December saw an across the board price rally. A lot of factors came into play this month and the rally felt overdone many times, but nevertheless, it continued. There were arguments to be made on the fundamental and technical side that support the rally, but the macro picture is certainly a key one. Grains weren’t the only market to rally this month, stocks, the broad commodity market and even Bitcoin rallied tremendously. There seems to be a flow of money into the market that can’t be stopped. At the very least it has no apparent desire to sell short, or even lock in profits. The dollar continues its steady decline as the Federal Reserve continues to print money, and the US debt continues to grow. There is a flight into assets. That aspect is understandable to some extent, what’s most baffling is that there seems to be little discernment which assets people buy.
Now specifically on to the grain markets. Participants have a growing expectation for ending stocks to dwindle, dangerously low for the soybeans. Price rationing is happening to be sure. Initially, many thought that it would occur in the mid $12 range, now that expectation is around $14. The USDA could print literally anything in the upcoming January report. On that day, and in the days following, the market could pull back temporarily if the information is bearish. We feel that a longer term bull market is here, with these prices or higher justified to not only ration the current grain stocks, but also to price in risk for the next growing season.
With Wheat over $6, Beans over $13 and Corn almost $5, risk management becomes a much larger focus. Even bulls have to acknowledge the potential for the market to pullback a dollar or more on relatively small events. That’s why we look to the market to give us more insight into what’s going on in the minds of the big players.
Interestingly, we haven’t seen much accumulation of the managed money position over the past month. We also have only seen a steady increase in volatility, which is more a function of the price moving up the call skew than actual volatility increasing. What we would expect to see is managed money locking in some profits and replacing their position with calls. At the very least we would have expected to see some put buying. While the put skew has climbed somewhat, we haven’t really seen any of the above. It seems that, for now, managed money is long and holding without really doing much of anything. As the January report approaches, we would expect to see some of that change as it becomes very irresponsible to hold on to longs at this level without any protection.
On this steady grind up it’s hard to get any sort of call panic. And we haven’t seen much of a pullback, it’s a very one sided market. We’re waiting for some balance to enter in as a sign that the market is functioning healthy and as expected. It’s tempting to want to be long, just because the market is going higher. And while it is never a great idea to fight a trend, we must always be cognizant of the pullbacks that could happen at any time, even in the most bullish of markets.