Grains: What Will Watson Do Next?

• Based on my Market Rule #6 (Fundamentals win in the end), we need to understand REAL market fundamentals to discuss where investment money might move over the coming weeks and months. 
• Markets in the Softs sector continue to show inverted forward curves, as does the WTI Crude Oil market. 
• Weather will likely be the deciding factor as to if some of the newly created investment money makes its way into the Grains sector. 

My friend Tony St. James took over the role of Market Specialist at RFD-TV this past August. I’ve talked to Tony about markets for many years, usually by phone interview, and am excited that I now get to visit with him face to face twice each week as part of my role as Barchart Senior Market Analyst[i]. The usual process is I’ll send RFD-TV my Morning Commentary, which is then passed along to Tony and others to lay the groundwork of things we can talk about. However, my friend does additional reading of what I post to Barchart, opening the door to further discussion. This morning (Tuesday, October 9) was just such a case as Tony referenced my recent piece, “Markets: Sunday Morning Q&A”. In it I talked about how my favorite part of presentations over the years was the Q&A as I never knew what question would come up next. With that in mind, Tony asked me THE key question on air, “What questions should we be asking at this time?”

I took a minute to think, then the answer became clear. With the long-term uptrend in US stock index futures continuing to generate investment money, and the noncommercial side of the Grains sector moving toward par (even) net-futures positions, what markets or market Sectors could see increased fund buying? As I talked about in a recent piece for Barchart, the Softs sector was a strong contender based on inverted forward curves for the various markets. Since posted (September 24), the US Southeast has been hit and/or threatened by two major hurricanes while the monsoon season began in South America. 

Of the 3 Kings of Commodities, buying interest has cooled in Gold despite the US presidential election being less than a month away and global chaos expected to intensify. Crude oil continues to show a backwardated (inverted) forward curve) indicating long-term bullish fundamentals, with the futures market making big rallies and selloffs the past couple weeks. Given some nefarious figures still have a goal of disrupting global economics and politics, both gold and crude oil should continue to find buying interest. 

But what about King Corn? After posting a long-term bullish technical reversal at the end of August (2024), the December 2024 contract (ZCZ24) has moved sideways between the round numbers of $4.00 and $4.40 (roughly). In a different piece (from September 13), I talked about how the previous long-term downtrend had come to an end, similar to what was seen back in 2014. What gets overlooked from a decade ago is the corn market then turned sideways between $3.20 and $4.20 (again, roughly) – for the next 6 years! That’s just the nature of the beast, and why I refer to corn as the bonds of the Grains sector. With this as a backdrop, will Watson[ii] go long corn?

The latest CFTC Commitments of Traders report (legacy, futures only[iii]) showed a noncommercial net-short futures position of about 7,200 contracts as of Tuesday, October 1. This was the smallest net-short futures position since the week of Tuesday, May 14, 2024, when Watson last held a net-long futures position of 224 contracts. Through the close the following Tuesday (October 8), Dec24 corn lost 8.25 cents. Though some of the pressure likely came from commercial selling tied to the 2024 harvest, we can also assume[iv] funds were adding contracts back to their net-short futures position this past week. Could funds eventually go net-long corn? The May-July futures spread continues to cover a bullish level of calculated full commercial carry (less than 33%), so my analytical response is “definitely maybe”. 

What about the rest of the Grains sector? As of this writing, none of the markets in the sector are showing long-term inverted forward curves. Yet, Watson is already holding net-long futures positions in both soybean oil and soybean meal, the latter tied to an inverted Dec-January futures spread. Generally speaking, the Grains sector simply doesn’t have the fundamental draw of Softs and Energies at this time. Could this change? Certainly. Once Brazil moves past its usual monsoon season we’ll see what the South American summer brings to the sector weather-wise. From a technical point of view, the only National Cash Indexes (national average cash prices, intrinsic value of the individual markets) that completed bullish reversal patterns at the end of August were the three wheat markets (IWY00) (IHY00) (IPY00). This is peculiar given futures spreads for all three markets are more bearish than what we see in corn or soybeans. 

But then again, it’s wheat, it doesn’t have to make sense.  

[i] Tuesdays at 8:15 (CT) and Wednesdays at 8:45 (CT). 

[ii] My name for the algorithm-driven investment (noncommercial, fund, speculative, etc.) industry in general. 

[iii] I know most folks like to talk about Disaggregate Futures and Options positions, but my thought is these same folks don’t understand options traders take positions for a number of reasons besides being bullish and/or bearish. Think of it this way: Options traders are playing chess while futures traders are generally playing checkers. 

[iv] Yes, I’ve seen the movie “The Bad News Bears”, so I know what “assume” means. 

On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.