Jan

26

wheatThe commercials seem to be weighing in (or large speculators weighing out) on Chicago wheat. In tonight’s COT report, on a rolling 18 month basis, this market was at the greatest polarization of commercials vs specs where the commercials are taking the long side. Slightly above that is also natural gas.

I’m not saying wheat’s going up tomorrow, because COT data are too coarse for short-term trading, but it seems like a good price range within which to start a longer-term accumulation.

For all the specs that are dumping wheat right now, I’m trying to imagine the trading desk conversation – “Food? Who the heck’s going to buy that?”

Bud Conrad writes:

I usually like to trade in the same direction of the Non Commercials. That is because the speculators (Non C) are big enough to drive markets. So I would interpret your data differently from conventional wisdom as saying grain could be driven down more.

The fundamentals on all the grains were made worse in last weeks USDA WASDE report, and they are in adequate supply. Wheat is probably the worst.

I hold no positions.

George Parkanyi responds:

I still have a substantial gas position and with the trading in and out of a portion of it, it’s now a little profitable; nothing huge – still waiting for the “move”. My main argument though at the time, with gas under $3 and everyone saying that there were record amounts in storage, was that the energy from the gas still had economic value, and that storage means nothing for gas, because whether it’s in a tank or in the ground, it’s all storage. The stuff flows like water. The determinant for prices is what comes out of the spigot at the other end. To me, industrial usage being down was the bigger factor. But for gas right now, this is exactly the price range where you buy the dips (as long as you’re not uber-leveraged). I’m thinking the same thing for grains, though I know I’m early, and I know that wheat has spent a lot of time in the $3 to $4 range in the past and beans $5 - $8. But China is now the elephant in the room as far as commodities go, including agricultural products. If they can’t meet their 8% growth objective to mitigate their population and urban migration problems, they will probably have to import and subsidize a lot of food to keep the lid on things. There should be a steady demand for soybeans at least. Corn is now a dual-purpose crop (energy as well as food), so with planting shifts and volatile weather conditions that may affect other crop seasons, wheat will certainly have its day - sooner than later methinks unless we get a really nasty reprise of early last year in all the financial markets (not unlikely).

I’m not using much leverage, so when I talk about accumulating a position, I’m talking about months, with my sights on the longer-term eventual recovery.

Ken Drees asks:

Do you believe nat gas price can overcome demand destruction factors:

  1. Industrial production down
  2. Household demand down based on homes not being used / versus colder winter
  3. Commercial property down — less gas use there

Seems like more fundamentals are against nat gas.

I like long grains, if a cooler spring/summer happens-which seems possible due to the cooling trends, yields could come off. Cooler summer also impacts nat gas, less energy used for A/C.

George Parkanyi replies:

Even if it stays in this range or lower, its choppiness works for me. It’s had two decent rallies since last September and a couple of useful wiggles. Could be a tough summer, who knows?

Rocky Humbert adds:

Ken wrote: "Seems like more fundamentals are against nat gas."

Agreed. However, in the short-term there are substantial bottlenecks in the domestic Natgas market and a near-absence of elasticity of demand. Additionally, with natgas massively cheap to heating oil, natty could double with no substitution effect. This structural situation explains why natgas can and does spike 100%++ in a short period of time. If you are on the right side of one of these spikes (or declines), with even a small position, it pays for a multitude of mistakes. Conversely, if you are on the wrong side with even a modest size position, it can result in ruin. (It's analogous to spot electricity pricing during peak summer months…) Accuweather just forecasted a "top-ten" cold February — No forecast from me on where natgas will trade over the next 60 days, however!

Larry Williams writes:

Extreme short positions by the large specs (as now in wheat) most often lead to rallies. More important is the relationship between open interest, the Commercial net position and price levels where Commercials have supported/sold the contract. It is not just levels of COT buying selling that matter, as I see it. Open Interest is a critical component to understand who is doing what and the consequences.

Wheat is getting set up to rally.

Jeff Watson comments:

Unless the new crop comes in at less than 1.22 billion bushels of winter wheat in the US, with the current carryover, I wouldn't be too bullish on the futures. Cash wheat at the elevators and ports has been hammered as of late and looks pretty dismal. However, my prognostications as of late have been less than reliable.

