I currently write my article on Wednesday to meet the publication deadlines of various distributors. The primary disadvantage to this is that most of the important government reports come out on Thursday or Friday. Late week reports include the monthly Unemployment Report, 1st Friday of every month, Producer and Consumer Price Index releases on the 2nd Thursday and Friday of each month. Also included on this list are several agricultural reports, including this week’s major agricultural reports - World Agriculture Supply and Demand (WASD) as well as the USDA Crop Production and Grain Stock Reports.
The nature of our business is to try and forecast what the supply and demand numbers will be. Trading agricultural commodities seems almost quaint as the fundamental trends relate to the age old equations of supply and demand. Once the acreage has been planted or livestock has given birth or been sent to slaughter, the supply for the coming season has roughly been determined. Meanwhile demand for food both domestically and abroad can be measured based on population growth and the health of the global economy. Food is a fundamental necessity and therefore fairly inelastic in terms of substitute goods or budget concerns.
Daily price fluctuations, on the other hand, are much more volatile and the large trader movement ahead of this week’s reports should add considerable fuel to the fire. The January WASD Report has become closely watched as it finalizes the previous year’s production. This report has led to considerable volatility including limit moves in the corn market for each of the last five years in the trading session immediately following its release. The fact that the mix of limit up to limit down moves over this period is three to two shows just how wide the range estimates and expectations can vary compared to the report data.
This year should be no exception. Commercial traders in the grain complex have been heavy sellers over the last three weeks. They have shed nearly a third of their corn positions, totaling more than 60,000 contracts on the year-end rally and have sold nearly the same percentage across the soybean complex. In fact, the amount of net selling has triggered a sell signal based on a statistical algorithm across all soy products. This has been backed up by Steve Briese’s comments in his most recent Bullish Review, “A COT-Fisher sell signal has been triggered by commercial selling in bean oil. We caught the top in the bean complex quite cleanly last September, and the bean oil chart has developed the tell-tale bear market pattern over the past 4+ months (circled).”
Commercial traders have been very successful in predicting the long-term trends in the grain markets. This has a lot to do with their direct involvement in the industry. The producers and end users of grain products are intimately involved with their markets. The availability of the Commitment of Traders Reports allows us to peek into their actions and thus, provides us with an opportunity to look over the shoulders of some of the best analysts and traders in the world. Whether the initial reaction to the report is positive or, negative is fairly irrelevant. Either way, the big money is betting on lower prices across the grain markets through the first quarter of 2011.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
