Heavy net short market, weather issues a recipe for price volatility

The dominant story in grain markets has been the perception of excessive global crop supply.

Recent concerns that China’s demand for commodities is sagging and that Chinese soy crush margins are poor added to the negative sentiment.

The pressure has been all downward and the big commodity speculation funds are all on the sell/short side of the market.

That position allows them to profit when the price falls further.

Reuters reports that as of May 30 the funds were in a record net short situation for oilseeds.

If you count in all grain and oilseed crop commodities in the United States, the funds are the second most bearish stance ever.

This negative attitude and the low crop prices that accompany it have been hard on grain farmers’ incomes.

But when the big money is all on the same side of the market even as prices are already very low, that raises the risk level for them.

If the weather shifts against crops and prices start to react higher, then those short positions that speculators hold could cause them to lose money in a hurry.

A weather event can spark a huge rush of short covering to avoid bigger losses down the road if the weather gets seriously bad for crops.

There are weather worries building in the crop markets, especially for wheat as we report this week.

There are also concerns about low protein in the U.S. winter wheat crop, the dry weather in the U.S. northern Plains and the southern Canadian Prairies and excessive moisture in the northern Prairies.

Adding to those worries are reports that in parts of Oklahoma, Texas and South Dakota, an unusually large number of winter wheat fields are not worth combining for grain and are being swathed for hay. In the southern areas, farmers are reseeding to cotton.

If the hot, dry weather gripping the Dakotas shifted eastward into the corn and soybean areas of Iowa for a few weeks this summer, the upward price response could be oversized as the funds scramble to get out of their heavy net short positions.

It is a case of speculative funds not ignoring the fundamentals of supply and demand, but adding to the range of price move, the volatility, pushing the lows lower and the highs higher.

There is no guarantee that the current weather worries will turn into a weather panic, but if they do it could generate pricing opportunities.

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