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The Unseen Forces Shaping Grain Markets: Fund Positioning, End User Behavior and Their Influence on Price
By: Barchart | June 10, 2024

“The beatings will continue until morale improves” keeps playing in my head as I watch these grain markets trade in what would normally be a somewhat seasonally friendly timeframe. My visions of $5.00 plus December corn feel like they are fading as the excitement in wheat and subsequent $1.80 run in price did much less than I had anticipated when it came to fund participation and rally depth in corn.

Don’t get me wrong, it’s not as though managed money hadn’t worked to cover their shorts ahead of planting. I talked about the push to cover their position during the stretch of wet weather at the start of May here adding that it would likely take an additional catalyst to get funds willing to go long.

Fast forward nearly a month and the relatively rapid jump in planting pace to ahead of average at the end of May across much of the country and an additional decent weather outlook for much of June has traders believing trendline yields on potentially higher acres than projected in March remain in reach.

As we start June there are few things we can say with certainty but one of them is that while there are pockets where rain seemed to beget rain, keeping some acres unplanted, the percentage of ground sitting idle this year is not likely to be anomalous.

When it comes to watching what is happening in price, there are a few things developing that have me scratching my head. Some I can understand to a certain extent, while others have me wondering if something has happened in the market to cause a fundamental shift in how end users approach managing their risk and the factors money managers look at when it comes to trading grains.

One of the questions plaguing the market that has me somewhat confused is cash driven, with the lack of end user participation, even when the worries over a wheat production shortfall out of the world’s largest exporter were on the rise, described as remarkable. Typically, at this point in the marketing year traders would have a certain amount of wheat sold to world buyers, with the ability to forecast additional sales and margins as each region harvests their crop and works to assess its own market needs.

This year traders out of Europe and the US say new crop export contracts are nearly non-existent as the world end user has become almost as disengaged as the farmer. The lack of market participation beyond hand to mouth purchasing is putting pressure on basis and spread, rewarding elevators for holding tight to supply via more carry in the spreads, but keeping basis levels wide enough end users who wait find themselves also rewarded.

I can’t help but wonder what is driving the reduced market participation and what it means. Obviously at face value it’s bearish as the days of traders pushing for supplies no matter what kind of jumps in price we had seen appear to be well behind us. Wider basis levels and carries say we have more than enough supplies to satisfy nearby demand as well.

In addition to signals from the cash market on what is happening currently, balance sheets predict a continued run of reasonable production, with this week’s supply and demand update from the USDA unlikely to show any signs we need to look to ration demand.

Of course, it could be as simple as China’s lack of participation is helping folks around the world feel more comfortable with waiting. The Chinese government announced officials will purchase more local supplies of wheat for reserves this year than last as quality and yields are expected to be better and concerns over world production have the attention of leaders.

Some believe China’s recent slowdown in feed grain purchases will come to an end soon as crops in the country get planted, while others feel their approach to the market in the months ahead will be slower and more methodical. Whatever China does over the next few weeks will play a pivotal role in ending stock outlooks, as any indication they will return to the market to make big purchases could help boost global export demand, especially if yields prove disappointing.

While the lack of end user participation has me scratching my head, as I mentioned, it at least makes sense from a market signal standpoint—I struggle to understand what is driving some of the relentless selling pressure we are seeing out of managed money in certain commodities. Fund selling in crude last week was one of the largest chunks of selling we have seen for any week dating back to 2013, and while you could say the decision by OPEC + nations to raise production in the fourth quarter or an announced release from SPR were behind the move, the headlines in my opinion did not match up to the move.

Fund selling in corn and beans was more aggressive than expected last week as well, marking one of the many occurrences we have seen over the last year where Friday’s CFTC data surprises us with a greater swing than expected.

Perhaps the fund's attitude towards crude and the grain markets has nothing to do with one another and it’s just a happy coincidence, but that feels unlikely when looking at all the other odd “happy coincidences” we have seen in these markets the last few years.

Whatever it is driving fund positioning and the need to maintain a healthy short—whether it is interest rate influenced or driven by something else, we will be hard pressed to sustain a significant rally without a change in heart or opinion.

Even with that in mind, I still feel we must continue to watch what is happening around the world closely. There are some possible shifts in the market that may take some time to show themselves with adjustments to production and market flow that are currently being masked by abundant old crop supplies and the ambivalent world buyer.

We are a week or so away from getting our first glimpse at what pollination weather could look like for much of the US, with increased risks of heat possible. One thing we have learned in recent years is overnight heat remains something to watch when it comes to potential yield loss, keeping the weather outlook imperative for price in the weeks ahead.

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