Furthermore the size of the M$ net short has consistently exceeded -100,000 contracts with the current record net short position established during that window on 10/29/2013, which totaled -180,627 contracts. Conversely it’s also worth noting that on the long side the M$ position has never exceeded +280,000 contracts.
Not surprisingly then since June 24th, 2014 spot corn futures prices have failed to trade over $4.50 per bushel while also trading down to a 5-year low of $3.18 ¼ on October 1st, 2014 (see chart on page 3 of the M$ position in relation to corn futures).
Therefore the obstacles to the corn market finding a pulse in 2016 and possibly exhibiting signs of the massive rally potential and price volatility we became accustomed to beginning in 2008 (when corn futures shot up to what was then a new record high of $7.65 per bushel on June 27th followed by crude oil futures rallying to its current record high of $147.27 per barrel just two weeks later on July 11th) have significantly more to do in my opinion with these 3 key macro-market influences. And while it can certainly be argued that tight U.S. corn ending stocks estimates (that also coincided with some of those record highs specifically in June 2008 and August 2012) also played a central role, I am a firm believer that without the active participation of money managers accompanied by a “cheap” U.S. Dollar and healthy energy complex, corn prices would not have rallied as far as they did.
Who’s winning right now with cheaper corn prices? I’m not sure anyone is. The reality is even “bona fide hedgers” (as defined by the CFTC) would now likely admit they yearn for the pre-Dodd-Frank days where corn rallies were measured in dollars instead of nickels and option volatility actually traded north of 30 and 40%. For all the headaches corn hedgers suffered due in part to the massive managed money positions speculators held in corn from June 2006 through June 2013, at least the liquidity crunch was a capital constraint and not a margin restriction. Ethanol plants in particular were still making money in 2008 and 2012 when corn futures were trading over $7.00 and $8.00 per bushel.
How? Ethanol prices compensated for the higher corn costs by trading over $2.70 to $2.90 per gallon. Point being, the price of ethanol decided whether or not corn was economical to ethanol producers, not the price of corn. That hasn’t changed in 2016. The reality is most risk managers are sleeping less than they did 5 years ago when the fear was a $10 corn market. And the reason is unless there’s an incredible shift in investor sentiment regarding commodities and/or some tangible downward correction in the U.S. Dollar, corn rallies will likely once again be relegated to 50-cents a bushel in 2016 barring a below-trend 2016/17 U.S. corn yield. And unfortunately… that type of rally/price volatility won’t come close to creating the margin opportunities a number of corn hedgers need to protect a positive ROIC in 2016.
Thanks for reading.
Twitter: @MarcusLudtke
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
Data References:
- USDA United States Department of Ag
- EIA Energy Information Association
- NASS National Agricultural Statistics Service
