The following editorial was published in Price Perceptions issue #1476 on February 16, 2013

Battle of Forces Ahead...

An interesting and puzzling phenomenon has unfolded in grain markets over recent weeks...

  • May corn futures advanced from a low on January 7 of $6.79 to a high of $7.47 on February 1 for a gain of 10.0%. During the same time period, open interest increased from 1.146 million contracts to 1.269 million for a gain of 10.7%. Since February 1, prices plunged from a high of $7.47 to a low this week of $6.86 for a loss of 8.2%. However, open interest increased from 1.269 million to 1.304 million for a gain of 2.8%.

  • May soybeans advanced from a low of $13.44 on January 11 to a high of $14.89 on February 4 for a gain of 10.8%. During the same period, open interest increased from 538,808 contracts to 602,335 for a gain of 11.8%. Since February 4, prices fell from $14.89 to a low this week of $13.94 for a loss of 6.4%. However, open interest increased from 602,335 to 629,989 for a gain of 4.6%.

  • May Kansas City wheat advanced from a low on January 11 of $7.95 to a high of $8.61 on January 22 for a gain of 8.3%. During the same period, open interest increased from 172,112 to 177,330 for a gain of 3.0%. Since January 22, prices fell from $8.61 to a low this week of $7.81 for a loss of 9.3%. However, open interest increased from 177,330 to 188,556 for a gain of 6.3%.

    Normally, when prices rise on increasing open interest, it signals new buyers are aggressively entering the marketplace. When prices take back those gains, open interest typically declines as the new longs suffer losses and liquidate positions. However, in recent weeks, open interest has increased sharply as prices took back gains. Therefore, not only are the new buyers who pushed prices higher now suffering sharp losses, but those buying during the following price break are also suffering losses.

    Conversely, shorts that entered during the advance are now showing handsome profits. In addition, new shorts entering the market as it fell are also enjoying profits. In other words, shorts in the marketplace now hold the upper hand.

    Focus in grain markets has shifted in recent weeks. Prior to the recent downturn, the dominant market force was anticipation of tight US supplies (old crop) into summer. During the downturn, focus has been on large supplies entering world markets from crops beginning harvest in South America. Also, next week the USDA will hold its annual Agricultural Forum that is expected to forecast much larger US production (new crop) next fall.

    Following the Agricultural Forum, much of the recent negative news will have been digested in futures. We expect a shift in price perception back toward tight US supplies for corn and soybeans as the March 28 stocks report approaches. This should lessen the dominance shorts now hold in old crop grain markets.

    The beginning of planting season should allow shorts to maintain dominance in new crop futures into spring. However, they could be placed somewhat on the defensive in old crop futures. Therefore, we believe an exceptional opportunity may be forthcoming by bull spreading old crop futures against new crop in both soybeans and corn.

    Bill Gary
    President/Editor
    CIS, Inc.


    TRADING IN COMMODITY FUTURES OR OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

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