Kottke Commodities – A Half-Empty or Half-Full Glass?

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Market Commentary from Kottke Commodities – Commodity Capital CTA – Kenneth Stein

We know of very few commercial entities or traders that were positioned last month to reflect much possibility that soybean prices at CME might be far too low. Plenty of different explanations have been offered as to the source of last month’s abrupt price explosion of grains and oilseeds prices. These can be roughly divided into two groups, “game theorists” and “statistical analysts.”

Game theorists view price movement as competition between big-money speculators. The CFTC publishes a detailed breakdown of the net positions of several different classifications of participants – grain companies and farmers, speculators, etc. Imagining these weekly figures to be an X-ray of the inside scoop, game theorists scrutinize speculator positions in particular, assigning it heavy weight in price forecasting.

Big speculative position shifts always occur in conjunction with big price moves. But to imagine one can finger a short speculator as the culprit in recent CME upsurge ignores crucial distinctions between different types of financial markets. The NYSE trades title and ownership of the underlying instruments, while futures contracts represent only the marginal risk of price change. In the former, a strictly limited number of shares exists to trade, while in futures no practical limit on open interest exists.. So it’s relatively easy for a suddenly expanded volume of futures offers or bids to draw a counter – unless a fundamental change, sometimes hard to pinpoint, has occurred. Not until contract expiration does a futures contract transition into 100% ownership of cash grain in an elevator – the reality underlying the derivative.

So while it’s axiomatic that big price moves accompany big position shifts, correlation is not causality.

The statistical analysts try to get in focus the recent past of world trade and crop production, and extrapolate that into forecasting price change. Everyone has free access to the same, if voluminous, data. The USDA’s many publications issue from extensive internal expertise including multiple field agents in every state and agricultural attaches in most foreign embassies. The International Grains Council in London and the U.N.’s Foreign Agricultural Organization in Rome each issues independent assessments. Every country of major stature in grains trade has an official agency that regularly quantifies agricultural production and trade: Instituto Brasileiro, Eurostat, Statistique Canada, etc. Private consultants bundle these and offer opinions, lobby groups and individual companies issue research, brokerage houses weigh in with their views and recommendations. Private weather forecasters abound, but similarly all start with the identical data.

As it is said, ask ten economists and receive twelve different opinions. To some a glass is half-empty, to others the message from the same mass of evidence is that it’s half-full. Analysts were all well aware that the combined total of Brazilian, U.S., Argentine, Paraguayan soybean production was very large and regarded that as the absolute determinant. What most missed was that the total of sales and shipments from these countries indicated demand growth so great as to equal this production, forming a trajectory that future production growth would be unable to match. Why? Mostly because government policies in Argentina and the U.S., two of the three big shippers, constrain farmers’ ability to change in response to price signals representing world food requirements.

But the simplest explanation of April’s sharp soybean rally is a paraphrase of the incomparable Mark Twain, whose obituary ran in newspapers while he was still quite healthy:  The rumors of the death of the world economy are greatly exaggerated.

Kottke Associates is a Multi-Manager CTA platform specializing in fundamental-discretionary managers focused on niche strategies within an individual commodity market.