I was certainly early when I announced that the corn rally was beginning a few weeks ago, but the premise is as true today as it was then. Looking at today's corn chart I see two things. First, the size of this coil is truly remarkable. Secondly, price is breaking out. The larger the coil, the more explosive the price movement tends to be on the breakout. Sentiment Trader made this observation: Agriculture is a market that has performed so poorly in recent years that it's basically an afterthought. It's easy to find a number of fundamental reasons for the steady slide lower, and essentially all of those continue to point to lower prices.
But here's the thing - the smart money isn't buying those arguments. At least, not for a while. The latest Commitments of Traders data shows that large commercial hedgers have continued to hold a net long position in a variety of ag contracts. By definition, these traders use the futures market to hedge their exposure to the underlying markets. In ag products, that usually means that a hedger is a producer of the commodity, meaning they are basically "long" the commodity. So it's extremely unusual for them to also be long the futures contracts. The PowerShares DB Agriculture Fund (DBA) is the most popular fund based on these commodities. That fund is itself based on an index from Deutsche Bank. Exposure to the 11 different ag contracts will vary during the year, and each November is reset to a base weight. Most of the contracts have about a 12% weight in the index. With big declines in several of them in recent weeks, hedgers have picked up their buying interest and are now have the most exposure in over a year. Going back to 1988, when hedgers were holding more than 10,000 contracts net long, the DB index advanced by an annualized +13.1%. When they were short by 10,000 contracts, it returned an annualized -2.1%. We can see that in the past few years, the DBA fund has halted its slide when the hedgers became net long. Their continued buying interest should serve as a floor under the fund in the weeks ahead.
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