|
NW Iowa | off DTN
Besides the fact everyone is affected by interest rate levels, either through the impact on expenses or income, why should we be concerned? Because of the influence the subject has on Commodity Index Trader (CIT) strategies.
As a group, they have been actively buying agricultural futures as a hedge against inflation since the August 2024 low. A basket of corn, Chicago and Kansas wheat, soybeans, soybean meal and soybean oil as well as feeder cattle, live cattle and lean hog futures demonstrate this very well. CITs went from a net long of 808,286 contracts (as of Aug. 12) in those markets to a recent high of 1,248,906 contracts (as of Feb. 18). The 440,620 additional net long purchases would have contributed to the rally seen throughout and a sudden shift in their outlook could present a serious risk.
If the efforts by DOGE and the speed of their implementation are enough of a shock to the economy to inspire disinflation and a recession -- or even just the likelihood of one -- long liquidation by CIT funds could be very problematic. In April 2022, they made the sudden shift to liquidate their long hedges against inflation, contributing to the sharp selloff seen in grain and oilseed markets at the time. They went from being net long 1,398,256 contracts March 28 (of the previous basket of ag commodities) when the Fed declared war on inflation to a net long of only 866,114 contracts on the May 22, 2023, low. It is too early to push the panic button yet, but weakness from Feb. 20 through to the time of writing (Feb. 24) in the grain and oilseed markets certainly does look like some liquidation is taking place. We will know more with the Commitments of Traders update on Feb. 28. | |
|
Market decline
