False Fund Rallies?

[marketeye]

I may be all wet here. But, I'm looking at these rallies for three sessions in a row and then back down double-digits. Wheat rallied 60¢ since May 13th, but we are taking a portion of that back, today. Soybeans got a 10¢ bump but remains pressured. We go up for a short rally but then it can't sustain itself. And a lot of the incremental rallies are sparked by the funds covering their near record short positions in wheat, corn and soybeans. I want to throw out a few questions on this thought that I have.

Though the funds do have near record net short positions in wheat and corn and even beans to some extent, are these periodic rallies that they create by covering just false rallies? Here’s what I mean: When you remove these acts of short-covering the fundamentals remain bearish, don’t they?
As a result, what is this market telling farmers about these short spikes?
How long will these funds keep doing this little act of pushing up the market for three days or so and then back down we go?
I’m wondering if what’s happening is these periodic rallies are faking out the farmers that are holding onto a lot of old-crop corn, anyway, into holding and thinking that one of these rallies will grow longterm legs?
Shouldn’t the farmers be looking at the bigger picture, bearish outlook, and reward the market on these rallies?

What say you?

Mike

[marketeye]

Ray Grabanski, Progeessive Ag, says the wheat market is underpinned by the latest Chinese news. "US Ag attache's last week revision of Chinese crop production potential reduced 5 mmt (about 200 mb) and Chinese demand hiked 8 mmt (about 320 mb). "This is a huge change, and the 32c gain that occurred that day didn't even come close to digesting that demand and supply news (more like a dollar is needed or more to digest this Chinese news if correct)," Grabanski stated in his weekly Agriculture.com article Tuesday.

Mike

[sw363535]

Mike is there any real proof that farmers are holding onto a lot of corn?   And wheat???  We haven't raised an average crop in 5 years, where can the stockpiles be?  And just before harvest, how much inventory would a farmer be holding after a year of price deteriation?

I think it easier to assume the farmers have long since cashed in and paid down debt and crop expenses that are not low.  It takes twice as much grain to buy seed and fertilizer as it did a short time ago..... Who would keep devaluating grain going into the next harvest?   It just doesn't seem logical, but the rumors do support a bear market, and that is the goal when fundamentals are turning...

 

Isn't it what the funds have to do to get out profitably?  Incremental buying when no one else is(thinking about the wheat ) ....... at a time when there is little activity in the US.....Especially.... and the lowest price range in several years, there is no incentive to pre sell the new crop so a little buying gets a sharp reaction.....

[Mizzou_Tiger]

Are you suggesting that the market is rigged and nothing more than a good ole boyz casino?

I am both shocked and appalled. Haven't you heard. Traders are great. They are gods gift to farmers. They are in a league of their own. They are above all.

Lmao. Really. You actually asked that question?

[roarintiger1]

I just have to say......This could be just like basketball........If you go for the head fake, you are toast.

[marketeye]

Mizzou_Tiger,

I put my questions to one of my most credible sources on the floor of the Chicago Board of Trade. Here's his response on this discussion, in his own words:

"Speculative fund shorts are near record because the forward fundamental outlook is bearish. Every new contract low rewards the short and encourages more interest to join the break. It's our experience that the speculative fund short can exist in the market for a long time.. the record short however speaks to the potential magnitude of short covering if fundamentals change.. or are threatening change..

The recent rally in wheat.. was the combination of several facts that threaten the short with a counter fundamental but unless they persist has little merit in changing the broader outcome. And that is large US wheat stocks and stiff competition from other origin suppliers. ...too much rain threatening wheat quality in the west and perhaps aggregate supply.. the 5 week decline in the dollar helped US corn look more competitive.. the frost scare in the Dakotas Sunday and Monday.. supported the rally.. but once these events subside we find our selves with less shorts involved and markets that are still bearish with crop developing in good weather going forward..the rally only made US wheat even less competitive for export.. which has been much of the problem all winter/Spring..

The dilhemma for farmers and speculative traders is the same.. It's hard to recognize in real time, lasting changes to fundamentals... every theme has a beginning an and end with a bread crumb trail along the way... if bird flu ends tommorrow it won't be a bearish factor.. as we haven't killed that many birds relative to the broader market... but we don't know when it will end.. we could get a forecast for 100 degree weather for next week.. but we don't have that forecast today.. we would short cover on it but if it lasts only one day.. than its not that relevant.. but you can imagine the short covering we would see in corn if it was true, at least for a day.. its human nature.

