EDITORIAL: Ag, energy markets under pressure in new year | News

Howdy market watchers. The new year is underway. Hopefully, those resolutions still are holding.

There is always Chinese New Year to (re)start a resolution as I often allowed while living there. The lunar new year falls on Jan. 22 this year and kicks off the Year of the Rabbit.

The market will continue to watch China’s reopening from zero COVID restrictions with much trepidation. While traffic trackers show a 30% increase in vehicle movements around China, it is going to be a bumpy ride for the economy, but even more so from the humanitarian aspects. An overwhelmed health care system that we experienced in the U.S. during the height of COVID is now playing out in China only by a multiple and magnitude of many times. Chinese cities are much more densely populated with vertical living.

Another complicating factor stems from the Confucian concept of filial piety prominent throughout the Chinese culture, whereby elderly parents live together as a way of taking care of them. Nursing homes have not traditionally been a concept in China and are only just emerging. Therefore, elderly people affected by COVID in apartments where their kids and grandkids live make for an uncomfortable situation. Especially beyond Tier 1 cities, health care lacks much of the modern technology let alone capacity to handle a large influx of patients. All this to say that China’s reopening is going to take time and result in some debilitating situations, so be cautious to buy the market betting on a major and immediate recovery in that economy.

Some 400 million people in China travel (home) for Chinese New Year. This is likely to result in a quicker and broader spread of COVID across the country. A faster spread will result in a faster peak in cases but also a quicker escalation in market disruptions. China’s 14th National People’s Congress (NPC), its annual legislative session where top leaders are appointed and where Xi Jinping is expected to be confirmed for his third term in office, begins March 5 in Beijing, at which time the worst of the COVID spread should be over. I suspect this was largely the plan behind the timing to reopen in addition to the growing outbreaks of unrest across China threatening the Communist Party’s grip on power.

The extent to which China can achieve a successful reopening will have a major impact on the global economic outlook for 2023 and likely the next several years. Many countries are now requiring COVID tests for inbound travelers from China. This is as important for agricultural, namely beef, pork and beans, and energy commodities as it is for equity markets and global inflationary pressures. Keep a close eye on this part of the world, which curiously has yet to be covered very extensively thus far.

The media had plenty to cover from Washington, D.C., this week with the Republican-controlled House failing to elect a speaker after 13 votes as of this writing. This situation seemed more like coalition in U.K. Parliament than at the U.S. Capitol. Political division, unfortunately, seems to be growing deeper in our country, which doesn’t make one very hopeful for progress in 2023.

It was a tough week for ag, energy and equity markets, though firmer footing was found by Friday. A strengthening U.S. dollar and weak U.S. grain exports pressured wheat, corn and beans lower. Rains in Argentina and thoughts that any crop shortages there could be more than offset by larger crops in Brazil dropped March soybeans by 64 cents in three trading sessions through Thursday before rebounding Friday. This was the third hottest December in Argentina, yet the fourth coolest in Brazil. Recent rains in Argentina have been spotty, and the forecast for the next two weeks is turning dryer than normal.

Soybean futures could see additional upside follow-through early next week and, if so, I would advise downside protection ahead of USDA’s Thursday WASDE and Crop Production reports.

Corn and wheat markets lost all the value in this week’s four trading sessions that it gained in the prior nine trading sessions. Talk of the large Russian wheat crop resulting in record January exports and a large Australian crop weighed on markets. While Russian exports will continue to be a threat, we hear that ship insurers are beginning to cancel coverage on ships in Russia, Ukraine and Belarus due to large losses. This alone is going to add uncertainty to the reliability of grain exports from these countries. The first monthly wheat crop conditions of the year were released by major producing states this week and supportive for prices. Conditions in Kansas came in at 19% good to excellent versus 33% last year and 21% when this year’s crop conditions were last reported in late November. Nebraska came in at 18% compared to last year’s 39% and last November’s 20%. Oklahoma conditions improved to 38% from 31% in November and last year’s 20%, and Colorado improved to 50% from 30% last November and 25% last year.

There is talk of precipitation coming to the wheat belt in the next several weeks, but it remains very dry across a large area, and it will take expansive coverage and meaningful rainfall to make any meaningful impact. Planted area of U.S. wheat also will be reported on Thursday. We typically see a rally after this report. Consider upside positions if you sell wheat before that report. There are reports of cold weather coming into Russian wheat areas with limited snow cover. However, it may only be 15% of the area, though we will know more next week.

The cattle market found strength mid-week with weaker feed grains. As grains stabilized and economic concerns became more center stage with a handful of large U.S. corporations announcing major layoffs, the cattle market fell victim to profit-taking. March feeders rallied over $3.30 on Wednesday to $188.750 before a two-day reversal took nearly all those gains back. There remains a gap above on March feeders that will be filled at $190.600. I believe that gap will be filled in the coming weeks and advise downside protection if and when we get there. March is always a precarious market for the feeder market. There is a lot of uncertainty in markets at this time, and you never know when a Black Swan could approach as it often does for the market in March.

The La Nina that has been responsible for extreme droughts likely will be coming to an end this year. Tropical waters are warming, though there is much debate on the outlook. Weather models largely favor getting to El Nino by spring and summer. The faster the waters warm, the better chance of cooler and dryer patterns. The slower the warming, the dryer and hotter based on past patterns.

Wishing everyone a successful trading week.

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 http://www.sidwellstrategies.com/disclaimer.