Market Morsel: Gambling on wheat

Market Morsel

Many people who trade wheat have no use for it. They are simply trading it to make a profit; they won’t even physically touch it – many probably haven’t walked through a wheat paddock.

Despite the fact that they don’t have much interest in the underlying commodity, they are an important factor in the market.

Gaining an understanding of how speculators are positioned is valuable. It provides us with a market signal and gives an insight into their sentiment of the market. The Commodity Futures Trading Commission (CFTC) provides a weekly report called The Commitment of Traders (COT), which provides this insight.

The COT report is released every week on a Friday. The weekly data is the positions held as of Tuesday; therefore, there is a delay.

The full report provides details on how many contracts are short (sold) or long (bought) positions for a range of different trader types. The type of trader we are interested in viewing is the ‘managed money’, a proxy for speculators.

The important thing to consider is whether the term is short or long. If they are short on wheat, that means they are ‘betting’ on the market falling further. If they are long on wheat, they are ‘betting’ on the market rising.

So how are they just now?

The speculators in wheat have increased their short positions significantly in the past six to seven weeks. At the moment, they are 140k contracts short across the three main exchanges overall. The biggest fall has been in Chicago, although this tends to be the case as it is the exchange with the highest liquidity.,

This means that speculators are betting on the market falling. This doesn’t mean that they are right, but it can be good for growers when there is a reversal. These short traders have sold wheat that they don’t own and are hoping to buy contracts at a lower price to fulfil their sales in the future.

If there is a shock to the system, i.e., the news out of Russia of a poor winter crop, they may buy their contracts quickly to reduce their risk. This causes a short covering rally, and the market moves quickly (for a short time).

It is a risky move to bet on wheat falling.