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- Occam's razor says the simplest answer is usually closest to the truth.
- Last Friday's CFTC Commitments of Traders report (legacy, futures only) showed funds had moved to a new record large short futures position in the soybean market.
- With the soybean market leading the rally to start the week, the simplest answer is fund short covering.
I know there will be a lot of chatter early Monday morning about US politics driving the rally in the Grains sector coming out of the weekend. But if we take a step back and think about it rationally, what has changed? The US’ role in the global market isn’t going to change, and if it does, there is a chance the situation gets worse rather than better. If we look at the Grains sector rationally, something few in the industry like to do, what do we see? Last Friday’s CFTC Commitments of Traders report showed noncommercial traders held net-short futures positions in all the major markets except soybean oil (net-long 2,031 contracts) and soybean meal (net-long 33,624 contracts) as of Tuesday, July 16. A closer look at the numbers and we see Watson[i] did not move to record large net-short futures positions in the three wheat markets. Nor did funds establish a record large short futures position in corn, with the previous Tuesday-to-Tuesday actually showing a decrease of 2,540 contracts. But the soybean market was another story as Watson reportedly held a record large short futures position of 296,755 contracts. Therefore, the simplest answer[ii] is funds were covering some of their short soybean futures positions.
Soybeans: The double-digit rally in the soybean market seemed to driven by noncommercial short covering and likely provided support to the corn market. Going back to Friday’s CFTC Commitments of Traders report, and the one item that stood out to me was the new record large short futures position Watson held in the soybean market. This left the door wide open for fund short covering, sooner or later and at some price and time. As of early Monday morning, that time seems to be now. A couple other interesting factors come into play, starting with the August issue (ZSQ24) making its way toward first notice day at the end of July. While I don’t pay much attention to the Jar Jar Binks of commodities (the August and September soybean contracts), there is still a segment of the fund industry that is required to be in the nearby futures contract. Even when it comes to the soybean market. This leads to the next possible factor of the Goldman Roll in early August. Theoretically, funds would be looking to not only roll out of August futures by the end of this month, but moving from September to November as Goldman starts to roll its position forward.
Corn: The corn market was in the green early Monday morning with some of the support tied to spillover buying from the soybean market. Starting with new-crop December (ZCZ24) we see the contract rallied as much as 6.75 cents overnight and was sitting near its session high at this writing. Trade volume coming out of the weekend was about 24,000 contracts, larger than what we’ve seen of late but still not heavy activity for a summer Monday morning. The 3 Ghosts of Weather (Past, Present, and Future) show: 1) The Corn Belt west of the Mississippi River saw some rain over the weekend while the eastern Corn Belt was mostly dry 2) Today’s forecasts shows a band of no rain stretching from north Texas northeastward through the Midwest, and 3) The latest 6-to-10-day forecast calls for above normal temperatures and precipitation for much of the US Plains and Midwest. I see these three maps as neutral, but possibly leaning bullish if rains don’t materialize. Recall futures spreads didn’t change much last week, covering a neutral level of calculated full commercial carry (cfcc) at Friday’s close. As for September, the nearby issue added as much as 6.75 cents early Monday on trade volume of 12,200 contracts.
Wheat: The wheat sub-sector was in the green to start the week with Minneapolis (HRS) once again leading the way. Here we see the nearby September issue (MWU24) gained as much as 12.25 cents and was sitting 9.75 cents higher at this writing, on solid trade volume of 880 contracts. Why? Again going back to last Friday’s Commitments of Traders report and we see Watson held a net-short futures position of 24,440 contracts, within sight of the record large net-short of 28,740 contracts from the week of January 16, 2024. It’s interesting to note that from last Tuesday’s close through Friday’s settlement, September Minneapolis was up 34.0 cents indicating funds had already started the process of covering short futures. Why? Again turning to the 3 Ghosts of Weather, particularly that of the future, we see the extended forecast remains hot and dry for parts of the US Northern Plains spring wheat growing area. While it is getting late in the growing season for the 2024 crop, this weather could still play a role in final yield prospects. September Chicago (SRW) rallied as much as 10.75 cents overnight and was sitting 5.75 cents higher, on trade volume of 8,200 contracts. Here the key is the continued bearish fundamentals of the market.
[i] My name for the algorithm driven investment fund (noncommercial) industry in general.
[ii] Occam’s Razor states “the simplest explanation is usually the closest to the truth”.
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.
