The Funds Are Out of Their Shorts. Now What?

February 21, 2018 10:48 AM
 
Chip Flory

Anyone that saw my outlook presentation this winter knows I said something like, “I don’t need the funds to get long corn, just get them out of their shorts.”

Okay… now what? The funds have exited short positions and as of mid-week last week were already into a slight net-long position. That has changed some, but corn marketers can no longer rely on fund short-covering as a source of support for corn prices. Could these fund managers decide they need to be long corn? Sure, but odds are that’s not going to happen. I’m not saying corn has done all it can or will do on the short-covering rally, but one of the “most bullish” corn features (the short fund position) is gone.

May or July corn futures aren’t offering the $4 most were hoping for before increasing old-crop sales, but many growers are moving some corn to reward recent price strength. And with December futures knocking against $4, some new-crop sales are also being made. This seems to be a prudent approach and farmer selling won’t likely become so burdensome that it forces corn prices back to the 2018 lows, but it can be heavy enough to make it difficult to work corn prices much higher.

Argentina’s crop problems are real, but until traditional buyers of Argentine corn more aggressively cover their needs with U.S. corn, those crop problems in South America are only potential support for corn prices. To be real support for corn prices, those Argentine corn crop losses must turn into additional demand for U.S. corn.

Argentina’s bean crop issues have generated some demand for U.S. soybean meal and bean oil, but not enough. And on a day like Tuesday with bean prices up a nickel on the day, it felt like beans closed a dime lower. That’s because the upside price gap to start a holiday-shortened week of trade ended with a close below the opening range. Beans were more than 15 cents higher in early trade, but nobody panicked.

The funds are long soybeans and odds are they’ll continue to build that long position. That keeps upside potential alive and the metered advance in bean prices certainly suggests the “blow-off top” has not happened… yet.

And growers seem to be taking a prudent approach to bean marketings, as well. With July beans near $10.50 and new-crop beans at $10.25, catch-up sales on old-crop and initial sales on expected 2018 production are being made. As in corn, those farmer sales are unlikely to be heavy enough to turn the short-term trend down in bean prices, but it may be heavy enough to cap upside price action this week.

And both corn and soybean traders will turn their attention to Washington D.C. at the end of the week. USDA’s Annual Ag Outlook Forum is Thursday and Friday with USDA’s Chief Economist’s office releasing its initial projections for the 2018-19 marketing year. Each year I warn these are “just” projections and should not generate much of a market reaction. Some years I’m right… other years the market latches on to the “new” numbers “from USDA” and prices react. And with new-crop soybean carryover likely to be projected higher than this year’s estimated 530 million bushels, the risk in bean trade may be some late-week price pressure.

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