Is New Buying Driving the Rally in Soybean Futures?
The May soybean futures contract rallied more than 50 cents from last Friday's close through this Thursday's settlement.
This week has seen the Goldman Roll take place, among other things, with funds reportedly holding a net-short futures position as of Tuesday, April 1. (No fooling.)
However, while the futures market has rallied this week, its total open interest and trade volume numbers continue to decline.
A young friend of mine from Greece, who has been studying and trading commodity markets since last June, sent in a question yesterday that cut right to the heart of the soybean market: “Why do you think the soybean market saw commercial support today (Thursday) through the spreads? I know around report releases, funds and algos tend to do their thing, but was this actual human commercial buying, or more of a ‘pseudo-buy’ triggered by the report?”
There is so much to appreciate in this question from someone who has been following markets for less than a year. What jumped out at me immediately was the “actual human commercial buying” comment as it illustrates his understanding of the Funds vs. Fundamentals reality: It’s “a mental” thing. (To see this, take a look at the spelling of the two words. Funds is Fundamentals without the ‘amental’.)
My answer to my friend was, and still is, Thursday’s spread activity was skewed by noncommercial activity, particularly in the old-crop market where we saw May gain another 3.0 cents on July, trimming the carry to 7.75 cents at the close. In fact, if we look at the spreads daily close-only chart we see the carry has been cut from 16.0 cents at the close of trade on Friday, April 4 (slide 2). What has happened this past week? Where do we start? But one thing that was forgotten was the Goldman Roll ran from this past Monday through yesterday’s close. And as I said previously, this would likely skew the May-July futures spread.
Why? Even though it goes against Rule #5 (It’s the what, not the why), there are some reasons we can put together.
- Last Friday’s CFTC Commitments of Traders report (legacy, futures only) showed funds held a net-short futures position of 3,512 contracts as of Tuesday, April 1. This was a decrease of 10,898 contracts from the previous week.
- Driven in large part by a decrease in short futures of 13,958 contracts
- With a decrease in the net-short created by reducing short futures not as bullish as one driven by new buying interest
- long futures actually decreased by 3,060 contracts as well
- From Tuesday, April 1 through Tuesday, April 8 the May futures contract closed 41.5 cents lower
- after falling as much as 57.25 cents through the close of Friday, April 4
- indicating funds had added to their net-short futures position once again
- From Tuesday, April 8 through Thursday’s close the May futures contract added 36.25 cents
- putting it back at $10.29, still down 5.25 cents from Tuesday, April 1
Is there evidence the move by May soybeans since last Friday, a gain of 52.0 cents, has been little more than fund short-covering? This is where olume and open interest numbers come into play.
- At last Friday’s close (April 4), total open interest in soybeans was 897,415 contracts, including
- At Thursday’s close (April 10), total open interest in soybean futures was 832,905 contracts with
- May at 226,783 contracts
- July at 295,353 contracts
- November at 166,887 contracts
Keep in mind classic technical analysis, if we can still use this method, uses changes in volume and open interest as trend indicators. “If volume and open interest are both increasing, then the current price trend will probably continue in its present direction (either up or down). If, however, volume and open interest are declining, the action can be viewed as a warning that the current price trend may be nearing an end.”[i]
What I make of this week’s action in soybean futures is renewed fund short-covering in the May issue. This has caused the May-July futures spread to be skewed, making it look like “actual human commercial buying” when it was Watson simply doing what it does. In other words, I don't see the market's real fundamentals have changed much.
[i] From “Technical Analysis of the Futures Markets” by John J. Murphy, pg. 180, 1986 ed.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.