Open interest is the 'Fuel' of any futures market. It measures the
outstanding futures contracts that are outstanding at any given point of time.
As market dynamics change, this number can go up or down considerably.
Also, who holds the positions is fairly important to understanding how the
market may react. The main points to understand in the milk market:
- The CFTC
(Commodity Futures Trading Corporation...a governmental regulatory body
overseeing the futures and options markets) collects information on the type
of trader in the market. There are commercial and non-commercial
positions. Typically, commercials are bona fide hedgers (trading risk)
and non-commercials are speculators. This is not always true, but will
work for these charts.
- Commercial buyers (i.e. end users and cheese plants) typically do not
participate in the milk market unless it is trading in the 10.50-11.50
range. Conversely, commercial sellers (i.e. farmers) are consistently
present in the market as you will see in the charts. As such, to get a
really good rally, it has to be based on something that gets the speculators
excited in the shorter run...as they tend to add and liquidate positions in
very short turnaround times.
Each week, open interest reports are released. While not perfect to
catch day to day moves...it does give an idea on who is in, who is out, and
offer clues into the drivers of what is next.