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Comment: Selling out early

Trade uncertainty is souring investors’ views of grain markets

Speculators spent the month of June selling Chicago-traded futures and options, specifically corn and soybeans, as if record U.S. crops were already in the bag.

But the trade dispute between the United States and China, the world’s largest soybean buyer, has driven market uncertainty. It was confirmed in mid-June that both parties would enforce tariffs against one another beginning July 6, and nothing suggests these moves will be reversed.

In the absence of trade conflicts, investors probably would not have been so early to sour on U.S. corn and soybeans. The government’s latest report puts crop conditions among the most favourable on record, but yields are far from guaranteed as they rely primarily on the weather during July and August.

In the four weeks ended June 26, money managers sold a record amount of CBOT corn and soybean futures and options contracts. When adding in the soy products and wheat, including K.C. and Minneapolis wheat, the collective sell-off was the second largest ever behind the four weeks ended April 4, 2017.

But the week ended June 26 was different than the previous three weeks as total open interest sharply declined instead of climbing to a new record.

Combining CBOT corn, wheat, and soybeans, open interest declined by a half a million futures and options contracts to just under four million total, according to data from the U.S. Commodity Futures Trading Commission. This weekly decline ranks third largest in data back a decade.

In CBOT corn, hedge funds and other money managers increased their net short position to 60,319 futures and options contracts from 14,038 in the prior week.

They also stepped up bearish bets in CBOT soybean futures and options contracts, extending their net short to 43,985 contracts from 12,801 a week earlier.

The last week of June ended with the U.S. Department of Agriculture’s annual acreage report as well as quarterly grain stocks, which have historically triggered some of the most volatile CBOT trading days. The corn and wheat numbers were a little heavier and the soybean numbers were a hair lighter relative to expectations, but the data was largely unsurprising.

The soybean market was clearly unimpressed. Despite being up 15 U.S. cents after the report, new-crop November soybeans settled lower at US$8.80 a bushel on Friday, its lowest close of the year, with the Chinese tariffs looming.

Analysts estimate the commodity funds were net sellers of soybeans and slight net buyers of corn.

Aside from the ongoing trade situations with China and other U.S. allies, the weather will be of utmost concern for the U.S. corn and soybean markets during the next several weeks. Forecasters have warned that warmer-than-normal temperatures could dominate the Corn Belt for at least the first half of July, which is not the most ideal scenario for corn pollination.

Speculators have considerably cut back on their bullish soybean meal stance that peaked two months ago following the major drought in lead exporter Argentina.

Through June 26, money managers reduced their net long in meal to 63,136 futures and options contracts from 83,574 in the prior week, and the new position is the least optimistic one since early February.

Funds are still massively short CBOT soybean oil. As of June 26, they trimmed their bearish bets to 90,180 futures and options contracts from the prior week’s record 93,139 contracts.

Trade estimates indicate that commodity funds were straight sellers of soymeal and straight buyers of soyoil recently.

In CBOT wheat, money managers extended their net short to 12,477 futures and options contracts from just 752 in the previous week. This follows their brief bullish stint in soft red winter wheat that lasted from late May to mid-June.

But speculators may not be ready to dig deeper on the short side of CBOT wheat as commodity funds are estimated to have been net buyers over the past three days, particularly on Friday.

USDA’s wheat numbers were not bullish at all as both wheat acres and stocks came in above expectations. But French consultancy Strategie Grains slashed France’s soft wheat output by more than four million tonnes that morning, commanding the wheat market’s attention.

The only other contract besides soybean meal on which funds still hold a bullish stance is K.C. hard red winter wheat, but they have retreated in this area, too. Through June 26, money managers cut their net long in K.C. wheat to 30,882 futures and options contracts from 47,213 a week earlier.

They also extended bearish bets in Minneapolis wheat to 7,891 futures and options contracts from 5,324 in the previous week. Funds have not been this pessimistic toward hard red spring wheat since November 2015.

Karen Braun is a market analyst with Reuters news service. The views expressed here are her own.

About the author


Karen Braun is a Reuters market analyst based in Chicago. The views in this column are her own.



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