A conversation with Dave Whitcomb

Good morning, Dave. Could you tell me a little about yourself and your background in commodity trading?

In 2004, I joined Cargill’s pension fund management team at their headquarters in Minneapolis, Minnesota. In 2010, I moved to Cargill’s grain trading group in Geneva to help build what they called their Non-Fundamental Analysis (NFA) group.

I founded Peak Trading & Research in 2018 as a quantitative agricultural research and trading company, where I’m currently the Head of Research.

How do non-fundamentals affect the markets?

The contract price will always converge with the cash (physical commodity) price when a futures contract expires. However, as a percentage of market participation, the number of players who use futures to source or deliver cash is decreasing. At the same time, the total number of players trading non-fundamental inputs has increased.

Until they expire, futures contracts will often make significant moves based on non-fundamental factors such as macroeconomic data and momentum trader flows.

You may be bearish based on your S&D balance sheet. Still, the macro-economic environment may be bullish – it’s challenging to stay short if crude oil is going up, the dollar is down, and inflation expectations are rising. You also need to take seasonal factors into account. Is it a time of year when prices typically move higher? You must also look at momentum; is it pointing upwards?

What does every fundamental trader need on their non-fundamental dashboard?

We refer to the non-fundamental price drivers in agriculture markets are the “Four Ms”: Monthly seasonality, Macro, Momentum, and Market Structure.

Agricultural markets have strong seasonal price patterns. Every commodity is different, but we see predictable and consistent seasonal patterns across most grains, oilseeds, meats, and softs.

Macro-flows are critical for agricultural markets: macroeconomic data, central bank policies, currencies, and energy, particularly crude oil.

Momentum is our third M. Many hedge funds focus on momentum as a reason to get into or out of markets. They try to catch the big moves, especially at the front edge of the futures curve. Momentum traders try to stick to the most liquid part of the curve.

Market structure is our fourth M. Fundamental traders must be aware of the Commitment of Traders (COT) reports showing how market players like hedge and index funds are positioned. Are they over-extended, either long or short? How vulnerable are those positions, given what prices are currently doing? Will we see a long liquidation, or, if they are short, will we see a short squeeze?

Can a fundamental trader be successful now just trading fundamentals?

It isn’t easy. Markets see cash convergence at expiry, but in the meantime, futures are increasingly following non-fundamental inputs. Traders who trade non-fundamentals continue to attract capital and are having more impact on our markets.

There’s a lot of focus on inflation right now – how is that affecting the markets?

The easy money is probably behind us. The Fed has announced that it will start tapering, winding down its Quantitative Easing (QE) purchases. We could have hikes in interest rates in the middle of 2022. Central banks are now actively working against inflation. It doesn’t mean that inflation can’t continue. One year ago, central banks were trying to manufacture inflation. They are now slowly shifting to capping inflation. Over time it will take some wind out of the sails of this supercycle story.

What would you put on a macroeconomic dashboard for agriculture traders?

Every trader should watch the US dollar and Crude Oil.

For the US dollar, we often say, ‘US dollar up = Ags down.’ Most of our markets are dollar-denominated, and changes in the dollar can impact the competitiveness of US products. A strong dollar encourages origin selling and acreage expansion while making US products less competitive.

Crude oil also matters for the ag markets. Strong energy markets ripple through the ags in many ways: higher fertiliser prices, production costs, transportation costs, etc. Then there are the secondary impacts like hedge funds buying futures because crude oil is going up. Energy market strength lifts ag futures prices in many different ways.

Beyond crude oil and the dollar, it’s essential to watch US and Chinese stock markets, commodity currencies like the Canadian and Australian dollar and the Russian rouble, bond and inflation markets.

What you have on your dashboard depends on the market you trade. Every commodity has its unique set of macro indicators.

And these macro indicators change over time. You must look at correlations and see which macro indicators move which market. Soybean traders currently watch fertiliser prices, propane, and natural gas. Five years ago, they watched Chinese rebar prices as a good proxy for Chinese growth expectations and soybean import demand.

Do physical traders still have an advantage?

Physical traders have a massive advantage if they work in trading houses where they can trade the various arbitrages available to them. They are beginning to understand how these new market participants operate and are learning to complement their views with non-fundamental inputs. It is absolutely a move in the right direction.

If they haven’t done so, every trader should build out a dashboard of non-fundamental trading inputs that matter for their market. Every market is different. Sugar has strong seasonality. Lean hogs are an excellent breakout market. Cocoa is mean-reverting. Bean oil trades all these macro flows. Work out which non-fundamental factors are essential in your commodity, and then follow them like a hawk!

Thank you, Dave, for your time and comments.

This is a short extract from Commodity Crops & The Merchants Who Trade Them available on Amazon.

© Commodity Conversations ® 2022

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