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Money Flow and the Dairy Futures Market

Mar 01, 2013

Why it’s important to be aware of the presence of outside money in the commodity markets.

Carl BablerBy Carl Babler, Atten Babler Commodities LLC

Dairymen understand the terms cow flow, milk flow and cash flow and their importance to their operation. "Money Flow" is also an important term when it comes to a dairy markets. The dynamic flow of funds in and out of the dairy futures market complex impacts dairy producer price volatility, opportunity and risk.

Money flow, outside money and fund money are interchangeable terms for the net speculative position held by participants in the futures market for investment purpose. Money flow into commodities by managed funds since 2007 has been significant drawing attention of market analysts. These funds, both domestic and international, have placed funds in many futures markets, including energies, grains, livestock and, even to some extent, dairy.

Dairy futures volume and liquidity has been a deterrent to big participation by these players, yet dairy markets have been involved. The figure below provides an example comparing the relatively low participation of outside money in dairy as compared to corn. It is generally a requirement that a market would have strong money flow to push prices to historical price levels, either highs or lows. Therefore, the awareness of money flow should be part of our observation of the dairy futures market.

Babler chart 3 1 13
Where do we get money flow information?

The CME Clearing House routinely reports open interest and volume for each contract traded, which represents the number of long and short contracts held in participant accounts that have yet to be offset and the total number of contracts traded on a daily basis. Open interest provides a measure of increasing or decreasing participation in a giving contract. This data reported in the Commitment of Traders Report is commonly divided into two trader classes.

• Commercials (those accounts that are trading contracts that related to their physical commodity exposure i.e. producers, processors, handlers);
• Non-Commercials (those accounts that are trading contracts but have no physical commodity exposure i.e. small speculators, index funds, managed futures funds).

Within the Open Interest position report, the clearing house provides the net position, either long or short, of a given number of contracts.

The chart below provides a view of money flow in the milk futures since 2006. In the various price rallies that have occurred, it is not clear if money flow pulled the market or pushed the market higher, but it is assumed the presence of outside money was a component of the price strength. There are many competing opinions on the long-term influence of outside money in futures markets, but, in any case, in the short run it is clear that it helps improve liquidity and it may increase volatility. It is important to understand this influence since volatility can result in both risk and opportunity for a dairy producer.
Babler chart 3 1 13b
Currently, milk market money flow is near a net zero position. The milk market is not providing conditions at this point that are encouraging money to flow in to the buy side. Including money flow awareness to your market analysis is warranted for you to know if your market being helped or hindered by money flow.

Risk in purchasing options is the option premium paid plus transaction. Selling futures and/or options leaves you vulnerable to unlimited risk. Atten Babler Commodities LLC uses sources they believe to be reliable, but cannot warrant the accuracy of any of the data included in this report. Past performance is not indicative of future results. The author of this piece currently hedges for his own account and has financial interest in the following derivative products mentioned within: Class III milk.

Carl Babler is a principal with Atten Babler Commodities of Galena, Ill. Contact him at or 877-259-6087.