What I think the farmer is now facing in futures
What if you had almost unlimited money, lots of time, no logistical issues to contend with, and a deep understanding of the psychology of who you are trading against?
That's what I think has happened in the rice, and coming to your favorite grain in the near future.
What I have observed since the beginning of may is a trading system unleashed on the rice market like no other, and apparently without limits to size, or common sense.
Its really a simple system on its surface. Detect weakness, and exploit that weakness. I was a CBOT delivery clerk back in the 80's and 90's, so I have some pretty strong opinions about how delivery specifications can affect how easy it is to run a given market up or down. To say rice has a problematic delivery specification is an understatement. It's quite common for rice to have more receipts registered for delivery than beans or corn, or for that matter beans AND corn. That those receipts don't clear is a pretty sure sign that the specs are in favor of the short side. We could go into wheat and variable rate storage, but lets save that discussion for another day. Another benefit of testing your system in rice, or previously in oats, is the size of the contract allows for much more clarity of cause and effect of orders entered, as well as orders executed. And be sure, there is a distinct difference between orders entered and orders executed. I think this is one of the keys to what we are facing. Once momentum has swung down, placing sell orders above the market can have just as much, and sometimes more, psychological effect towards fulfilling that downward pressure goal.
Here is the way it works. On a strong opening, stay small and let the longs run themselves out, then bring selling. On a flat day, bring selling early to as far as you can push without selling the farm, then hold it down with offers above the market. Let it breath upwards in the middle of the day, the bring pressure again in the last 15-45 minutes, making sure it settles as weak as possible. The luxury of offering above the bid is that you can actually be the bid, with an offer just above, so the longs puke to you, and the buyers have to pay up, abet from a low price to own. The more you buy back, the more bullets you have for the afternoon churn. Every day you do this, you break the longs spirit. That's the psychological aspect of it. This isn't really new, just magnified. As a farmer you already know that the commercial is more than happy to back up his bids with the lower market. But at some point basis has to come into play if the commercial truly needs product. That when the market has overshot. But the problem lies when basis corrects but the seller is so detached from the underlying product that the selling continues. I know the easy answer is that the market will correct itself, but if you have broke most of the participants and only a few commercials and a giant fund are left to settle up, Those small participants just wont come back, and without the smalls, the bigs find a new place to hunt. And the hunting grounds just lay decimated.
As rice approached may deliveries, the market had experienced a decent run up, both futures and cash. Some rolled may to July, and some just took may profits. But that opened the door to a downward selling program, which picked up steam as the market broke, and they continued to sell more and more, becoming self fulfilling. In a matter of a few weeks, cash basis trades went from 50 under bid to 70 over trade. That would be like a 50 cent corn basis swing in a few weeks. Not futures, but basis in the heart of delivery territory. So every long that said, wow this is too cheap, got pummeled the day after they bought the market, because the seller doesn't seem to have any size limit issues. Eventually many just gave up, took the loss, and scratched their collective heads at what we were experiencing. Don't think that pain won't come up in their minds the next time someone says, wow, futures sure are cheap down here. My gut says anyone caught in this run that is truly involved in the rice market will take a pass next time. I don't know of a soul the truly believes the carry over numbers in the WASDE report. I understand the governments stance. They have to report what is reported to them, and some reasonable amount of commercial sales are just slow reported, or show up on a census report that is 2 months old. But the cash guys have a better handle than that. And I believe they got caught too. Or at least commitments of traders say they did. Speaking of which, in todays electronic age, why other than legacy, is the commitments report as of Tuesday, but not available to us lowly flunkies until Friday at 2:30? Why not every day at 2:30, and current?
Back to the rice trade. I sit here on 6/16/18, awaiting the final week of trade in July futures with the July options open, anticipating one of two outcomes.. In simple terms, July goes up, or July goes down. But the thing is, its not nearly that simple. This is an important thing to note. How July futures trade thru next week can have a significant effect on how July trades going into delivery and thru expiration. July rice has limits to size carried into spot, and not nearly enough receipts available in a receipt heavy contract to fulfill short obligations. The commercial is long, has cash contracts loading on the river as we speak, and domestic milling needs still not covered. The spec is short, and caught. I can imagine the conversation between the quant that wrote the program and the trader that is executing. Trader is frustrated because he has watched $2 of profits evaporate because the July/Sept spread has went to $2 bucks over and climbing. The quant is frustrated because if the trader had executed in sept in the first place, he would have a lower profit, but not the rolling expense. Which brings me to my concerns in corn, wheat, and beans. Execute the same program, but in December corn, December wheat, and November beans. Now the calendar doesn't get to have a correcting effect in the same way. I've always wondered why these firms fill themselves with PHDs, but neglect to hire the ground level guys that can spot the glaring flaws in the laboratory system. Time will tell.
I am a 30 year professional trader. I will almost always have some form of rice position on to make sure I stay intimately in tune with the rice market, including thru this trade.. I trade my own money, and advise mostly farmers on the many aspects of their profession where I might bring value. These observations are my opinions, and no one else's. My assumptions could be completely wrong about everyone and everything involved in the recent rice melt down. I do not endorse anyone making trades based on these observations. Beyond that, Think of every commodities disclaimer you have ever read and apply them here,. If you have not read a myriad of commodities disclaimers, please disregard everything you have just read as pure fiction, for enjoyment purposes only.
