The New Year is here market watchers!  

And so marks the eighth year of the Sidwell Strategies CommodityBuzz.  It is hard to believe that I’ve been sharing weekly commentary for nearly a decade.  A lot has happened during that time both in the markets and in my life.  As some may know, I’m also an investor in private agribusinesses in addition to being a commodity broker.  I have taken on many challenges to shape the future of agriculture since moving back to the farm in 2016 following a global career in food and agriculture supply chain spanning banking to mergers and acquisitions.  It has been a journey.

While much has changed in our industry over the past eight years, I foresee much more change ahead in the coming decade.  This next year, in particular, is likely to see some foundational changes in our industry with tightening margins and an unpredictable policy and trade environment despite the clean GOP sweep, largely seen as a positive, in the recent election.  It seems we could see fundamental changes in how food, agriculture and healthcare are interlinked and funded.  

The precarious majority in the US House of Representatives re-surfaced Friday, the first day of the 119th Congress, with Speaker Johnson retaining the gavel by a single vote after one Republican dissention.  This is now the narrowest majority in the US House in almost 100 years.  

During times of change, the best we can hope for is underlying strength in the economy and demand for our products to help us adapt from a position of solid footing. While the overall US economy seems strong, our agricultural economy is tedious from falling commodity prices, higher insurance, interest and other operating costs that have significantly tightened margins.  

The international situation is less than desirable with weak economic growth and now the threat of tariffs and counter-tariffs disrupting supply chains. Just after Christmas, China announced its industrial profits declined for a fourth straight month, down 7.3 percent in the month of November.  

There were also some concerns over US demand in this week’s EIA reports.  Crude oil stocks reduced less than expected while gasoline stocks rose much more than expected as gasoline demand softened despite lower prices.  Distillate stocks also came in larger than expected with an increase instead of trade guesses for a decrease in the latest EIA numbers.  

However, demand for soybeans in November’s NOPA crush report told a different story, showing stronger than expected increases, and setting a new, all-time record for the month by five percent.  US soy oil stocks for November were higher than expected and October stocks were also revised higher.  While higher stocks could turn into a negative for future crush demand, it also represents an industry that is optimistic about such future demand.  The continued shortages being reported in Southeast Asia’s palm oil production along with Indonesia’s increased domestic biodiesel blend confirmed this week despite a short delay, is likely part of that optimism.  

Corn demand for ethanol also continues to increase year-over-year although partly attributed to issues with prior USDA data.  All in all, domestic demand for US corn and soybeans remains strong, which is shaping up to be that position of strength for the year of change ahead of us.  

Having said that, new crop risk management is strongly advised this year as things can change quickly in an uncertain trade and economic environment with much concern over the Chinese economy, in particular. Dial in your breakevens, add a reasonable margin expectation and get risk management targets in place when futures markets reach those levels.  It is likely to be an incredibly tight year over the next 12 months and so plan proactively.  

Volatility will probably continue to increase, which will create quick opportunities, but also see them disappear with similar haste.  We saw that play out Friday with a fast sell-off across the grain and oilseed complex after a slow, build on the cusp of looking like a breakout higher was possible.  The next round of USDA reports come January 10th with wheat specific figures on January 13th.  The wheat reports, in particular, could be market movers, which they desparately need.  We will see the extent to which the winter storm coming in this weekend will be seen as moisture versus potential winter kill for late planted, immature wheat. 

Note early 12:15 PM closes for ag markets on Thursday, January 9th, in observance of the National Day of Mourning for the late former President Jimmy Carter. 

The only market breaking out is the cattle complex that could have seen topping action on Friday for feeder contracts.  The new year started with explosive break higher in feeders and fat cattle contracts that continued early in the January 3rd session, but lost momentum into the close. In fact, both the feeder and fat cattle futures look toppy from Friday’s chart action.  

December fat cattle futures expired at the end of the year with February now the front month.  Cash fed cattle prices also exploded Friday trading as high as $197 in Texas and Kansas and up to $200 in Colorado and Nebraska.  There was a regional packer in Nebraska that paid $201!  

February fat cattle futures traded to a high of $196.200 on Friday before closing the session at just above $194.  If cash trades re-emerge next week at these levels, I foresee more to come in the February live cattle contract.  Having said that, several contracts have reached new, all-time highs although January feeders that reached a high of $267.875 on Friday, are still short of last year’s early February high at $272.300.  

USDA’s month-end, annual cattle inventory report, after the bi-annual report was suspended due to so-called budget constraints, will likely show just how tight numbers are, but the market may very well have that priced in ahead of its release.  

Risk management is always the most difficult at the extremes, both high and low, and we see that here in the cattle market with everyone convinced that it’s just going to keep going higher.  And it will probably go higher, but we will get a correction that could be severe while the charts remain in a bullish channel.  It is hard to say what that trigger will be, but there is more chatter that business is getting done before the inauguration with uncertainties thereafter and we know that markets do not like uncertainty.  It is still unclear where we are with the reopening of the US-Mexico border to inbound cattle that could add volatility.  

There are a variety of ways to manage risk while not selling out and it involves a combination of strategies.  Sidwell Strategies is the one-stop shop to protect cattle with futures, puts, LRP or a combination of all, which is probably the best strategy overall.  

If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss risk management and marketing solutions to pursue your objectives.  Self-trading accounts are also available.  It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.  

Wishing everyone a successful trading week!  Let us know if you'd like to join our daily market price and commentary text messages to stay informed!

Brady Sidwell is a Series 3 Licensed Commodity Futures Broker and Principal of Sidwell Strategies.  He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com.  Futures and Options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at https://www.sidwellstrategies.com/fccp-disclaimer-21951.