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Todd's Take
Monday, November 18, 2019 4:49PM CST
By Todd Hultman
DTN Lead Analyst

The Commodity Futures Trading Commission (CFTC) describes noncommercials as large traders not engaged in business activities hedged by the use of the futures or option markets. More commonly known as speculators, noncommercials are often booed as the source of today's market troubles or cheered as an essential part of free markets.

As an analyst, I keep close track of the noncommercial positions revealed in CFTC's weekly Commitments of Traders reports for several reasons. The main benefit comes from understanding how noncommercial behavior distorts market prices and adds risk.

I've never heard economists talk about this before, but noncommercial behavior cannot be represented on a supply and demand chart. Unlike commercials, speculators have different motives, and shifting demand curves up or down doesn't accurately portray their influence.

The problem is noncommercial behavior drives prices away from equilibrium -- not toward it. Show me a market where noncommercials are heavily net long as they were in corn in June and I'll show you unstable prices with significant downside risk.

That does not mean the speculative crowd is always wrong. Sometimes the trends they follow have strong fundamental reasons. One of the most popular examples of success happened in 2006 and 2007 when noncommercial net longs rode the wave of expansion into ethanol.

In the long-run, however, the noncommercial track record is a long list of failure as the natural tendency to follow trends without knowing much else has proven to be a sorry method for trading. As I see it, noncommercials are bad poker players with a lot of chips -- they push prices too high or too low and have a knack for making the biggest bets at the wrong time.

As bad as that may sound, keeping track of noncommercial behavior is a wonderful advantage for grain producers who know how to take advantage of their mistakes. Noncommercial overenthusiasm is a big reason DTN Market Strategies recommended forward cash sales of corn and soybeans at good prices early in 2018 and a second corn sale on June 21 of this year.

As valuable as those market tips have been, the current grain market is gleaning little help from noncommercial positions. A typical corn and soybean harvest would see speculators turn bearish and drive prices lower than they deserve. However, this year is no ordinary year.

Noncommercials have already lost three bets in corn in 2019, the largest being 318,221 net longs as of July 16. It is understandable if they lost their nerve to try again and are currently sitting with a small number of net shorts.

In soybeans, noncommercials lost a bearish bet in early May after the trade talks with China quickly went from looking promising to the U.S. initiating a new round of higher tariffs. By mid-June, noncommercials were largely out of the soybean market and stayed out until October, reluctant to make bets again on a political trade decision.

The most recent CFTC data shows noncommercials net long 91,933 contracts of soybeans as of Nov. 5, a modestly bullish position that has been encouraged by rising prices and increased purchases from China. It is not a big noncommercial bet, but it is on thin ice with plenty of uncertainty about where trade talks are headed.

For now, the bigger risks of market disruption are the U.S.-China trade talks and South American weather. As things currently stand, we have to assume China's purchases from the U.S. will remain limited by the trade dispute, and the lack of an agreement likely means a big increase in U.S. corn planting will take place in early 2020.

According to USDA, Brazil is on its way to growing a record high 4.52 billion-bushel (bb) soybean crop in early 2020. The season is still young and so far the weather has been generally favorable. Brazil's CONAB estimates the soybean crop at 4.44 bb, still large enough to offer stiff export competition.

Once again, we see another aspect of 2019 that is not like other years and are left with an unsettled conclusion. In the case of corn and soybeans, the current levels of noncommercial activity aren't offering much bearish risk to prices, but other factors clearly are.

Todd Hultman can be reached at todd.hultman@dtn.com

Follow him on Twitter @ToddHultman


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