Who is long? Who is short? How much of each? This is one of the most valuable pieces of information when analyzing the futures market.
The Commodity Futures Trading Commission (CFTC) publishes the Commitment of Traders Report every Friday. The report shows the futures position of larger traders as of the previous Tuesday. It’s important that all cattle producers are knowledgeable about the Commitment of Traders Report. Over the past couple of years, the Western Livestock Price Insurance Program has become more popular for all types of cattle producers. This program is based on the options market for live cattle and feeder cattle futures. You don’t want to buy price insurance when the market is at the low. Therefore, the Commitment of Traders Report is useful when timing the implementation of your hedging strategy.
When one type of trader has an overly large position on the futures market, this is a good indication that the trend may be coming to an end and there is potential for a large move in the opposite direction.
In this article, I’ll describe the four classifications of traders whose futures position is shown in the Live Cattle Futures Disaggregated Commitments of Traders Report. The first classification is the “producer/merchant/processor/user.” This trader is considered the commercial trader or packer. Very simply, this type of trader uses the futures to offset their cash position. Therefore, if this trader has a large short position in place, it reflects that packers have significant coverage in the cash market.
The second classification is the “money manager.” These traders manage funds or conduct trade on behalf of clients.
The third classification is the “swap dealer” and I won’t focus too much on this category of traders. These traders use futures to manage risk of swaps; I could write a whole article on this alone but it’s not necessary for cattle producers.
The final category is the “other reportable or non-commercial.” Every other trader that is not included in the previous three is placed in this category. Some analysts say that this final category is usually wrong so if you’re a contrarian, use them as a price signal.
I’ve attached a graph below showing the managed money long position on the live cattle futures from November 20, 2018 through August 12, 2019. The live cattle futures were trending higher as the managed money built up their long position. Without going into detail, on March 26, the long position was a record. These traders extended the length which reached a peak on April 23 of 155,183 contracts. It was about this time that the live cattle futures were trading at contract highs.
On the flip side, cattle producers sometimes have to put themselves in the mindset of a packer. When a packer is buying cattle in the cash market, they offset their purchases on the futures markets. Cattle producers watching the report should also realize that the commercial position (producer/merchant/processor/user) is considered the “smart money.” These traders have extensive analysis and understand what’s going on more than anyone else. Therefore, it’s important to watch these traders.
On April 23, 2019, when the managed money had a record long, the commercial was a record short of 223,996 contracts. If packers have a large short position on the futures, this means they have a large long position in the cash market. Packers have extensive coverage and there is no demand left to come forward.
When the managed money has a record long and commercials have a record short, cattle producers know that the top is near or has just passed by. This is the time to place hedges aggressively or buy your price insurance. From April 23 through to July 1, the managed money was an aggressive seller and the commercials were buying their positions in as cattle were delivered to their plants. The non-commercial was actually a net buyer during this time, doing the exact wrong thing.
In conclusion, the Commitment of Traders Report can be a useful tool for timing price insurance purchase or placing hedges. On the flip side, the position of these traders can also indicate when the market is putting in a low for the season.