In the Christmas season when so much of society’s conversation is about the joy of giving, and the value of generosity, it would seem appropriate if the commodity markets would share a little Christmas cheer with those of us in agriculture. Is there such a thing as a “Santa Claus rally?” And might it occur in the coming weeks?
There are typically two factors that can create price volatility in the commodity markets at Christmas. The first of these is the reduced volume of trading during the shortened weeks around Christmas and New Year’s Day as some of the participants are simply absent from the market.
A lack of volume simply enables faster price moves. In a high-volume exchange, there might be 5,000 contracts of corn for sale at $3.60, so it takes buyers of 5,000 contracts of corn before the price can move to $3.61. In a period of reduced-trading volume, there might only be 50 corn contracts for sale at $3.60, so the move to $3.61 and beyond is much faster.
The second factor or fuel source for a Santa Claus rally is that Christmas lands at both the end of a quarter and the end of a year. Fund managers like to have all of the money invested all of the time and year end is a bit like cleaning up the house when you know company’s coming. They’re neatening up the books prior to anyone else taking a look at what they’ve got. So as they move into a reporting period, the combination of both a thinner volume of trade and some money shuffling positions creates the circumstances to propel the market in some lively short-term price movements.
There are two other factors present as we move into the 2016 holiday season that heighten the potential for a Christmas time rally in the markets. OPEC (Organization of Petroleum Exporting Countries) met in late November and agreed to cut production among OPEC member nations. Crude oil prices around the world have firmed up prices through most of the month of November on the mere suggestion that the OPEC cartel might be able to slow oil production from their member states.
Rationally, you wouldn’t think that the energy market could necessarily drive the prices of agricultural commodities, but commodity futures are a surprisingly interrelated basket of products. If gasoline rises, that supports higher ethanol values. If ethanol prices rise, that supports higher corn prices. If corn prices rise, other field crop values rise in order to hold on to their share of the available production acreage, and the wealth creation in oil prices trickles down into seemingly unrelated things like wheat.
Another key trigger for market fluctuation prior to Christmas this year is that the US Federal Reserve meets on Dec. 13. There has been some discussion about the U.S. raising interest rates, which in turn would strengthen the U.S. dollar, and in doing so put downward pressure on things like commodity futures which are valued in U.S. dollars. Raising U.S. interest rates would raise the value of the U.S. greenback. Considering that the U.S. dollar is already at it’s highest level relative to other world currencies in the past 13 years, it doesn’t really look like the U.S. economy needs cooling. An interest rate hike on Dec. 13 has the potential to cool the market’s Christmas party, but it’s not a likely outcome of the U.S. Federal Reserve’s meeting.
One thing to bear in mind is that Christmas parties don’t go on all year. It’s entirely likely that we will see some rapid fluctuation in commodity prices through the December period, but with 2016 producing the biggest corn crop in history, and the highest U.S. soybean yield in history, there isn’t enough fundamental fuel in the supply and demand picture to support a long-term sustained rally.
It’s not entirely rational to plan for a long-term trend of higher prices, but rather we should be anticipating the relatively quick, two to four week cash rallies and use those as opportunities to make sales. This coming holiday season is setting up to be one of those rally periods. If Santa is handing out pricing opportunities, don’t forget to keep an eye on your stocking.
Steve Kell operates a crop farm in Simcoe County and is a grain merchant for Parrish and Heimbecker Ltd. in Toronto.