Fund buyers send soybean futures prices off kilter

CHICAGO, Ill. — Crop markets are not behaving as they should given the fundamentals, says an analyst.

“There’s a lot of things going on in our markets that really don’t seem to make sense,” said Tregg Cronin, a farmer and broker from South Dakota.

When that happens, he looks to the basis and spreads for answers.

American farmers harvested a record 15.23 billion bushels of corn. The market should be paying farmers and elevators to store a tremendous amount of grain, Cronin told delegates attending the 2016 DTN Ag Summit.

“It’s not.”

Carry is the price spread between nearby and more distant futures contracts. It represents the cost of storing grain, plus interest.

The market is now paying 65 percent of the price to store corn between December and March. That is not a lot considering the corn stocks-to-use ratio is high at 16.4 percent.

Cronin said the cash price for corn is higher than it should be, while the futures price is “muddling along” in a range of 30 to 50 cents per bushel.

“Spreads are not trading where we think they should, relative to the amount of supply we have and basis certainly is not trading weak enough to justify the prices we’re at,” he said.

The situation is the opposite for soybeans. The market is paying 93 percent of the cost of storing soybeans between January and March and 71 percent of the cost of the full carry between March and May.

“If we go back over the last five years, you’re very, very hard-pressed to find a time when the market was paying so much to store soybeans,” said Cronin.

That makes no sense in a market where futures prices have been trending up for a month. The cash price of soybeans is weak and futures prices are strong.

Cronin believes the futures price is over-valued relative to supply of the crop. He thinks the answer lies in the puzzling behaviour of institutional fund investors.

The funds are net long 135,000 contracts in the soybean market, which is more than triple the 52-week average. A year ago, the funds were net short 83,000 contracts.

By contrast, the commercials, which are grain elevators and other users, have reduced their net long position to 227,116 contracts, down from 323,000 a year ago.

“These are the guys that I like to pay attention to,” said Cronin.

“They’re the ones that use the product every day. They know what it’s worth.”

One factor is a lot of money normally in Chinese stock markets is looking for a home due to the weakening Chinese currency.

Some of that money is spilling over into the soybean market and pushing up futures prices. The problem is that cash and futures prices will remain unlinked for only so long.

“The soybean market is definitely a concerning one,” said Cronin.

He believes cash and futures prices will realign, with futures weakening as the year evolves.

In the corn market, the funds hold a sizable net short position, while the commercials have a big net long position. So the funds are working against commercial efforts to lure corn out of farmers’ hands.

The commercial interest in buying corn means demand is stronger, supply is smaller or farmer retention is greater than anticipated. Cronin thinks it is likely a combination of all three.

He believes corn will have a tough time breaking out of its current trading band. If prices reach the $3.70 to $3.90 per bushel range farmers will rush to sell. If prices drop to $3.20, growers will lock their bins.

Cronin said it will be important to watch basis and spreads if prices climb to the top end of the range.

“If you see basis backing off, if you see Gulf bids drop, if you see spreads widening out, that’s a sign that the farmer is selling that corn.”

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