Kub's Den

This is the week that hundreds of millions of Chinese workers travel to their hometowns and families to celebrate the start of a new Lunar Year -- in this case, 2017 is the year of the Fire Rooster. For at least a full week, and sometimes longer, they will travel across the countryside, prepare New Year's reunion dinners complete with lucky foods such as fish and dumplings, clean and decorate their homes, pray for good fortune in the coming year, set off fireworks, and just generally try to get things off to an auspicious start.

The fortunes of Chinese consumers definitely matter to the United States grain markets, and I wish all of them a prosperous new year. But while all the average Chinese consumers are taking a well-deserved vacation, so are all of the country's eager commodity traders. What happens when that line of business shuts down for a week?

Already, the stock markets and the commodity futures and options markets experience this phenomenon every Christmas season. Traders across several continents anticipate that their colleagues and competitors will be taking some time off to celebrate with family, so they choose to take some time off, too. The average pace of business slackens at the end of December, and daily trading volume -- the number of contracts bought and sold during a given session -- tends to dip. In a low-volume trading environment, prices can get act jumpy. There isn't the full, usual population of participants to step in as buyers when prices dip or as sellers when prices climb, moderating the moment-to-moment price swings.

You'd think that in the era of algorithmic trading, when so many trading programs are run by computers set up to buy or sell based on mathematical signals rather than on the opinions of humans, all that activity would keep churning along even while the humans were away on holiday. In many cases, it does. But bona fide hedgers are far and away the most numerous participants in the grain futures and options markets. The "Producer/Merchant/Processor/User" category represented 76.7% of the number of traders reported on the most recent Commitment of Traders report, and those are the kind of folks who sometimes do take some time off.

Now, as Asian consumption of commodities grows and Asian participation in commodity futures markets grows, a similar phenomenon is noticeable in global trading volumes during the Spring Festival, which is the official name for the celebration of the lunar new year. This holiday is celebrated not only by Chinese merchants and traders, but also by many traders from Hong Kong, Taiwan, Singapore, Indonesia, Malaysia, Thailand, Vietnam, Cambodia and the Philippines. Five of America's top 25 trading partners are in that list.

It's not just grain commodities. The Dalian Commodity Exchange, which trades futures contracts for agricultural products and also for fiberboard, blockboard, coking coal, and iron ore, among other things, will be closed from its Jan. 26 night session through Feb. 2, opening again on Friday, Feb. 3. The Financial Times reports this week that some London-based metals traders are reluctant to take on fresh positions during this drop in global activity, with some traders even using the opportunity to take a holiday themselves. At some point, the anticipation of low trading volumes becomes a self-fulfilling prophecy.

In U.S. grain futures, we can already see the effects. On Friday, the soybean market's daily trading volume was 51% as large as its 2016 daily average. The corn market's Friday volume was 61% of the previous year's average, and the wheat market's Friday volume was 82% of average. Even on Monday, during a wild session that presumably triggered a burst of stopped-out short selling, the soybean market's daily volume was still below the average expectation for a "normal" day. On Tuesday, the combined trading volume of corn, soybeans, and wheat was only 66% of the daily average volume from 2016.

In other markets, crude oil futures' trading volume has similarly been below its average expectation during the past few trading sessions. Gold futures trading volume has actually been a little bit higher than average, demonstrating that, of course, there are always other things going on in the world, no matter how many dumplings are being eaten or how many red money envelopes are being distributed in Asia.

This is also historically a timeframe when the corn and soybean markets tend to experience spurts of concern over South American weather and abnormally heavy commercial and speculative futures trading. The lunar holiday, obeying the lunar calendar and not the Gregorian calendar, obviously doesn't always fall on the same days or weeks of the financial calendar year. And South America's weather patterns obviously don't care about either of those calendars. In the past three years, soybean and corn futures trading volumes during the week of the Chinese New Year have ranged anywhere from 104% of their normal pace of business to 146% of the previous year's average daily trading volume. Year by year, as Asia's influence grows and Western traders learn to anticipate the dip in volume, a clearer trend in volume may be developing, but it's too early to see it in the data for grain and oilseed futures volumes just yet.

I don't know if we can argue that Monday's 26 1/2-cent collapse in soybean futures was explicitly caused by a low-volume, illiquid trading environment. But it's certainly a plausible series of events -- prices sagged while traders contemplated an improved Argentinian weather forecast, then bumped past some stop orders right around $10.34 on the front-month chart, then -- bam! -- prices collapsed another 15 cents within about an hour, all because there weren't enough bargain-hunting humans sitting at their desks to see the opportunity and step in as buyers.

Perhaps they will see the opportunity when they get back from their holidays, later this week.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.

(BAS/SK)

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