Demand and Global Outlook

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Demand and Global Outlook

The Commodity Futures Trading Commission (CFTC) approved limits on speculation in food, energy and metals, restricting the futures positions a single trader can hold to 25% of deliverable supply for commodities about to be delivered. For contracts further in the future, which are usually held by investment funds, 10% of open interest for the first 25,000 contracts and 2.5% over this level will be the limit. A similar mandate is being debated in the European Union. These regulations stem from fears that speculation contributed to food price spikes and some of the largest funds will have to liquidate their holdings [1]. Traders will have to demonstrate to the CFTC that they have the space to store the commodities they are hedging [2]. These regulations came into play as $9.9 billion was withdrawn from commodities last month sparked by macroeconomic fears [3]; e.g. China’s GDP growth during third quarter is lowest since 2009 [4] which could curb its demand for commodities.

Impact on our trading game:

Corn and wheat already have speculative caps on it. But in previous demand group posts we mentioned that if gold suffered a sharp price drop, commodity funds might have to liquidate their positions in agricultural commodities to pay their margin calls. This regulation should dampen this effect.

The regulations aim to reduce the effects of “herd behaviour” which can be amplified by large funds that spur self-fulfilling prophecy patterns; and therefore reduce price volatility.

Watch for sharp drops in soybean prices leading up to November’s delivery date as large funds that currently have open contract exceeding the new limits will have to liquidate their holdings. Also track open interest and the Commitment of Traders and bid accordingly.

Weekly news: not much big news but keep a close eye on outside markets like the EU.

Corn: Market prices suggest that Chinese demand for corn is far higher than the 182m tonnes cited by official US data, suggesting a large untapped import demand. If prices fall to or below support levels we might expect some large purchases.

[1] [2] [3] [4] [5]

Nchoykm02:20, 25 October 2011