George Parkanyi adds:

"It's not an extremely risky call 'getting set up to rally'"

Isn't that what I said when I started this thread? The risk-reward looks pretty good for wheat - not tomorrow morning maybe, but in the next few months. I know there's supposedly plenty of supply, but in the past I've noted that many a rally began when all the news was "We'll never dig out from under the stuff." And, uncannily, when specs are going crazy at one extreme or the other, the market tends to reverse against them at or not too long after those COT inflection points. I think it may have to do with the fact that specs need to get out as well as in, and are building up latent selling/buying liability against themselves as they all run to one side of the boat with the trend. If everyone's shorting a market, then they eventually have to buy back to get out or roll, and if everyone's long, they have to sell to cover. The hedgers don't care - they just take the other side, and may not have to cover at all if they are delivering or taking delivery (thereby not feeding the trend). They also have the advantage that if their hedge works (beyond just locking in the original price), they can always lift it when they see their risk now to be low in doing so, and if the market reverses again, can put the hedge on again and capture the delta to increase their profit. (So that's why you might have commercials lifting hedges after big declines and willingly buying as speculators sell. If they do it in size, it can set off the specs going the same way to cover and ignite sharp reversals).

Larry certainly does a lot more justice to these calls than I do. If not for his books, I couldn't even spell "COT" (Though I wouldn't use me for a testimonial or anything, Larry. I wasn't exactly one of your model students.

Anatoly Veltman writes:

Regrettably, George, (cause I love you bro) you are missing all points:

You quoted me out of context; I simply implied that this particular Larry's call lacked precision/resolve.

You complain about getting bashed re: your COT application — but problem is not in you or in bashers. At issue is application; your one-dimensional application of COT simply doesn't make the cut. You steadfastly believe what you've explained below — and it's not incorrect; it's just not sophisticated enough to trade on… COT application is multi-dimensional; one should view COT with great deal of skepticism vis-a-vis other tools, given COT latency, arbitrary week definition, poor categories' definition and other arcane factors, which 99% of people who "can spell COT" still fail to consider, including all who attempted to quantify COT and talked about their attempts (I'm prepared to make exception for those who might have succeeded, and kept their success secret).

George Parkanyi rebutts:

Now that you mention it, I guess I am a one-dimensional kind of guy. My strategies are keyed on price –- don’t really care about much else except maybe time (for rate of return). As long as a market fluctuates and is not 0-bound, there are strategies that can be put in place on price action alone. In theory, anyway. (Usually it’s when I try to put a rationale behind a direction or a position weighting that I get into trouble. The short ETFs I’ve held and added to since the summer have certainly overstayed their welcome.)

I still like wheat (and I’ll like it a whole lot better $2 lower.)


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4 Comments so far

  1. Jeff Watson on January 26, 2010 12:58 am

    I remember waiting from 1982-1986 (Chernobyl) for wheat to rally. For five years, it was walk in the pit, sell the open, cover during the session and repeat the next day. A slight exaggeration, but that’s the way things were and some of us did OK. It was trying to catch falling daggers that did people in.

  2. Steve Burke on January 26, 2010 1:52 am

    All this talk about the future price of wheat and not one word about the stocks/usage ratio (very low despite massive production), weather in other major wheat producing countries (continued drought in Australia). Yes, I know all of this is well known by savvy (and not so savvvy) market participants and baked into the price, but any prognostication has to start with the basics.

  3. Kermit Johnson on January 26, 2010 7:42 am

    Doesn't anyone who uses COT data bother to try to actually quantify it? Anatoly is dead on — "it's just not sophisticated enough to trade on." The data are readily available. The tools have never been better. (Look at Ward Systems Group for excellent and relatively cheap tools.) I find it hard to believe what I'm reading here.

  4. Craig Bowles on January 28, 2010 7:11 am

    In gold terms, wheat has only been this cheap twice in the 1980s. Relative to gold, it would have to double just to get up to the average of the last decade. We're retesting the September low now. Either gold has to drop or wheat rise. During the Depression, grain prices fell despite dust bowl growing conditions. So, anything is possible if Bob Prechter's third leg becomes reality and none of this other stuff matters much. He moved max margin short stocks right at the recent high and sent out a full report.

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