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Markets get ready for the holidays

With thin, light trading and the lack of traders, any big news item will likely result in the markets to exaggerate the move from the news. That would make it prudent to put in some sell orders at higher levels for a just in case moment.

Piece of ham isolated on white background
Time to pull out the Christmas ham as December draws to a close.
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Editor's note: Catch Randy Martinson every Friday after markets close on the Agweek Market Wrap at agweek.com.

The second week of December did not end as most would have expected. The grains started the week mixed, with wheat and corn posting strong gains while soybeans and soybean meal sold off hard. The rest of the week had wheat and corn trading in a back-and-forth fashion while soybeans slowly dug their way out of the hole. By the time the dust had settled, all three wheat exchanges were posting gains along with corn while soybeans posted small losses.

Soybeans started the week off on the defense due to reports of better-than-expected rains in Argentina. Selling was also tied to reports of a large increase in COVID cases in China due to their relaxing of COVID restrictions. The increase in cases was expected and will likely start to improve, which once it does will result in a large increase in demand from China.

But the pressure from the rain was short lived as hot dry conditions returned to Argentina and has continued to cause concerns. A better-than-expected Consumer Price Index estimate on Tuesday, Dec. 13, added support. The CPI estimate came in at 7.1% versus expectations of 7.3%. This helped to encourage the Federal Reserve to only increase interest rates 0.5% on Wednesday, Dec. 14. To top that off, in his speech, Federal Reserve Chairman Jerome Powell made the comments that it is likely the Fed will only look at increasing rates another 0.75% to 1.0% in 2023.

Argentina’s production estimates continue to be a moving target as officials are consistently lowering their estimates weekly. Wheat harvest has crossed over 62% completed and so far, yield reports continue to disappoint. Wheat production is estimated at 11.5 million metric tons versus 11.8 million metric tons last month and versus USDA’s estimate of 12.5 million metric tons. Corn production is estimated at 47 million metric tons versus 55 million metric tons last year. Soybean production is estimated at 49 million metric tons versus 51 million metric tons last year.

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The third week of December started the same way the previous week did, with all the grains under pressure. This is the last full week of trading for 2022. That will likely result in the funds to continue to liquidate positions ahead of the holiday as well as end of year. Look for trading volume to progressively get lighter throughout the week. This could result in a big swing in either direction, especially if any big news hits the market.

The third week appeared to be a risk off session with the grains losing ground right out of the gate. The Chicago markets (wheat, corn, soybeans) were hit the hardest trading with heavy losses throughout the session. Early selling pressure for corn and soybeans came from weather forecasts calling for cooler temps and rain for Argentina. If realized, it will help the soybean crop, but it appears any weather improvement will be too late for corn.

Chicago wheat was pressured by demand concerns. Wheat exports continue to lag. Even with the reports of missile attacks and bombings, Ukraine continues to move grain out of the Black Sea region. Russia’s wheat exports have slowed down but are expected to pick back up after the first of the year.

Corn demand is also in question. Corn exports continue to lag behind last year due to the absence of China. China has not been as big of a buyer of corn this year due to COVID lockdowns and lower demand. But China is trying to reverse that trend. Slowly China has been relaxing their COVID restrictions and, as expected, has seen a huge increase in COVID cases. Once the initial flush of cases is over and China starts to reopen their country, demand for products will increase. But this likely won’t occur until spring, when the U.S. will be competing against Brazil for export business. Brazil is expected to export 44 million metric tons of corn this year, double last year’s expectation. This is due to the new trade agreement between China and Brazil.

That is just an estimate at this point as 75% of Brazil’s corn crop has not even been planted yet. The second corn crop doesn’t get planted until the soybeans are harvested. A lot can happen in three months.

The biggest driving force in the grains has been more technical in nature then fundamental. Open interest has been decreasing in the grains the past few weeks, which is a sign of liquidation. It appears traders are evening up positions and heading to the sidelines ahead of the holidays and year end. This is common as most traders like to start with a fresh deck at the first of the year.

The Dec. 20 session saw support spilling over from a stronger crude oil market with a lower U.S. dollar adding support. Weather added a bit of strength as extremely cold temps are expected to blanket the Plains states over the next few days. The cold is expected to dip into northern Texas, and most are expecting some damage will be done to the exposed winter wheat in Kansas, Oklahoma, and Texas.

Read more market news here
U.S. corn and soybean supplies will be bigger than previously expected due to weaker domestic demand, the government said on Wednesday, Feb. 8.

South American weather also grabbed the headlines Dec. 20. It seems that the forecasted rains for Argentina might not be as robust as first thought. Tuesday’s forecast started to reduce the amount of rain and the area that is expected to see the rain. Both of which being friendly to soybeans.

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I know we have been saying this for a while, but the grains are in a sideways pattern looking for direction. The professional traders are wrapping up on money management ahead of the holiday and year end. This will likely really make next week a quiet week of trading. But that doesn’t mean you can’t have volatility. With thin, light trading and the lack of traders, any big news item will likely result in the markets to exaggerate the move from the news. That would make it prudent to put in some sell orders at higher levels for a just in case moment.

Corn has opportunity, but there are some obstacles that corn must jump over to be able to hold gains. Demand is the biggest hurdle in corn as not only is export demand lackluster at best, but ethanol demand is also not showing signs of expanding and neither is feed demand. The Cattle on Feed report and Quarterly Hogs and Pigs report — both due out on Dec. 23 after the deadline for this column — will likely confirm that. But Argentina’s production is going to be reduced sharply due to drought and Brazil has yet to plant their second corn crop.

Soybeans have been able to show the most strength of the grains. Part of the support is due to solid export demand with help coming from production concerns in Argentina. Brazil is even starting to have some regions of concern. As it sits now, Brazil is expected to harvest another massive soybean crop (due to increased acreage) and will likely corner the export market in late January or early February.

Cattle ended the second week of December mixed with live cattle higher on weather concerns while a stronger grain complex put minor pressure on the feeder cattle market. Traders have been getting ready for the December Cattle on Feed report. The report is expected to be friendly to cattle with early estimates putting the on feed estimate at 97%. If realized that will be the lowest year-over-year estimate in 31 months. Placed are estimated at 96% and marketed is estimated at 101%. Add in the forecast for another winter storm the weekend of Christmas for the Plains and you have the making for live cattle to trade to new contract highs. The cattle outlook looks promising going forward, barring any major economic event.

“The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results.”

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