Look to sell when speculators mis-price the market

Commodity fund investors don’t always pay attention to market fundamentals

Supply and demand ultimately determines grain prices, but speculators often ignore those fundamentals and that can create selling opportunities, says provincial crop market analyst Neil Blue.
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Some speculation in commodities markets is a good thing, but large amounts of speculative money these days means price swings can be very dramatic, says a provincial crop market analyst.

And that can create opportunities.

“It has been estimated that over a trillion dollars is involved in the commodity futures and options trade,” said Neil Blue. “Speculative money flow can lead to higher or lower prices than what would happen without their influence, so that can either be good or not good, depending on what side of the market a hedge is on.”

Speculators also tend to follow market trends and can, at least in the short term, seem to ignore supply and demand fundamentals, he said.

“There are limits on how many contracts that one entity can hold in a futures market,” said Blue. “After the financial collapse in 2008, there was an investigation into speculative activity and it was determined then that speculators did not have unacceptable market control.”

Still, they have an effect.

“The U.S. dollar index began its recent decline around the first of March — not coincidently, the soybean and crude oil markets began their significant price climb about this same time,” said Blue. “As speculative money continued to move to the buy side of these commodities, other related commodities were also purchased. Supporting the crop price rally was flooding of Argentina crops and also in some U.S. and European crop areas — although there is no shortage of soybeans or corn in the world, at least not yet.”

Each week in the U.S., the Commodity Futures Trading Commission gathers and releases information on what groups hold positions in in each commodity futures. The mid-June report indicated that managed money funds were net buyers of 66,102 contracts of corn during the week, making them net long over 130,000 contracts compared to a net short corn position just a few weeks ago. Funds had increased their net long position in soybeans to almost 234,000 contracts, the largest since August 2012 when soybean prices were over $17 a bushel, compared to the mid-June price around $11.50 a bushel.

“What does this mean to an Alberta producer?” asked Blue.

“To mid-June, our canola and wheat prices had been supported by U.S. market activity. Crop conditions here and in most other parts of the world are looking good overall. That rally was likely a seasonal pricing opportunity for a percentage of those crops with prices implying a reasonable margin above production costs.”

There will be other opportunities to forward price before harvest, he added.

“For producers concerned with contracting with a physical buyer and then having a crop shortfall, or missing out on higher prices, they should consider using a put option or similar pricing strategy to retain marketing flexibility and leave price upside open.”

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