Many markets have faced contraction as both commercial and speculative traders have taken chips off the table ahead of the election and year-end. There are, however, a couple of interesting setups in the grains and a head scratcher in the British pound.
The grain market’s decline has finally brought processors back to the buy side. The most compelling argument could be in corn where long hedgers were aggressive buyers as the market neared the $3 per bushel level. The story behind their recent purchases goes back to June when the corn market was stretching towards $4.50. Growers sold more than 280,000 contracts in their efforts to hedge this year’s huge crop. Their actions have now shifted to short hedge covering. Most futures contracts are cash settled rather than delivered. It’s simply easier to offset the futures position and apply the cash toward the physical holdings; this swap is exactly what is currently taking place. The total commercial trader position peaked just above 1.5 million contracts in June and has now declined to just over 1.12 million contracts, and the commercial traders’ net position has gone from short more than 280,000 in June to long 87,000 currently. This process is an excellent example of their macro behavior and leads us to the next setup.
The recent buying in corn — both short covering and commercial processor — is positive for the market. The strength coincides with the typical November/December seasonal low. Furthermore, the decline in the commercial traders’ total positions shows that there is plenty of buying capacity left within their normal range of holdings.
Finally, this pattern is very similar to the close of 2013, as corn bottomed with low volatility amid significant commercial purchases before rallying 20% into the overhead resistance of its long-term moving averages. The current analog is eerily similar.
Chicago wheat futures are exhibiting unusual behavior. Other than a few blips, the wheat market has been in a steady decline for years, and it seems, the speculators are finally catching on. Commercial short hedging peaks are quite visible and in line with multiple rally attempts during the last several years. The last significant point was in July of 2015. This year’s June rally didn’t attract the commercial selling it normally does, instead; the large speculators led the selloff. Moreover, large speculators took the lead in total positions as they built up their short position, heading into the current lows. This is the longest period of late where the large speculators have held a greater total position than the commercial traders in the Chicago wheat market. This is a good indication that a bottom is near.
Finally, a brief note on the British pound. Commercial buying followed the Brexit vote, which appeared to support the market. Obviously, this was incorrect as the market made a new low, close to $1.20 in early October. However, this decline has brought about more commercial buying and pushed their net position to record levels. Conversely, this low is also setting speculative net short and total position records. This is the most short the large speculators have ever been and like the wheat, is an example of speculative excess beyond commercial value.