Death comes to us all. Life's but a walking shadow | Look at the last three charts showing the net positions (longs minus shorts) of the various trader categories. In all three cases the net position of managed money and swap dealers is the mirror image of the commercials. They track opposite the commercial's moves almost perfectly. There are two good reasons for this. Somebody always has to take the other side of any trade. Second the managed money knows that sometime down the line the commercials will redeem those shorts and they can collect a toll when that happens. Remember the managed money never really wants to exit the market, they can roll positions almost forever as long as they make a little every time or wait until the time is just right. Third, what is the function of the swap dealer? The function of a swap dealer is to take the risk from someone else for a fee. I suspect but I don't have any proof that the rise of the swap dealer is directly connected to ethanol. Remember a few years ago swap dealers weren't even tracked.
How would this work, Suppose a ethanol producer want to fix their price of corn without direct involvement in the futures market. They write a swap contract with the swap dealer for let's say $4.00/bu corn. If at the end of the settlement period the price is higher than $4.00 the swap dealer writes a check for the difference between $4.00 and the actual price (as calculated by the swap agreement). On the other hand if the price is less then the ethanol producer writes the check for the difference. Usually there is fee charged as well. Meanwhile what does the swap dealer do? He buys corn futures. If the price goes up he collects the difference and pays the ethanol producer and pockets the difference. If the futures prices go down then he takes the money from the ethanol producer and covers his loses and hopefully has some left.
I think the thing to remember about this business is that the managed money and the swap dealer aren't trying to make a killing, they are trying to make a living.
The first two charts just separates old crop contracts from the new crop. It shows how the bookkeeping goes. The second three charts with all the colored bars just shows the different contributions of the different traders combine to make the total longs and shorts. Each one of those charts represents fifty two weeks of new crop COT reports, some 500 numbers. Don't try to look at each individual number just look at the pattern.
Edited by 1234 7/28/2014 21:15
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For those who like good data.
