Volume & Open Interest Update

[rayfcom]

Since last Wednesday, September 19, when corn price started what has been a nearly 20 cent rise in prices, here's what Volume and Open Interest numbers in the front month December 2018 corn futures contract have recorded :

Wednesday September 19

Volume : 241,348 contracts

Open Interest At Close Of Trading : 1,743,579 contracts

Thursday September 20

Volume : 435,864 contracts

Open Interest At Close Of Trading : 1,740,435 contracts

Friday September 21

Volume : 244,154 contracts

Open Interest At Close Of Trading : 1,732,297 contracts

Monday September 24

Volume : 243,521 contracts

Open Interest At Close Of Trading : 1,724,807 contracts

Save for Thursday's big jump in volume, the nearly 6% jump in corn prices over the course of four trading sessions has not resulted in any increase of the capital being dedicated to the corn market. More troubling to the bearish cause, a 6% rise in price has been met with a drop in market commitment to the higher prices, as Open Interest has fallen by some nearly 19,000 contract drop.

These kind of negative divergence, where the commitment to a price move is absent, are the kinds of things that the computer algorithms look for to initiate positions. If the marketplace is not expressing commitment to a price move, the feeling is that the new prices will not be sustained for long. 

Corn prices are showing signs of pull back today (Tuesday September 25), as the December contract is lower by 2 cents as we approach the end of the morning recess.

[illinifarmer]

Local IL guy close to Morris just sent me some yield avg.s. Soybeans running about 35-45bu wet corn 20% running about 100bu. Sorry for the reality check 🤔

[rayfcom]

A reality check constitutes a lot more than the pimple on the ***** of an elephant, which is all; your report amounts to. 

The overall numbers from one of if not the largest corn exchange in the world are saying that this increase in prices of the last few days does not have the fuel to be sustained. When those numbers change then perhaps your microcosm will be pertinent, but until then they are nothing much more than an aberration.

Did it catch your attention yesterday that harvest numbers for corn are running stronger than expected, and stronger than last year when there was a very healthy and strong crop ? Why do you think corn farmers are working so hard to get ahead of pace ? Could it be they know they have a big job to do ?

Look, prices may rise further. Sometimes markets defy reason. This could be the exception to the rule. But right now all of the important factors that determine have determined price for a long time past are saying that this upmove in price is not going to last, and as such, the greater risk is for prices to fall rather than rise from here.

Except of course in Illinois close to Morris...

[JimMeade]

I don't follow volume and open interest all that much.  Is a 1% drop in open interest pretty big?

[rayfcom]

Its not so much the size of the change, but more about how it relates to the price action. As a general time-tested rule, a directional move in price is difficult to sustain without progressively more capital being devoted to support the move. Its like trying to complete five hundred miles at Indy on one tank of gas, you may be able to do it but not at the speed necessary to win the race. Changes in Open Interest provide a very good insight into the sustainability of the price move, they validate the stamina of the move as it is happening.And without continual injections of capital to support a directional price move, the fuel to keep the drive going is just not there.

The object of a hedging strategy is to discern future adverse moves in price that will negatively affect your profits and cash flows. Open Interest metrics, when viewed together with the movement of price, provide good warning signals for when price action is about to move against your financial interest. And conversely, Open Interest metrics can tell you when the odds are in your favor that prices may be about to move in a direction that will increase your profits and cash flow, helping to prevent you from selling your product at a price lower than that which is likely to be better for your bottom line.

We presently are experiencing such an occasion where Open Interest metrics may be valuable to the producer. Corn has increased in price since last Wednesday by about twenty cents a bushel, but the Open Interest in the Corn Futures has dropped by about 25,000. This divergence between the price and Open Interest measures calls into question whether the move higher is sustainable. This analysis takes on added importance since harvest has begun and producers will be looking during the next few weeks and months to sell what they have grown.

Based on the observation that the recent price rise has not been supported by increasing participation, the sustainability of the present corn price is called into question. Which means the odds are greater that prices from here will move lower rather than higher. Accordingly, it may be an opportune moment to place some of the present harvest through the use of the December futures contract, and lock in the price presently trading. 

Now a month from now, prices indeed have fallen. Perhaps at that time there will be some good indicators that prices have bottomed and a price upswing commences. You can then buy back the sales you made, pocket the profit, and wait for the indicators to tell you that the movement back up has run out of steam. Then you place the hedge again. This kind of dynamic hedging strategy is a very effective means to take some risk out of your marketing efforts and even maximize your overall revenue well beyond what could have been achieved without a hedging strategy. A good adviser with a proven track record of success can increase the chances that you will be successful in this initiative. Its a great way to overcome the phenomenon of the last few years of continued price erosion in corn almost down to the cost of production.