The bigger picture resides in large carry in stocks and large world stocks of grain that have built over the last 2 years.. Ethanol fuel policies effect on corn prices peaked in 2011 when ethanol use was subsidized with a tax break and forward mandates were high... We will get an update on June 1 on forward mandates.. but a rallying US dollar in a post financial crisis environment and a flat growth policy in ethanol means we are back to incremental demand growth... only weather induced supply shocks are hope at this point for firming prices.. that leaves prices still volatile as we relay more these days on foreign origin suppliers like 2nd crop corn in Brazil that is now moving towards pollination... or planting weather in the Ukraine... and FSU or next winters crop in Australia ... but rallying above current subsidy prices appears harder to do with large carry-in stocks... never mind the 100 million tons of corn in government storage in China... China has a similar corn program that the US farmer did in the US in 1980... high support prices for corn relative to other crops and government taking large stocks into storage.. we worry that this policy is changing as well.. adding more grain stocks to the world market .. its one of the reasons they have been delaying shipments of sorghum and DDg's lately."

Mike

[crophugger]

until we get the index funds to come back into these markets the trend is clearly lower and the only way I see them coming back is with a weather problem. We dodged a bullet here lastnight but I am more concerned about tonight. hopefully the weather problem isn't here but there. Just my 2 cents

[WCMO]

That was interesting.  Thanks!

[sw363535]

I agree that the trend is down and the chart i posted shows that.  With each bounce we are seeing a new low.

The question was what is causing the bounce and incremental profit taking is a large part of that answer.....  IMO

MT I am not saying there is any rigging other than the fact that the funds are allowed to overpower the house in casino lingo...

When they are in that extreme a position it takes some time to unwind it and not create a run...and loose their profitable position....

The only question to that is ---- Are they following a trend or creating one???  or at least enhancing it creating an over reaction in the market????

But my question was Mike, what on earth supports the idea that farmers are holding grain?  Where is that inventory?  Your source did not address that question at all.  Even though he seems to believe it..  The logic does not fit at all..... for me ...maybe I am too thick but here I go...........

The wheat positions

Funds are short the market--"in record amounts" .....Sold grain that they do not possess... ..and cannot deliver

Farmers didn't buy the paper .....

Farmers can't be in the market since-- Mike is speculating that it is because they possess "large stocks of grain"

Would Farmers sell grain and buy wheat futures to cover their in house stocks.  Or store the grain and buy more on paper in a down market......... NO     Not if there are "large stocks of grain" in their posession  

BUT

If they had sold all their wheat as normal ... they would have helped funds drive the market down...by selling the physicall as Funds sold the paper...  That makes sense to me....

 I know a lot of farms that have storage but there are not many who have storage for multiple years of crops.....And storage charges doubled in the last two years with the price dropping in half.  --- 48 cents a year per bushel here locally..... that is 12% per year storage fees....

Cash flow issues with high expenses and we "believe" farmers are still holding 2014 wheat because the market is going down.....  give me a break.   I am sorry but it rattles me when someone calls me and my neighbors idiots....  Thoughts like that can only come from someone who believes that farmers are those rich 1% ers......or they are stupid....or both

And MT I have sat in meetings for years and listened to marketing experts talk down to farmers while asking the same farmers for their business.   Then go to the next meeting and tell other farmers how stupid farmers are because they don't hire their services.

Farm ownership might fit for corn in the cornbelt..... for a few ..... but for wheat ..... I need some proof.... or I will question the credibility of my source.  I am asking mike to question as well.

Or did I miss it totally and  ADM, Cargill, Continental, etc  are the real farmers Mike refers to

[rayjenkins]

On the March 1 grain stocks repor, less than 5% of wheat was being held on farm in both Kansas and Nebraska

so the question is how much of the off-farm inventory is actually held by farmers via (mostly) price later contracts of some sort

with such limited on farm inventory, I can see where it is easy to say "where's the grain" because you don't see evidence of physical delivery taking place......

if there is actual movement via sales of price later grain, the elevators are going to be buying back their long hedges they had in place, and may even be going short to hedge the inventory.....