During the month of May, U.S. grain prices did a swan dive. Soybean prices fell $1.78 a bushel, corn was down $1.35 and wheat slipped into the red by $1.27 a bushel. The grains were riding high in April, but clearly shot down in May.
The biggest and heaviest sellers of grains in May were the Index Funds, also known as the “algo boys,” “the hot money traders,” or as I often refer to them, “the infamous commodity funds.”
The reason the funds sold the devil out of grains was because they all tend to follow certain chart patterns or algorithms as determined by computers. The funds rely on computers to make trades rather than individuals.
The computers are, in most cases, more right than humans, and that is simple to explain because humans have emotions while computers do not. In May, the funds, thanks to computer-generated sell signals, all tried to exit the same door at the same time.
But the big story in the grain complex this week was the mad rush by the infamous funds to go back to the long side of the ledger in the grain complex. Yes, after dumping a huge amount of grain futures in May, they have since done a “180” and are back to being bullish.
How bullish, you ask? Within the last week, the funds are back to holding more than 1 million contracts in the grain complex, the largest since 2011, a decade ago.
There are two simple reasons to explain the funds rushing back to the long side of the grains. One reason is because of the “reflation” trade that is being touted daily on Wall Street.
Here is the best definition of the reflation trade I found on the internet: “The reflation trade is the name given to the bet that assets that benefit from a strengthening economy and a pickup in inflation will outperform safer and steadier ones.”
There is no doubt the U.S. economy is picking up steam with jobs being created, stimulus checks being spent and life getting back to normal after a year of lockdowns.
An enormous amount of pent-up demand is about to be unleashed and will spur the most robust economic growth in over 20 years. The “reflation trade” is real.
Another reason the infamous funds are back to playing the long side of the ledger with corn, soybeans and wheat is they view grains as cheap compared to existing fundamentals with the entire growing season still ahead.
Historically, the funds try to be long the grain complex because they realize a corn crop is made or broken in July and a soybean crop in August. The funds are loading up on the long side of the grain complex in hopes Mother Nature blasts the Grain Belt with above-normal temperatures and below-normal rainfall in the heart of the summer.
From a fundamental standpoint, it only makes sense to be long grains going into July and August. With the U.S. Department of Agriculture forecasting a record low level of ending stocks of corn and soybeans, I shudder to think how high grains could possibly rally if Mother Nature blasts the Grain Belt with searing heat this summer.
I stated once before — and I will again: With U.S. grain stocks razor thin, any significant shortfall regarding soybean yields or production this growing season could bring forth shockingly high prices for soybeans, corn and wheat.
It should also be kept in mind that U.S. grain stocks are so razor-thin, so meager, that it will take 12 to 18 months at the very least to rebuild supplies back up to where they were a year ago.
Thus, the bullish fundamentals impacting grain prices will not go away for some time to come. That, too, is another reason the “algo boys,” the “hot money boys,” want to be long grains with the growing season dead ahead.
My most reliable weather sources are calling for intense heat into late June to draw down soil moisture into mid-month. Other than the Delta and far eastern United States, the forecast is for above-normal temperatures and below-normal rainfall.
My sources are calling for a high-pressure dome to block precipitation into the Grain Belt with heat intensifying. In the old days, the 1970s and the 1980s, such a weather pattern in the months June, July or August was called, and rightfully so, a “Dome of Doom,” and it was quite bullish for grain prices.
It is crystal clear why the infamous funds rushed back to the long side of grains in early June. The reflation trade is in play, grain stocks are razor-thin and the growing season lies ahead.
But as always, the fate of the grain complex rests with Mother Nature and what she has up her sleeve in July and August. And right now, she is trying to lock into place a “Dome of Doom” that may send grain prices to all-time historic highs.
Only time will tell.