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Todd's Take
Wednesday, July 19, 2017 1:25PM CDT

By Todd Hultman
DTN Analyst

Noncommercial traders are broadly defined by the Commodity Futures Trading Commission (CFTC) as any futures account that does not engage in "business activities hedged by the use of the futures or options markets." It does not matter if the account is an individual or an investment fund or some other form as long as they are not in the business of dealing with the physical commodity traded. (CFTC's definition of commercial and noncommercial traders can be found at: http://bit.ly/…)

If the number of contracts held in an account or group of related accounts reaches CFTC's reportable position level, those positions will be reported in CFTC's weekly Commitments of Traders report. In the case of corn, any position of 250 contracts or more gets reported in CFTC's weekly report. As of last Friday, 36% of corn's total open interest came from reportable noncommercial positions, 51% was from reportable commercial positions, and the remaining 13% was from smaller accounts with non-reportable positions. (Information on reportable position levels for grain futures at the CBOT can be found at: http://bit.ly/…)

Some analysts focus on the "managed money" section of CFTC's disaggregated reports to get a read on what traders are doing. Here at DTN, we talk about total noncommercial positions in CFTC's aggregated report. I mention that because it sometimes confuses our readers who hear more than one analyst. Personally, I prefer the broader noncommercial category because markets themselves don't care if the speculative trader holding a position is defined as managed money or not. A spec is a spec.

Which brings us to the point of today's article. The main reason we care about these designations is that it gives us valuable insight into the markets that we can't get anywhere else. Noncommercial traders have different ways of operating in the markets than commercials do, and we are seeing again this summer the importance of knowing the pros and cons of each.

Near the end of June, noncommercial traders in soybeans put their largest net-long position on record, just before USDA's Acreage report on June 30 sparked a dollar rally in soybean prices. Trader losses were compounded by a slow response, as it took them two weeks to back out of those net-shorts -- even though November soybeans posted a new three-month high as early as July 3.

As bad as that trading went, Friday's Commitments of Traders report just showed another flop, this time in corn. According to CFTC data, noncommercials increased net longs to 175,745 contracts on July 11, just in time to see December corn drop 34 cents the next two days.

The purpose here is not to gloat over others' pain, but to bring up something I have suspected for a long time. We hear a lot about commodity funds employing computerized trading algorithms these days as if that were a giant advantage. If you read enough of these articles, you might even get the sense that the average grain producer or small trading account doesn't have a chance in today's markets ruled by technological titans.

But when we look at the actual track record in grains the past few years and especially again this summer, we see one noncommercial train wreck after another. Where are all these fantastic algorithms? To borrow a famous book title, "Where are the customers' yachts?" (I'm referring to the 1940 book by investment humorist Fred Schwed Jr., "Where Are the Customers' Yachts?")

Writing an opinion piece for Bloomberg News on July 12, 2017, investment adviser Shelley Goldberg noticed that things are not going well for trading firms. She noted, "The number of commodity trading houses has dwindled over the years, and the institutional, pure-play commodity hedge funds that remain -- and actually make money -- can be counted on two hands." (To read Goldberg's full piece "Why Commodity Traders Are Fleeing the Business," visit https://bloom.bg/….)

It is fair to say that not all noncommercials are created equal and not all commodity funds are equal either. In fact, there are several managed futures funds that have a strong reputation for being disciplined trend-followers, and they will tell you that they will not come out ahead every year. But, over the long run, they expect to be profitable.

Judging by CFTC data, however, we can see that the bulk of noncommercial positions are not behaving as disciplined trend-followers, adhering to computer trading algorithms or strict rules of position-sizing. They are behaving as most people do, loading up on soybean positions when they think soybean acres will be higher than expected and loading up on corn positions when the extended forecast looks hot and dry.

In spite of all the talk of technology ruling the world, the actual record of noncommercial positions is far less glamorous. The siren call of those trying to predict the future is as strong as ever, and no doubt more technology than ever is being employed. As far as I can tell, fallible people are still calling the shots.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on Twitter @ToddHultman1


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