Market Thoughts 1.03.21
Quite a way to send out 2020 as March corn advanced 33 cents to close at 484’0. That was the largest weekly gain for corn since May 2019 and the 484 close is that commodity’s best since April 2014. Corn has now closed higher in 14 consecutive sessions, adding 63 cents in the process. New highs for beans too as Nov added 46 cents to close at 1311’0. Beans have rallied 150 cents in the past three weeks and are also at their highest prices since 2014. Spring wheat added 16’4 to close at 599’2, finally taking out the October highs (which have long been a distant memory for corn/beans) and trading to the highest level for spot spring wheat since late 2018.
The Argentine port strike was resolved this week after dragging on for nearly a month but in its wake officials announced they were suspending corn exports until March. Along with Managed Money much shorter than expected, strong weekly U.S. export sales, continued marginal SA weather and the USD sliding to its lowest level in three years, grains raced to the new highs noted above with corn leading the way. It’s interesting to consider this latest stage of the rally has been fueled primarily by things other than Chinese demand headlines or major weather issues. Perhaps most compelling as we expect more of this – comparing this year’s Argentine port strike to other years. In the past, a brief strike mostly for show was followed by a nominal wage increase and resumption of activities. This year they demanded a 30% increase plus Covid hazard pay and had stuff shut down for nearly a month. This is one example of something we discussed earlier in the fall; covid-related supply chain disruptions in other parts of the globe that are bullish for your grain. All told, we enter the new year with corn and beans at 7 year highs, the main driver behind it (China demand) still intact, a weak USD, Managed Money with buying power, increasing supply-chain issues globally and the need for both American continents to have excellent crops with little margin for error.
We’ve been talking since August about the similarities between this rally and the 2010 rally (Demand catalyst, flash drought, S&D revisions, Russian wheat crop issues, etc.) and the price performance continues to track remarkably similar. If the pattern persists, expect a price correction this week/ early January followed by contract highs in late Feb/early March…
I’m not sure if that last bullet point was even necessary as the farmer doesn’t need any help to be bullish right now. On the other hand, the caution signs: Corn’s move to seven year highs has included 14 straight higher closes, a record and an effort that has pushed tech indicators to the most overbought level that we can recall. We’re seeing rumors in the cash markets like we saw in late November when things cooled off for a month – China cancelling/switching cargoes, one of the ethanol plants we supply informing us they are slowing down, etc. Our Sell Signal algos are now above the Sell level for both corn and beans. And perhaps most surprisingly, crude oil is at just 48/barrel. Crude was over 100 the last time corn and beans printed prices at this level and it’s tough for us to envision a prolonged commodity bull market without Crude participating.
So what now? Selling new crop means selling against a strong seasonal tendency, against a compelling fundamental story, before Managed Money net long has peaked, before North American weather plays out (both nationally and your actual farm production) and selling a massive inverse with old crop prices currently way higher than new crop. Not selling means potentially missing out on solid profits that come alongside 435 corn and 1112 beans if the market starts caring about the things we put in the last bullet point. This then is a text-book time for put option strategies, a time where doing a put option strategy is likely less risky than either selling or doing nothing. Most people look at the end result of a put option and cringe because by definition at that point it will have performed worse than the better of either selling or doing nothing; inferring then that the premium was somehow wasted. But we don’t know the end when we do an option trade, we only know the beginning. Rarely do we have a beginning quite like this, a chance to use put options to lock in attractive/profitable levels while still leaving topside open. And in the process, not risk either missing out on current prices or capturing a major move higher for new crop.