March 17, 2011

Are fundamentals or non-commercial dollars driving corn market?

By Kelly Brunkhorst, Director of Research for the Nebraska Corn Board

Over the past few years, non-commercial investment in the commodity markets have gained significantly. This has lead to many things including a lack of convergence in the marketplace, but it also has been a driver in the significant increases we have seen in the futures prices, specifically in mid – 2008 and currently, the graph (below) clearly shows the effects that non-commercial liquidation of the long positions can have.

We shared the graph with Dr. Dennis Conley of University of Nebraska-Lincoln’s Department of Agricultural Economics and he had this to share:
When I inspect the graph, it looks like two things are happening. First, for the past few years there is non-commercial interest in futures contracts as a place to invest. The motivation is to try and capture returns for funds that do not have good, liquid alternatives for investment - like stock equities or bonds - during the great recession that started in early 2008. Second, it appears the non-commercials positions are correlated with price. Some of the time the volume of their positions, both during increasing volumes as well as decreasing volumes, tend to look like they are leading prices up and down, respectively.
This all leads to another question, are true fundamentals driving today’s commodity prices? Even if you believe they are, one can not underestimate the role that outside influence is having, specifically non-commercial interest.

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