Some Thoughts on Corn and the Commitment of Traders

Those of you who trade the grains as I do are well aware of the importance of this Monday's upcoming USDA grains report. We will get a fresh look at the yield numbers and the overall size of the crop based on the latest from USDA as well as what the expected changes in the final carryover will be for the 2014-2015 marketing year.

It is no secret that we are expecting record corn and bean crops. The only question is what size? Traders such as myself are going to be especially interested in the carryover numbers expected.

Heading into this report however, we have had a huge rally in the bean complex as well as generally higher prices in corn, after it made a low near $3.20 at the beginning of October. It has since rallied some $0.60 higher in the face of a record crop which has most traders confounded and left scratching their heads looking for a reason to justify a move of this extent.

It did back down a bit this week as expectations began to circulate that we would get some higher numbers based on what the private firms were saying as well as some anecdotal type reports from long-time crop watchers/observers.

I want to make an especial note that these USDA reports more often than not produce some violent moves. Many traders tend to move to the sidelines ahead of them therefore to avoid getting caught in the usual crossfire that erupts when the numbers hit the wires.


I have noticed something however that I feel is worth mentioning. In going over the Commitment of Traders reports, I was struck by the size of the NET LONG positioning of the LARGE SPECS heading into this report. To put it bluntly, they are banking on a very bullish report.

Take a look at the following COT chart and note the blue line. That is the combined NET position of the LARGE SPEC category. As of Tuesday this week, it is the largest it has been since May of this year. As a matter of fact, it is at levels commensurate with late May when they began to exit and move out from their heavy long side exposure in earnest, eventually reaching a net short position in the process.  ( NOTE the price chart where this is detailed).

Here is what should make any trader a bit nervous about this...

If this report is not strongly bullish, given the fact that corn has rallied to the extent it has over the last 5 weeks, one has to be concerned that there is now a hefty contingent of these large specs sitting on the net long side of the market waiting for this report to essentially confirm their bullish bias. While the report may yet to prove bullish, it is going to take a much lower than expected yield, a lower ending carryover, or a lower planted/harvested acreage number than what the market has built in heading into this report to provide the additional fuel required to push this market much higher in my view.

As I see this thing, the corn has essentially been pulled higher by the antics of the meal market, which as I have been commenting rather frequently of late, has been dragging the entire grain floor higher alongside of it. The strong fund buying in the meal then spilled into the beans, which then spilled into the corn.

But here is the interesting thing - the number of OUTRIGHT LARGE SPEC LONGS has not seen near the volatility as has the number of OUTRIGHT SHORTS. Look at how relatively stable the long positions have been versus the sharp moves up and down in the number of outright short positions.

To put it bluntly, the vast majority of this move in corn, both down from its peak in May and now HIGHER, from its valley in October, has been caused by sharp fluctuations in the number of short positions held by these large speculators which dominate our markets.

It has been my experience that a market which moves higher due more to the fact of an overwhelmingly larger amount of short covering, than BRAND NEW LONG POSITIONS being added, lacks the necessary ingredients to support a bullish trend remaining intact.  In other words, that move is suspect.

Those of you who have been reading here for any length of time at the site, know quite well that I have often commented on the inability of gold to sustain rallies due to the fact that the largest component of the move higher  during the current bear market has been based on short covering and not NEW LONG positions.

I suspect the same thing with corn. When the shorts are finished being run out, who is left to buy up at these levels? Answer - not many, especially when they realize that a record crop is coming. For now, the bulls, aided by nervous shorts, have been able to push this market well off the low made in early October as the final size of the crop was becoming known. Harvest delays, meal rallies, etc, have been the fundamental justification to support that rally.

Will the report we get this coming Monday turn out to be the swan song for the large specs or will they be proven to have been correct? We shall certainly see.