Co r n prices have rallied $2.50 per bushel, since the market stopped going down on June 29, 2010. Some of the buying is a result of hedgers locking in prices before the market goes higher. But to a larger degree, it is the large speculative buy orders that have driven prices to $5.73 per bushel, a level only seen for the second time in history.
The funds are holding a record-large long position in corn and total open interest is fast approaching the historically high levels seen in the last bull market of the 2007-08 crop year.
Open interest is the amount of contracts held by either the longs or the shorts, which have not been liquidated by an offsetting transaction, or by making or taking delivery.
Someone who has purchased a futures contract in anticipation of prices going up is said to be long the market. Someone who has sold a futures contract and is expecting the market to go down is said to be short the market.
As illustrated in the accompanying chart, open interest provides a valuable insight to market direction. Increasing open interest (a) in a rising market (A) is a sign of a strong bull market.
A bull market needs to be fed fresh bullish news daily. Continual demand or a draw-down in supply is required to attract additional long positions and fresh buying to the market.
On Friday, Oct. 8, 2010 USDA slashed the 2010-11 U. S. corn yield to 155.8 bushels an acre, which in turn reduced ending stocks to a tight 902 million bushels. In an effort to ration supply, the market quickly moved up the allowable 30-cent daily limit.
It goes without saying the trend is up until the market tops out. Most often – and without notice – a top develops when a market abruptly reverses direction and prices quickly erode. This occurs because a bull market dies under its own weight. The longs who were originally buying contracts on the way up are now liquidating their positions. In this environment, little else matters. Some sell to take or protect profits and others sell to stop losses. This long liquidation is evidenced by decreasing open interest (b) in a declining market (B).
More recently, open interest (c) has once again been steadily increasing and accompanying rising prices (C). This strong bull market will continue to rally until the buying dries up. Fresh buying occurs when funds initiate new long positions and as others add to their already profitable positions and when hedgers anxiously lock in prices before the market goes higher. Additional buying is the result of short covering. This occurs when the shorts buy back their positions.
History will repeat. It’s not a question of if the funds will liquidate their long positions, but when. Markets go down twice as fast as they go up and this is why farmers should never take these markets for granted. All too often farmers get complacent by believing prices will continue to rally and remain high for extended periods of time.
Grain markets tend to make V-Tops, as prices rally straight up and drop straight back down. This is why it is so important to have a marketing plan. All too often I see farmers with one goal in mind and that is to hit a home run with 100 per cent of their production. Unfortunately, they can strike out by aiming to sell everything at the top. Remember, games are won by making singles, doubles, and the occasional home run.
Farmers should not lose sight of the fact that from a historical perspective grain prices are at relatively high levels and that a profit isn’t realized until the grain is priced.
Join me online at www.Ag-Chieve.ca/cooperator/for an audiovisual presentation about this article and chart.
David Drozd is president and senior market analyst for Winnipeg
based Ag-Chieve Corporation. The opinions expressed are those
of the writer and are solely intended to assist readers with a
better understanding of technical analysis. Visit us online at www.Ag-Chieve.ca/cooperator/for
more grain-marketing ideas and educational tools, or call us toll free at 1-888-274-3138 for a free consultation.