Tuesday, July 21, 2009

The Debts of the Spenders: Corn Wars - Index Funds vs Black Box Traders

Earlier this year, the index funds were advancing based on heightened inflation fears. They have not changed their tune. But now, the short term traders like quants are winning.

CBOT Corn Spec Funds Go Net Short, Market Eyes More Selling

Speculative funds last week moved net short in Chicago Board of Trade corn futures for the first time since April, and analysts and traders differ on whether funds will extend their short positions much further.

A short position is held by a trader who agrees to deliver a commodity at a future date. Holders of short positions are expecting prices will drop. Friday’s supplemental commitment of traders report from the Commodity Futures Trading Commission showed that the “trend-following” funds were net short 4,738 contracts as of July 14. Those funds had reduced their long positions by 11,848 contracts and increased their short positions by 11,606 contracts during the preceding week.

It was the first time since the week ended April 28 that the speculative funds had been net short.

Analysts say the liquidation was prompted by a long stretch of favorable crop weather, which is fueling expectations of a high-yielding crop. Also, the U.S. Department of Agriculture said June 30 that farmers would plant 87 million acres this year, the second-highest U.S. total.

Another factor, said Jeff Hainline, director of Advance Trading, is concern about the potential for the CFTC to limit speculation in the markets. A Senate subcommittee recently issued a report examining excessive speculation in the wheat market, and the CFTC has announced plans to enact speculative position limits in the energy market.

A lot of the speculative, or trend-following funds are “black box” traders that simply trade based on the recent trend, said Rich Feltes, vice president and director of research for MF Global.

Index funds, meanwhile, have continued to add to their net long position, noted Arlan Suderman, analyst for Farm Futures. The mostly long-only funds added 8,267 contracts to their long positions and added 4,800 contracts to their short positions, putting them net long 313,242 contracts, the CFTC said.

Suderman said the index funds were increasing their net long position “based on these long-term inflationary perceptions.” Traders and analysts differ on whether the speculative funds, having gone net short, will further extend their short position.

The market’s movement will depend on whether funds continue to liquidate, they said. Feltes said the funds typically “get long a lot more than they get short. “I would say that the selling that has been in the market from the liquidation of the trend-following funds, except for soybeans, is likely going to ease or abate in the weeks ahead,” Feltes said.

But that doesn’t mean prices won’t remain under pressure, he said. The market has yet to feel the weight of selling by the U.S. farmer, “who still holds over 2 billion bushels of old crop corn and is frozen in the headlights in this waterfall formation in corn.

Source: CME News For Tomorrow
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