Large commercials are on the opposite side of the recent commodity rebound, which may be telling. In metals, the silver market has attracted the most attention. Commercial traders set a new net short position record of more than 91,000 contracts on a record total positions exceeding 200,000 contracts. There have been three other times in the last 30 years when the miners were net short more than 85,000 contracts. Each time, the market was lower one month later. It gave up all its recent gains and then some. The last time the imbalance between the large speculators and commercial traders was this big was February of 2013. That also was the last major high. Furthermore, just as the commercial traders have set a new net short record, the large speculators set a corresponding net long record. Large specs tend to have their largest positions on at the most inopportune moments, primarily as a function of trend-following. A mass exit by the speculative long position could create a vacuum. It will be very interesting to see if the market is trading in the $15 or $18 range when this is published. Our bet is the low side.

The record selling pressure has not been confined to the metals. The pre-planting rally in the grain markets has been a breath of fresh air as crop prices have risen above breakeven for the first time in far too long for comfort. This is around $10.25 per bushel in soybeans and $4.20 per bushel for corn, according to the Department of Agriculture and Consumer Economics from the University of Illinois. Farmers are rapidly taking advantage of their opportunity to lock in profitable forward prices for this year’s crops. They sold more than 200,000 soybean contracts in March and April and their total position size has surged by more than a third to set a record of its own. 

The same pattern, to a slightly lesser extent, is building in energy. These markets have been so beaten down that the recent rally has simply allowed them a moment to breathe. It began in December as hedgers set multi-year highs. The buying supported natural gas and crude oil long enough to force some short covering and provided the impetus for the recent rally. We see no reason for WTI crude to trade above $47 per barrel. Drilling companies have doubled their forward short hedges to lock in enough revenue to service their debt and struggle along. Make note of their recent significant short position of a little over 480,000 contracts, which coincided with the July 2014 high of $115 per barrel. If the commercial short position surpasses this total while prices are $70 lower per barrel, it would indicate just how much of the industry is forced to rob from future profits to pay past due debts and could force the market to new lows for the move.

The macro evidence shows that the commercial traders as a group collectively expect commodity prices to fall. Commodity producers are selling forward production at record and near record rates across multiple markets. Food and beverage accounts for about 15% of CPI and transportation is another 15%. Throw in declining metal prices and deflation may be shifting from possibility to probability.