Commitment of traders report is window on grain market

The front-of-mind factors for farmers to consider as they work out their marketing and hedging strategies include costs of production, break-even points, cash flow needs and the overall supply and demand fundamentals of the market.

Those are the basics, but there are a host of technical indicators that can also help understand market trends and predict where they might go in the future.

It is also helpful to be aware of what each group of players in the market is thinking.

The participants in grain markets can be divided into three groups:

  • commercials, which are those in the grain business such as grain handlers, exporters and processors
  • non-commercials, which are big speculative investment funds
  • non-reportables, which are small speculative traders.

The U.S. Commodity Futures Trading Commission issues a Commitment of Traders report every Friday afternoon about the weekly net shift in positions. It is available at www.cftc.gov.

The reports cover the week’s trade ending Tuesday and have nothing to do with price.

They provide information on what the largest industry players are doing. From it we can tell if they are changing direction in their buying and selling power.

The report shows the position of each of the groups, whether they are net long, meaning they hold “buy” positions and expect the market to rise, or net short, meaning they hold “sell” positions and are expecting the market to go down. The report compares the positions relative to where they were the previous week.

However, to put the numbers into context you need a longer-term view over many months or perhaps years.

Graphic, long-term pictures of these shifting positions are available from web-based market data providers such as BarChart.

The agricultural market price listings on our website, Producer.com, use BarChart data. If you burrow down into the chart offerings there, you’ll find that you can select “indicators.”

Among the options available is a commitment of traders line chart.

If you select that, a chart showing the positions of the speculators and commercials will appear immediately below the price and volume charts.

Sometimes the page does not load properly the first time, but stick with it. It usually works on the second try.

Regan Espeseth, an investment adviser and commodity broker with the Royal Bank in Saskatoon, spoke about using futures markets for risk management when addressing the Agri-Trend 2012 Farm Forum Event in Saskatoon Nov. 28.

Espeseth highlighted the Commitment of Traders report as a valuable window on the market. He likes to take trading cues from the commercial players.

“The number one reason is they have been the most accurate looking back on the charts,” he said in an interview. “They are laser focused on their particular commodity.”

The commercial players are directly involved in the grain business. They know what the export market is demanding and how much oilseed crushing plants, flour mills and other end users need.

They have a front row seat on the demand picture and work it into their hedge trades, long before the word gets out to the analysts, newsletters and market traders.

I’ve also heard other analysts talk about the importance of watching to see what big speculators are doing because they have huge amounts of money to invest and the weight of their dollars can have a big influence on price direction.

I think a good first step for farmers learning about risk management is to start watching the report to become aware of what all the players are doing.

It is a bit like a football player knowing the broad strategies of the opposing team.

Espeseth identified a specific example of how watching commercials can provide a signal of future market direction.

Commercials are in a record net long position in soy oil. They were building that long position this fall, even as prices across the oilseed complex were falling because speculative traders began to worry about the potential of a record South American soybean crop.

However, commercials apparently knew demand for North American soy oil would be great, especially as the last supplies from South America’s 2012 crop were used up. Soy oil futures began to rise as that became known in the wider market later in November, and so did soybeans and canola.

So in this case, watching the commercials build up their net long position in soy oil gave warning that the autumn price decline in oilseeds was about to reverse.