A look at long-term trends of commercial interest in the CFTC’s “Commitments of Traders” report.
Seven markets set net position records in January. While none of them were in the grain complex, it may be the most compelling sector. In January, the commercial traders continued purchases put us on the lookout for reversals higher in corn, soybean oil and both the Kansas City and Chicago wheat. The grain markets rallied with corn rising 4.6%, beans 6.4% and both the wheat markets popping more than 10% from their respective lows.
The commercial grain producers have jumped in to hedge their forward production extremely aggressively. The Chicago wheat commercial traders’ net position has declined from 96k+ to 49k+. The soybean net position has declined from 111k to 60k, even as the total commercial position has grown by 90k contracts. Finally, the commercial traders in the corn market have decreased their net position by 90k while pushing their total position to within a hair of a record. Commercial grain producers have used the January rally to lock in a significant portion of their expected 2018 harvest. Barring weather events, this is an omen for grain prices this year.
Crude oil set yet another net short record position among the drillers. However, it did not set another new total position record. Heating oil also set a net short commercial position record, but isn’t even within 20% of its total position record. The total position is an essential number at market extremes as it defines production or consumption capacity. Commercial traders trade within the execution of their businesses’ needs. Once those needs are met, new speculators begin to push the prices beyond the fundamental consensus. Crude is within 10% of the total position record set in January. Therefore, it appears that $70 per barrel is the new drillers’ cap. A push beyond here would be speculatively fueled.
Moving to the euro currency, commercial traders have been massive sellers since November. Their current net short position of more than 190k contracts is a record and surpasses their November 2014 total by nearly 25%. The commercial traders’ collective forecast indicates that they expect $1.25 is too strong. Finally, the speculators are currently long 2.36:1 in the euro futures. The last time their position was this lopsided was May of 2011 when the euro topped at $1.49.
The short end of the yield curve continues to grow its commercial bid even as the downward prices accelerated into February. Both the eurodollar and five-year Treasury Note set net long position records and the 10-year T-Notes are within a whisker of a record, while the 30-year Treasury Bonds remain relatively neutral. The commercial traders expect the yield curve to steepen by short-term rates falling, rather than long-term rates rising.