Market Thoughts 12.20.20
New date/location for our grower summit…
March corn gained 14’0 cents this week to close at 437’4. This represents a new high weekly for corn and the daily high of 438’4 is just below the 439’4 high from three Sundays ago. January beans gained 59’4, their strongest weekly advance of the entire rally, and easily passed through the 12.00 mark to make new highs at 1220. March spring wheat actually lost a penny on the week and closed at 568’4. This is still up over 20 cents from lows the week prior but spring wheat hasn’t even made it back to October levels even as corn and beans march into new contract highs.
Our theory from a month ago that grains wouldn’t make new highs until 2021 was thoroughly invalidated by beans last week and corn appears intent on doing the same tonight (wheat is at least still proving us right…) That wasn’t just our theory though, numerous analysts had expected versions of the same given the setup – managed money large net long position, Chinese purchase announcements tapering off, poor Chinese crush margins and South American weather not perfect but good enough. Then this week played out and with it, considerable scrambling to attribute a cause for the largest weekly advance in a couple years. Low volume, Argentine port strike, “because it can”, etc. While we waste as much time as anyone trying to guess what markets might do next, we find it much more important to study how markets work. And to that end, the most watched/hyped grain bull market in in years doesn’t make a massive move to new highs with Managed Money already holding a large net long position on no news. Below was shared from a client of ours: Credit to Roger Wright (great info, good follow on Grain Market Discussion). He points out that Mato Grosso (most productive area, think Illinois), is actually quite moisture deficit at this critical juncture as they need rain 9/10 days in that area. With the U.S. balance sheet teetering on the brink of running out of beans before harvest – the USDA at 175 million bushel carryout with many private estimates lower – any risk of further decline is going to be met with major buying interest and while the casual observer (like us) would look at overall South American weather and say good enough, the below shows what caught Managed Money’s attention and pushed us to new highs.
New crop corn traded to 419 and beans to 1081 this week. Interesting as those levels are profitable and considerably higher than we’ve seen at this time of year (or period) in years. On the other hand, they represent substantial inverses (lower prices) to old crop, seasonals suggest patience and a prolonged demand bull market requires a shift to the approach on marketing. In an over-supplied bear market (such as the past five years), forward selling aggressively to lock in carries was often the only way to achieve acceptable results. In a demand bull market, the exact opposite tends to be true as often (such as now) the immediate spot price is the highest. This doesn’t necessarily mean abandoning risk management principles though. Beans and Corn are quickly approaching levels where owning outright puts is a possible strategy. This would lock in a guaranteed floor at profitable levels while leaving topside completely open; ensuring attractive current prices don’t disappear while allowing unlimited potential upside if prices improve later as expected.