The volatility in agricultural commodities has disappeared – kind of. Ag commodities are back in their “happy place” of abundance and oversupply, waiting for a weather event. One might expect that the spec funds, aka Managed Money (MM), have left for greener ($) pastures. This is not the case. The data shows they never left. They have however, changed the way they bet.
The change over the last five years has been their propensity to bet on the short side. Take a look at the data – graphs below – the growth in the short side bet is obvious. The graphs show the combined open interest for managed money long and short. The first graph totals all open interest for CME corn, soybeans, soy meal, soy oil, wheat, and KC wheat.
If there are larger bets, then why no volatility? There have been sparks of volatility, and the moves have been large: e.g. July17 cotton, July16 corn and July16 soymeal, but most of the last three years has been like drying paint. When MM chose to add short to their betting toolbox they automatically started to become more balanced – more shorts to offset longs. Occasionally, balance is lost and MM pushes a market to the outer edges of the limits. A small trigger is all that is needed to expose the weakness of the imbalance. A May 1st snow on Kansas wheat created a 60c KC wheat rally in 6 days.
The volatility is present in occasional large doses. It is a great environment for position traders, painful for those that need more action.
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