Tuesday, December 2, 2008

Beaten Down Commodities

From Bryce Knorr at Farm Futures Magazine this morning:

"Open in interest in the corn market dropped by a staggering 350,000 contracts after expiration of December options, according to the latest CFTC commitments report, delayed due to the Thanksgiving holiday. Funds were net buyers on the week, however, though speculative hedge funds remain net short overall. Open interest dropped another 10,000 contracts yesterday on December deliveries, with 1,850 contracts put out. Stoppers are starting to emerge, as holding corn provides a better return that investing in Treasuries."

This one statement seems to be symbolic for many futures in the current market. The accompanying chart for soybeans, a favorite of traders, shows how erratic trading has become for the grain markets over the past few months, and liquidity has dried up and funds have liquidated their positions. This is not the sign of a healthy market. Liquidity has been more than halved over the course of the summer and fall months. It is significant that funds remain net short also. Everyone blamed funds and traders for the rise in commodity prices over the first half of the year, but no one gives them credit for also driving prices down more than 50% over the past four months to prices that are near two-year lows.