With summer coming into full bloom, is it shaping up to be one to remember in the grain futures markets?
For what’s seemed like an eternity to those CTAs who focus directly on agricultural markets – volatility was getting sucked out of grain markets as they remained range bound crop after crop. See corn since late 2014 as a prime example:
But while your average guy or gal off the street might not think there’s a lot of differences in pricing between an ear of corn and a soybean (much less soybean meal); there’s a world of difference if you are a professional grains trader.
One can be used to create a substitute for Asia’s heavily used palm oil, for example; while one cannot.
These markets do march to their own beat, to the tune of soybean meal futures up nearly 60% in 2016.
Which leaves us with the interesting question – of whether this is the beginning of something big in terms of volatility rising to levels where discretionary ag traders can make some hay, or whether the move has already happened.
Soybean meal may tell you that the move has already happened, and consolidation is ahead (at least for that market).
But other markets show this as just a small move out of the long, extended ranges they’ve been in.
Consider wheat, as an example:
If we forget the markets for a minute and just look at the monthly performance of the BarclayHedge Ag Traders index, we can see the performance up and down has condensed significantly over the past two years, suggesting that an increase in the volatility of the markets will result in larger moves in this index (both up and down).
Since 2013, there’s only been five months in which the index has been above or below 2% (Disclaimer: Past performance is not necessarily indicative of future results).
Part of this may be because the numbers of ag managers have grown since 2011 from 29 to 41 in 2016, but the other explanation (and the one we hear direct from ag managers themselves) is that there just hasn’t been enough movement in the grains for them to do what they do.
They all see the consolidation like a coiled spring ready to unload.
And while this should help any and all man- agers who have grain markets in their portfolios, it will definitely help those who trade only grains that much more.
Even if the largest funds wanted to focus just on grains, they can’t get any meaningful exposure given position limits in those markets.
We’ll see what happens, but one thing is for certain – keep an eye on discretionary ag traders this summer.
Unscientifically, they’re due. More scientifically – there’s proof of grain markets breaking out from their quarters-long consolidation.