market entity pushing corn and soybeans lower at this time. Before we get into this discussion, let’s review some facts: First, there are two sides to every market, commercial (those actively involved with the underlying cash commodity) and noncommercial (aka funds). These two sides do not have to always agree, a situation that leads to what I call a Rubber Band Disposition[i]. Eventually, this disposition is usually resolved by Newsom’s Market Rule #6: Fundamentals win in the end. But because of the Vodka Vacuity[ii], there is no such thing as “always” meaning there are times noncommercial traders win.
Corn futures have been in a long-term downtrend since a bearish 2-month reversal was completed on the market’s continuous monthly chart at the end of May 2022. At the time, the Jul22 issue was priced at $7.5350. As of Wednesday’s close, the nearby March 2024 contract was priced at $4.11, a decrease in value of 45%. Similarly, the continuous monthly chart for soybeans shows Jul22 closed the month of June 2022 at $16.75, completing a bearish key reversal. Fast forward to Wednesday’s close and the Mar24 contract finished near $11.61, a drop of 31%. This is a good time to post the reminder of Newsom’s Market Rule #1: Don’t get crossways with the trend. Why? Because trends are generally driven by Watson.
In early May 2022, the noncommercial net-futures position in corn was long 501,865 contracts. In late June, Watson was net-long 178,379 contracts of soybeans. Fast forward to last Friday’s CFTC Commitments of Traders report (legacy, futures only) and we see the corn position had flipped to a net-short of 245,939 contracts (a change of 747,800 contracts) while the soybean position was a net-short of 161,751 contracts (a change of 340,130 contracts). Both were record large net-short futures positions for the noncommercial side.
Before we start thumping our chest and squawking about how this confirms the myth, let me ask you what defense mechanism the commercial side has against an unwarranted move by their noncommercial counterparts? If you answered “Basis”, good for you. You’ve been paying attention. A look back at the basis markets for 2022-2023 and we see both corn and soybeans posting their highest weekly closes over the past 5-years through at least the end of June 2023. Why? Commercial traders still needed to source supplies to meet demand, so they pushed the cash price with their most effective tool – Basis. This marketing year, though, we see basis markets for both corn and soybeans running below average and sometimes threatening the weakest weekly closes of the past 5 years, all while futures are taking a beating. Why? There is enough supply to meet demand. And then some.
At Wednesday’s close the Barchart National Corn Price Index (ZCPAUS.CM), the weighted national average cash price, was calculated near $3.92. The NCPI correlated to an available stocks-to-use[iii] of 13.1%. This meant the NCPI was at its lowest and as/u its highest since the end of October 2020. It was a similar situation with the Barchart National Soybean Price Index (ZSPAUS.CM) and its calculation of roughly $11.06, putting available stocks-to-use at 11.3%. Again, the last time we saw numbers close to this was back in October 2020.
While Newton’s First Law of Motion applied to markets tells us, “A trending market will stay in that trend until acted upon by an outside force, with that outside force usually noncommercial activity”. But again, if fundamentals win in the end, and US supply and demand is growing more bearish as indicated by commercial activity, then Watson can continue to add to its net-short futures position without fear of fundamentals. Some of the funds I’ve talked to and work with use REAL market fundamental reads as part of their algorithm equation, meaning they too watch trends in intrinsic value and basis[iv].
What, then, is the conclusion in regard to the myth that Watson is singlehandedly driving corn and soybeans lower? “Busted!” The US is also dealing with bearish REAL fundamentals.
Next time on Market MythBusters, we’ll tackle another urban legend, maybe the one about how money can only be made in an uptrend. That should be fun.
[i] Like a rubber band being stretched, a market will only go so far before it snaps back to its base, with that base being fundamentals.
[ii] The Vodka Vacuity tells us there are no Absoluts in markets.
[iii] Don’t confuse available stocks-to-use with ending stocks-to-use the rest of the industry comes up with using USDA’s make-believe supply and demand numbers. The reality is we don’t know what supply and demand actually is, but we can gauge the relationship between the two by tracking the market price, or cash index of the various markets.
[iv] While paying little to no attention to the made up fundamentals of USDA reports, something your broker/advisor likely won’t tell you.
On the date of publication, Darin Newsom 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 Barchart Disclosure Policy here.
