What Does CFTC Commercial Data Tell Us About Corn Fundamentals?

• Those in the ag industry that use social media, also known as #agtwitter, will turn over any and every stone looking for something to be bullish about in the corn market. 
• The latest example is supposedly commercial traders moving to a net-long position in the latest weekly CFTC Commitments of Traders reports. 
• However, real reads on market fundamentals - basis and futures spreads - are not bullish. 

Before I started writing this piece over the weekend, I looked back through my recent work for Barchart and saw this would be similar to what I posted Monday, November 27. It tells me a couple things: First, it seems some folks in the grain and oilseed industry might not be reading what I post, or Second, folks in the industry have a short memory as they search for any reason to be bullish rather than realistic. 

A good friend sent me a message Saturday that simply said, “Accurate?”. His question was in reference to a post on social media that read, “Commercial traders are net long corn for the first time since 2020. Now what does that tell you #agtwitter?” My response to the post? Nothing. My response to my friend prompted me to put this piece together as a way of explaining. 

Let’s start with the CFTC Commitments of Traders (CoT) reports themselves. As a tool the numbers in these reports are basically useless for any purpose other than confirming what we already know by watching trends (price direction over time). Why? Newton’s First Rule of Motion applied to markets: A trending market will stay in that trend until acted upon by an outside force, with that outside force usually NONCOMMERCIAL activity. This led to Newsom’s Rule #1: Don’t get crossways with the trend. Why again? Because to do so means you are getting crossways with large fund money, not a good position to be in. 

Next, which of the plethora of CoT reports should we look at? Folks in the industry usually talk about the “Disaggregated Futures-and-Options Combined”. For the third time, why? I think because it makes them fell smart to be able to say “Disaggregated”. Otherwise, this particular set of numbers is a waste of time. 

• I’ve talked to a number of CFTC officials over the years, and the general consensus is there’s still no clear-cut way of “disaggregating” the various market groups. 
• I’ve also had the opportunity to talk shop with some of the industry’s best option traders, and the reality is most of them are not bullish or bearish. True option traders study the Greeks (a long list of option variables noted individually by Greek letters) and look for anomalies that can be traded and profited on. It doesn’t matter if a market is trending up, down, or sideways (yes, sideways is a trend). 

When it comes to the Commercial position in CoT reports, we have to remember this group is supposed to be “hedgers”. With that comes the old saying, “Hedgers gotta hedge”, so any position this group holds is again not a reflection of being bullish or bearish. Just for fun, though, let’s take a look at the legacy/futures only commercial net-futures position chart. 

• First, this group has been net-long futures since the week of Tuesday, August 8, 2023. 
  • Since then, December 2023 corn (ZCZ23) dropped 48.5 cents through the low of Tuesday, November 28
  • At the same time, the noncommercial futures position switched from a net-long of 25,727 contracts to a net short of 157,148 contracts. A difference of 182,875 contracts 
    • Or for the fun of it: 914,375,000 bushels worth of futures contracts
• Second, commercial traders have been buying corn futures since a low of net-short 505,016 contracts the week of Tuesday, January 26, 2021
  • Since then, the Barchart National Corn Price Index (ZCPAUS.CM), the weighted national average cash price and what I consider the intrinsic value of the market, has risen and fallen with the net result a drop of $1.09 through last week’s low of $4.23. 
  • Again, commercial positions are hedges (theoretically) and not necessarily a bullish/bearish indicator.

All that being said, is there a nugget of bullishness in the latest CoT reports? A look at the legacy, futures only NONCOMMERCIAL chart shows us that there is a silver lining to all the selling. As of Tuesday, November 28 the noncommercial net-short futures position had grown to 157,148 contracts, an increase of 33,142 contracts from the previous week. 

• This included a decrease of long futures by 31,430 contracts
• And an increase in short futures of 1,712 contracts
• The fact most of the change came from long-liquidation rather than new short positions could be viewed as a less bearish change 

But there’s more to it than that: 

• The net-short futures position of 157,148 contracts was the largest since 157,444 contacts the week of June 30, 2020. 
• The short futures position of 408,342 was the largest since 441,615 contracts the week of August 11, 2020. 
• This opens the door to a potential noncommercial short-covering rally, regardless of what happens with real market fundamentals. 

As Hamlet would say, “Ay, there’s the rub!” Real fundamentals. Most folks in the industry don’t want to talk about them because the reality is often not bullish. As I discussed last week (and over the last few decades), our two best reads on real market fundamentals are basis and futures spreads.

• Last Friday, national average basis versus March corn came in at 44.75 cents under as compared to the previous 5-year low weekly close for last week of 39.25 cents under March. 
  • This means that despite futures being under pressure, merchandisers (also known as COMMERCIAL traders) do not feel the need to push the cash market to source supplies to meet demand. 
• The end of November saw futures spreads close
  • March-May at a carry of 12.25 cents and covering 55% calculated full commercial carry (cfcc)
    • As compared to the end of October close of 8.75 cents carry and nearly 41% cfcc
  • May-July at a carry of 9.25 cents and covering nearly 43% cfcc
    • As compared to the end of October close of 6.75 cents carry and 32% cfcc

The bottom line is the commercial side grew less bullish toward the corn market as November progressed, regardless of what the CoT reports showed. That’s the reality. That’s what the market told us. #AgTwitter. 

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.