Happy New Year to market watchers. 2021 is in the books and it’s 2020 time too! Wait NO, 2022.
Take a deep breath because it’s time to start over. All the things you hoped to accomplish last year can be added to your new goals for the next 365 days. Reset and regroup because your optimism should be at an all time high to start a new year.
And what a year it’s been. Despite heightened volatility which made trading very delicate, equity and commodity markets ended the year with impressive growth. Oil jumped 60%, stocks nearly 30%, KC wheat 30%, corn 35%, soybeans 22%, cotton 48%, feeder cattle 26% and fat by almost 25%. These advances, while respectable, are not at the peak of the year either. With rising inflation, the continued compromises of COVID variants, and mounting geopolitical tensions, the next 12 months are expected to be more complex.
The three potential Fed rate hikes are anything but certain because they respond to economic and employment progress on time without being premature. The most unpredictable of the uncertainties on the horizon is the evolution of geopolitics between the United States and Russia, China and Iran. Take your pick from the most critical issues, but I think the ones that will emerge in a big way in Russia and China are border and sovereignty issues involving Ukraine and Taiwan, respectively. I foresee that the leaders of Russia and China will simultaneously insist on these conflicts to accentuate the political appetite of the executive but also of the legislative branches of the US government for conflict resolution.
With the Biden administration’s approval rating declining and unlikely to run for a second term, I expect this stalemate to worsen next year, allowing such conflicts to persist. How will these potential disruptions impact the broader market? Hard to say, but it can actually add a volatility premium to commodities, both agricultural and energy, if trade flows are affected.
With new leadership in Germany, it will also be interesting to see how the major EU economies react given the energy dependence on Russia and trade with China.
During the last week of trading, the wheat market peaked in overnight Sunday trading before selling the rest of the week. Russian troop movements off the Ukrainian border and the risk of precipitation in the United States, although accompanied by cold, played into the weakness. The US Wheat Belt is badly in need of precipitation, but I expect very little to materialize compared to the gap. This cold snap will permanently put wheat into dormancy with lows at or below freezing until at least mid-January. Snow cover protects winter wheat from freezing temperatures, but gives limited actual moisture.
Time will tell, but I think we haven’t seen the peaks in the wheat market yet. March KC futures fell below $ 8.00 on Friday, but managed to close above $ 8.01Â½.
Corn and soybean markets remained reasonably strong in light of last week’s surge. Friday’s action looked to be an indoor day on corn until the last segments of the session before dipping below Thursday. Soybeans closed with an interior day (higher lower and lower higher) on the chart, suggesting Monday’s move should follow in that direction. The drought in South America continued to add a weather bonus to the corn and bean charts.
Sales of corn in the United States this week were larger than expected, while soybeans were down and wheat was lower than expected. Forecasts show much needed precipitation in Brazil and Argentina over the 6-10 and 11-15 day outlook. This market should find support if the actual value is insufficient, but be careful with some sales before the next start. I expect the battle for acres in the US between corn and soybeans to start in mid-January or early February. China this week expanded approvals for GMO corn varieties for planting in the country. It’s no surprise that all of the approved varieties are from Chinese companies, but let’s also remember that Syngenta is now owned by a state-owned enterprise (SOE), so these approvals are likely to be the next one. While this may help increase or at least help stabilize Chinese production, I think the greater importance of this decision is that the import of GMO corn will be increasingly difficult to restrict through fair trade practices via the World Trade Organization (WTO).
This could be the start of China signaling to the world market that adequate supplies of corn are increasingly important as the country’s animal protein and ethanol sectors expand. Lately, there have been a lot of signals from China that American beef is all the rage. Recent figures have been weaker for China, likely reflecting the rebound in Brazilian beef exports after the August BSE case. However, I expect American beef to remain a top competitor in Asian markets next year as quality becomes more and more important. The cattle market was on fire this week, especially feeders which hit new highs recently on Friday, rebounding from the initial weakness. March feeders jumped 5% this week alone to close at just under $ 170. Like I said, I think this market has the potential to hit $ 180 on March, April, or May contracts, but it won’t happen without fluctuations.
As we all know, traders usually manage to sell the markets in March when the fattening producers herd cattle from wheat. open, but protect the drop. You never know when the next Black Swan event is going to hit us. If you are looking for downside protection while keeping the upside open, I encourage you to consider LRP, which I also offer through insurance, in addition to puts and hedges, this is a great way to protect against declines for less premium. This is basically a subsidized put option, but there are other differences as well, including the option to pay the premium after the coverage expires instead of upfront.
If you are ready to trade in the commodities markets, call me at (580) 232-2272 or drop by my office to create your account and discuss risk management and marketing solutions to further your goals. Auto-trade accounts are also available. It’s never too late to start, and no operation is too small to have a risk management and marketing plan in place. Come see me every Thursday during sales at the Enid cattle market and let’s talk about the markets. I wish everyone a successful trading week.
Sidwell is a Certified Series 3 Commodity Futures Broker and Director of Sidwell Strategies. He can be reached at (580) 232-2272 or [email protected] Trading in futures and options involves risk of loss and may not be suitable for all investors. See the full disclaimer at http://www.sidwellstrategies.com/disclaimer.