The soybean oil market’s reaction to USDA’s September supply/demand report underscores the role Managed Money traders can play in setting futures prices.
When following the grain markets, sometimes who is following the news is more important than what the news actually says. We especially like to keep an eye on the Commitments of Traders report to see what it says about what everyone else is thinking, and sometimes thinking about how “they” are positioned can give a better indication of what the market is likely to do than by just looking at what the fundamentals might show.
The Commitment of Traders report lists the net positions of each classification of trader – commercial, managed money, large speculator, passive index funds, and “other” small traders. In this case the managed money category is of most interest.
This classification of traders encompasses large hedge funds and CTA money managers. Many of them individually control tens to hundreds of millions of investor dollars, and they often tend to move in a “herd” mentality. Each of these funds are large enough that they have to put on large positions to give their investors a decent potential return. If you are managing $25 million and think corn is going to go higher, you can’t just buy 50 or 100 contracts – you have to buy a lot! Many funds might come to the same fundamental analysis that corn is undervalued and start buying, then that drives prices higher and funds that follow technical momentum might join in and start buying as well. Eventually funds might control upwards of 200,000 contracts of corn – but may have driven the price well above where the fundamentals justified it being in the first place!
What eventually happens is that fundamentals win out in the long run but the funds can move the market to unjustified levels for an extended period of time. Then suddenly the bullish news that triggered the market rally in the first place doesn’t look so bullish once the market reaches higher prices.
An example of this can be seen in the Soybean Oil markets reaction to USDA’s September supply/demand report. Since late May funds have been buying Soybean Oil on speculation that increased demand and slowing domestic soybean crush pace would tighten US stockpiles. Since then, as nearby Soybean Oil futures have rallied from 31 to 35 cents/pound, funds have been net buyers of over 100,000 contracts, taking their net long to 88,600 contracts as of September 5. This is the second largest net long Managed Money traders have built in Soybean Oil ever, and 80% of the Managed Money traders who reported a position in that commodity were long.
So when the September USDA report forecasted Soybean Oil ending stocks at 1.757 billion pounds – 15% below the August forecast – it would seem logical that the market would rally. Instead the futures market only rose by 0.05 cents – 5 ticks. The bullish news was already priced in, and now for the market to keep going up there will have to be new bullish news from somewhere, or those funds are going to start exiting their position.
So keep an eye on how the news is setting futures prices, but remember that market sentiment is sometimes the bigger determinant of where prices might go next.