The commercial-trader category in the corn market has performed exactly as expected this year. This has revealed both the strengths and weaknesses of commercial traders.
Commercial traders are mean-reversion traders. They initiate positions when the markets have moved towards valuations that call them to action. Once the market moves back inside its predicted value envelope, the trade (hedge) is lifted and the cash balance of the account will reflect their physical needs. This strategy works great in sideways or generally meandering markets. However, when a market trends as corn did heading lower through the summer, commercial traders’ hedges become more entrenched.
Is The Rally Over?
The above qualifications out of the way, it’s no wonder our corn trading was quiet this summer. As the market bottomed out, and we began to approach the harvest season, we were able to pick out a couple of exploitable opportunities. Our mid-October harvest rally expectations held true and now, it appears this rally is about over.
The December corn futures contract still has about three weeks of active trading left in it before the delivery period. Considering the number of contracts that changed hands in the $3.60 – $3.80 range, we expect to find considerable resistance as commercial traders will lay off their hedges to realize their profit or loss in the futures market, rather than participating in the delivery process.
December Corn Opportunity
When their expected selling is combined with the technically weak price divergence that’s developing, the corn futures chart begins to look pretty bearish. There’s a good chance that Thursday’s high of $3.89 ends up being the top for this run. Either way, December corn futures above $3.80 represent a much more profitable opportunity on the short side of the trade than they do the long side.
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