Steve Malcom
Malcom Ag Group
That's what I think has happened in the rice, and coming to your favorite grain in the near future.
What I have observed since the beginning of may is a trading system unleashed on the rice market like no other, and apparently without limits to size, or common sense.
Its really a simple system on its surface. Detect weakness, and exploit that weakness. I was a CBOT delivery clerk back in the 80's and 90's, so I have some pretty strong opinions about how delivery specifications can affect how easy it is to run a given market up or down. To say rice has a problematic delivery specification is an understatement. It's quite common for rice to have more receipts registered for delivery than beans or corn, or for that matter beans AND corn. That those receipts don't clear is a pretty sure sign that the specs are in favor of the short side. We could go into wheat and variable rate storage, but lets save that discussion for another day. Another benefit of testing your system in rice, or previously in oats, is the size of the contract allows for much more clarity of cause and effect of orders entered, as well as orders executed. And be sure, there is a distinct difference between orders entered and orders executed. I think this is one of the keys to what we are facing. Once momentum has swung down, placing sell orders above the market can have just as much, and sometimes more, psychological effect towards fulfilling that downward pressure goal.
Here is the way it works. On a strong opening, stay small and let the longs run themselves out, then bring selling. On a flat day, bring selling early to as far as you can push without selling the farm, then hold it down with offers above the market. Let it breath upwards in the middle of the day, the bring pressure again in the last 15-45 minutes, making sure it settles as weak as possible. The luxury of offering above the bid is that you can actually be the bid, with an offer just above, so the longs puke to you, and the buyers have to pay up, abet from a low price to own. The more you buy back, the more bullets you have for the afternoon churn. Every day you do this, you break the longs spirit. That's the psychological aspect of it. This isn't really new, just magnified. As a farmer you already know that the commercial is more than happy to back up his bids with the lower market. But at some point basis has to come into play if the commercial truly needs product. That when the market has overshot. But the problem lies when basis corrects but the seller is so detached from the underlying product that the selling continues. I know the easy answer is that the market will correct itself, but if you have broke most of the participants and only a few commercials and a giant fund are left to settle up, Those small participants just wont come back, and without the smalls, the bigs find a new place to hunt. And the hunting grounds just lay decimated.
As rice approached may deliveries, the market had experienced a decent run up, both futures and cash. Some rolled may to July, and some just took may profits. But that opened the door to a downward selling program, which picked up steam as the market broke, and they continued to sell more and more, becoming self fulfilling. In a matter of a few weeks, cash basis trades went from 50 under bid to 70 over trade. That would be like a 50 cent corn basis swing in a few weeks. Not futures, but basis in the heart of delivery territory. So every long that said, wow this is too cheap, got pummeled the day after they bought the market, because the seller doesn't seem to have any size limit issues. Eventually many just gave up, took the loss, and scratched their collective heads at what we were experiencing. Don't think that pain won't come up in their minds the next time someone says, wow, futures sure are cheap down here. My gut says anyone caught in this run that is truly involved in the rice market will take a pass next time. I don't know of a soul the truly believes the carry over numbers in the WASDE report. I understand the governments stance. They have to report what is reported to them, and some reasonable amount of commercial sales are just slow reported, or show up on a census report that is 2 months old. But the cash guys have a better handle than that. And I believe they got caught too. Or at least commitments of traders say they did. Speaking of which, in todays electronic age, why other than legacy, is the commitments report as of Tuesday, but not available to us lowly flunkies until Friday at 2:30? Why not every day at 2:30, and current?
Back to the rice trade. I sit here on 6/16/18, awaiting the final week of trade in July futures with the July options open, anticipating one of two outcomes.. In simple terms, July goes up, or July goes down. But the thing is, its not nearly that simple. This is an important thing to note. How July futures trade thru next week can have a significant effect on how July trades going into delivery and thru expiration. July rice has limits to size carried into spot, and not nearly enough receipts available in a receipt heavy contract to fulfill short obligations. The commercial is long, has cash contracts loading on the river as we speak, and domestic milling needs still not covered. The spec is short, and caught. I can imagine the conversation between the quant that wrote the program and the trader that is executing. Trader is frustrated because he has watched $2 of profits evaporate because the July/Sept spread has went to $2 bucks over and climbing. The quant is frustrated because if the trader had executed in sept in the first place, he would have a lower profit, but not the rolling expense. Which brings me to my concerns in corn, wheat, and beans. Execute the same program, but in December corn, December wheat, and November beans. Now the calendar doesn't get to have a correcting effect in the same way. I've always wondered why these firms fill themselves with PHDs, but neglect to hire the ground level guys that can spot the glaring flaws in the laboratory system. Time will tell.
I am a 30 year professional trader. I will almost always have some form of rice position on to make sure I stay intimately in tune with the rice market, including thru this trade.. I trade my own money, and advise mostly farmers on the many aspects of their profession where I might bring value. These observations are my opinions, and no one else's. My assumptions could be completely wrong about everyone and everything involved in the recent rice melt down. I do not endorse anyone making trades based on these observations. Beyond that, Think of every commodities disclaimer you have ever read and apply them here,. If you have not read a myriad of commodities disclaimers, please disregard everything you have just read as pure fiction, for enjoyment purposes only.
Steve Malcom
Malcom Ag Group
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