Three commodities to watch in December
As we flip the calendar page to December and count the days until 2020 is over, there are three commodities to keep a close eye on this month. These commodities are either undervalued, building a base of stronger demand, potentially facing reduced supply, or experiencing a combination of all the above. They have the potential for price movement not only for the month of December, but also well into 2021.
For three weeks corn futures have been hovering near recent highs. The March 2021 contract has technical overhead resistance near the $4.35 area. This is also the high price from June and July of 2019. With the projected lower ending stocks for U.S. corn supplies, currently pegged at 1.7 billion bushels, all eyes are on export demand, feed demand, and ethanol demand. If there is any perception that ending stocks in the United States or the world are getting smaller, that will be a trigger for corn futures prices to climb higher.
The December 10 WASDE report will shed light on the demand picture. Many feel exports will continue to improve, and China will buy additional corn from the United States as it replenishes its feed needs for the building hog herd. The export category on the USDA report may indeed need to be adjusted higher. According to recent data for the week that ended November 19, U.S. Corn export sales were running 162% ahead of a year ago and shipments were 59% ahead with the USDA forecasting a 49% increase. Ethanol demand may begin to improve with the release of a COVID-19 vaccine sooner than later. The perception that the virus may finally be getting under control may allow Americans to get driving and moving around again.
The crop in Brazil is off to a poor start with the extreme heat and dryness that country has endured. According to agribusiness consultancy Safras & Mercado, they now forecast that Brazil will produce 19.052 million tonnes of first-crop corn, almost 18% below the 23.161 million tonnes harvested in the 2019/2020 summer season. There is already concern that the second-crop corn (Safrinha) will be lower in production as well. This second-crop corn accounts for 70% of Brazil’s total corn production.
The outlook for cattle prices into 2021 looks supportive. The theme of heavy cattle – and plentiful numbers that kept prices in check for November – is starting to shift as we wrap up 2020 and head into 2021. The November cattle on feed report was bullish, as it saw placements and total cattle on feed below estimates. The total number of cattle on feed as of November 1 was at 101%. Placements in feedlots were at 89%, while marketing for the month of October came in at 100%. This was in line with the average guess.
Demand appears to be strong. The cutout has been improving slowly for weeks now and in late November was trading near $245.06, which was the highest since early June. I hold the view that with many families having smaller holiday gatherings this year due to COVID complications, traditional large holiday turkeys and hams will be less popular. Not needing to feed a large group at the holidays may leave families looking for an alternative menu. While some Americans have been out of work due to COVID, a good portion of America has made the shift to working at home. They are still receiving a paycheck. With the many limitations that 2020 has pressed on Americans, it might be nice to splurge on steak as a holiday indulgence this year.
Lastly, looking a few months ahead, drought conditions continue to persist in the western United States. Unless there is meaningful precipitation this winter, this may put cattle producers in a difficult situation. Will they preserve herd size with supplemental feed or cull their herd to stretch feed resources for quality cows and calves? There will be many factors to monitor in the weeks and months ahead for cattle. However, the bottom line is that heading into 2021, the outlook for cattle is optimistic.
A new president. Potentially new fracking policies. Skewed demand for crude oil due to COVID-19. There are plenty of things to monitor here. While there are some optimistic signs for the economy, with several drug companies offering vaccines, the question remains how quickly the vaccines will become available. Will there be any additional nationwide shutdowns in the meantime? The sooner we are able to get back to normal, the better. However, some feel oil demand may never fully recover to pre-COVID levels. We have now learned to work from home or have cut work travel. With business travel lessened as well as, we have adapted to video meetings instead.
Since April, OPEC has done production cuts in efforts to reduce supply to meet lessened demand. Technically speaking, crude oil futures posted an outside bullish reversal for November on monthly charts. This may attract additional technical buying in the weeks ahead. It could be that $50 a barrel is the next upside target.
The Bottom Line
We all are ready for 2020 to be over, but don’t hang that 2021 calendar too fast. There is plenty to watch and be mindful of this December. Keep an eye on the three C’s: corn, cattle and crude oil. As the New Year draws near, there may be a shake-up in the markets. Stay tuned.
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