Are Funds Long and About to be Wrong?

  • Posted on: September 7, 2010

December corn (new crop) had had a 1.26 rally from its June 29th contract low to last Friday’s 14 month high at 469. The next resistance goes back to the 6/09/09 high at 4.70. Followed by the 1/09/09 high at 480 1/2. That 1.26 rally translates to an extra $6,300.00 for every 5,000 bushels. If a farmer has 100,000 bushels, he just made an extra $126,000.00 A large farmer with 1,000,000 bushels gained $1.2 million on his bottom line.

Conversely, end users just saw their input costs jump by that same amount. A cattleman who feeds grain suddenly has a bigger feed bill to pass on.

Currently, the speculative trend following funds are long 420,000 contracts. That’s 2.1 billion bushels of corn. The funds are part of the reason we have had this $1.26 rally. If bullish news was to falter, if Informa was wrong and a 158 estimate on corn yield morphs back to 164, where are they going to go with 420,000 longs? It could get ugly very very fast.

One important caveat, unfortunately, this morning on CNBC, there was a story about exciting new highs in corn. Sqawk box was talking about getting out of stocks and going long ags. That, quite frankly, makes me want to run out and do the opposisite with both hands, and both feet. UGH… That has to give bulls pause. Popular media sentiment is rarely precient, except as a fade. Alas, the old adage, Sell Rosh Hashanah, Buy Yom Kippur may be the sentiment to follow. Bottom line, I’d have my trailing sell stops in protecting any long profits. Period.

New crop beans had their rally from our June 11 low at 8.87 up to our Aug 6th high at 10.49. We have yet to be able to pop above that resistance, and quite frankly, with yields increasing and pointing towards record crop production, the fundamentals are not there. However, the fundamentals were not there for wheat to rally 3.85 and we did.

The wheat has rebounded nicely after its 50% retracement, which, if you go back to my last few entries, I suggested using that pullback to get long. I have not changed my opinion. As long as the Russians can pull the market anytime they want with some Ukrainian politician or Putin himself mentioning the word, drought, or short-fall, or imports…. I would argue that before he gets the second syllable out of his mouth, the market will jump on his comments. In short, if I were trading wheat full time, I’d love to be friends with the inner circle of pols in the former Soviet Union.

Good Trading