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Open Interest of Specs

Open interest is the number of futures contracts on the books that must be offset at some later date with an equal, but opposite transaction or be settled by a delivery of the actual commodity.

If you have no futures position today and you buy one May corn futures contract this evening, the corn open interest increased by one contract. When you sell one May corn futures contract later, open interest will decrease by one contract. All futures must be offset by an opposite transaction or delivery.

The Commodity Futures Trading Commission (CFTC) regulates all futures exchanges in the U.S. The Commodity Exchange Act requires the CFTC to report specific market information to the public. Probably the most important market information from the CFTC is the Commitment of Traders (COT) issued Friday afternoons.

The COT reports the open interest as of the close of business the previous Tuesday. It details the positions of the what we call the big spec funds, the index funds, the commercials and the small traders. The spec and index funds are referred to as managed money funds. Commercials are hedgers (cash grain buyers and sellers), and the small traders are traders who trade positions less than 200 or so contracts.

View the website for the COT, which includes futures and options positions, here:

https://www.cftc.gov/dea/options/deaviewcit.htm

Generally speaking, market analysts do not pay much attention to the commercials’ position because they are hedgers, meaning every futures contract they buy or sell is the opposite of a cash market transaction, so the net market impact is a wash. Analysts know the small traders' net position is wrong because they lose money consistently. If they did not lose money consistently, they would be big spec fund traders.

Index funds are managed speculative trading funds with one or more specific requirements of its investors. Perhaps each member of the fund has to be corn producer/corn user or own a million dollars’ worth of stock in a cereal company, etc. Index funds became popular in the 1990’s and have grown substantially since them.

An unusual characteristic of the Grain Index Funds is they have always been long the futures market since the CFTC separated them from the Big Spec Funds in March 2007. The number of contracts they are long will vary by several hundred thousand over the course of a year or two, so they do make a difference in the price. But they have never been net short corn, wheat or beans.

The Big Spec Funds are the gun slingers, always looking for the fast buck. They don’t care whose money they get or how they get it, as long as they do not break the CFTC rules. These traders will shift their money from crude oil to hogs to corn to ethanol to soybeans, etc., as they search for the perfect trade with a balance of low risk and profitability. Their computers are humming 24/7 seeking those opportunities. They may be day traders or long term traders, but likely are both. So what does all this have to do with us farmer types?

The futures price is influenced most by the Big Spec Funds, then the Index Funds, and somewhat by the small traders. It is a good idea to keep an eye on the commercial position because that will tell you if farmers are selling more or less of a commodity than is being consumed.

But more than anything, a successful cash grain marketer, as well as a futures trader, needs to be aware of what the Big Spec Funds are doing. Are they building a large short or large long position week after week? Are they net long more contracts than they ever have been before? If so, you better empty your bins!

When the Big Spec Funds liquidate their long positions, they will be selling. There is no group of traders to absorb all their sell orders to keep the market from declining or even hold it steady. Likewise when they are buying, you don't want to selling except to lock in a profitable price for your cash grain.

Take a look at the week to week change in the soybean position of the Big Specs and the corresponding price change for that same week. I will begin with the first week in November 2021 because the fall low for soybeans was made Nov. 9:


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