Combine worsening droughts in Argentina and the United States, the weakest dollar in more than three years and a massive speculative short position in the Chicago grains market, and a substantial round of short-covering is the inevitable result.
In the week ended on January 30, professional commodity funds bought back a combined 237,265 futures and options contracts across the Chicago- and Minneapolis-traded grain and oilseed markets, according to data from the US Commodity Futures Trading Commission.
Money managers have only twice before bought more total contracts in a single week: those ended on July 11, 2017, and June 30, 2015. Both of those events propelled funds' overall market view from bearish to bullish. But despite last week's historic round of short-covering, speculators still hold very pessimistic views toward the market as a whole, particularly in the grains. And as the threat to overall world supply remains relatively small, last week's buying momentum has largely fizzled in the days since, though the interest in corn still lingers.
A pickup in demand for US corn along with uncertainties for Argentina's crop had speculators rethinking bearish bets on the Chicago Board of Trade last week. Dollar weakness, which makes US grains more attractive to foreign buyers, was also a factor. In the week ended on January 30, money managers slashed their net corn short to 130,942 futures and options contracts from 219,676 in the prior week.
This is funds' least bearish view on the yellow grain since early September and is among the largest rounds of short-covering in a single week outside the US growing season. The speculative corn purchase, equivalent to 444 million bushels, amounted to a seemingly insignificant gain of 10 cents a bushel in most-active CBOT futures. But percentage-wise, the 3 percent bump was the contract's largest for a five-day period in two months.
Commodity funds also rushed to cover short positions in winter wheat as US crop ratings plunged, reaching record lows in Kansas and Oklahoma, lead producers of the hard red variety. Money managers nearly erased bearish bets in K.C. wheat futures and options, moving to a net short of just 1,897 contracts versus 15,962 a week earlier. In Chicago wheat, funds chopped their net short to 96,763 futures and options contracts from 145,408 in the prior week.
The resulting stances in the winter wheat markets are funds' least bearish since October. Continued drought in Argentina and a slower Brazilian soyabean harvest than last year spooked speculators from their heavy short bets in CBOT soyabeans. Through January 30, money managers dumped about 50,000 outright short positions in CBOT soyabean futures and options, moving to a net short of 21,849 contracts versus 81,538 in the previous week.
Speculators also expanded bullishness in soyabean meal since Argentina is the leading exporter. Funds extended their net meal long to 55,235 futures and options contracts from 33,221 in the prior week. The most modest buying last week came in soyabean oil, as money managers trimmed their net short to 16,588 futures and options contracts from 21,496 a week earlier.
Minneapolis-traded wheat was the only contract in which funds were sellers last week, and this established a bearish spec view toward the spring wheat for the first time in nine months. The change is slight, though, as the net short amounts to 458 futures and options contracts versus the net long of 332 in the prior week.
Corn is the only one of the bunch that funds did not backpedal from at the end of last week. Trade sources suggest that commodity funds were net buyers of the yellow grain but sellers of wheat and soyabeans over the last three sessions. One of the most impressive features of the corn market is the recent strength in US export sales, which tallied their strongest three-week run in at least four years through January 25.
This is perhaps a tangible sign that buyers are truly concerned over crop potential in South America, with Argentina's drought and questionable second-corn plantings in Brazil. Both of these factors combined with a weaker dollar are seen as encouraging for US corn exports.
But abundant world supplies, potentially improving weather in both North and South America, and the generally overbought conditions in the futures market have speculators second-guessing last week's hasty exits in wheat and soyabeans. Most-active wheat and soyabean futures have both lost about 2 percent over the last three sessions.
Weather models as of midday Sunday suggested rain chances for Argentina's soyabean belt toward the end of this week, and snow looks likely for the US hard red winter wheat belt over the next several days. Given Brazil's capability to generate big corn yields and the chance for Argentina to stabilize over the next several days, speculators may soon retreat from the short-covering mindset and return to their comfortably bearish corn positions.