The Weekly Export Sales report came out Thursday showing 1.003 million metric tons of corn was exported last week.  This was up 19% from the week prior.  The surprise in the report was the number was considerably larger and did not have China buying any corn.  Mexico, Japan, and South Korea were a few of the active customers.  I wrote an article about a month ago talking about the demand for corn moving to the forefront as China becomes a more aggressive buyer.  We still look for that to develop in the months ahead, but in the meantime exports continue to outpace compared to a year ago.  This speaks well for long positions in December new crop contract. 

Let’s review a few of the bullish factors for the new crop, December corn.  February 19th and 20th are the outlook forum meetings.  Traders will be looking for our government to come out with its projections on how many acres of beans will be planted this spring.  History notes that this report generally has them giving a conservative number.  At the end of March, we get the actual poll of farmers as to how many acres they will plant of each crop.  We expect strength into that February report because of fear the number of acres to be planted for corn will be lower than expected and that will be followed by a small correction.  After that, we potentially look for another rally into the late March report when farmers look to aggressively cut corn acres to be planted for the more profitable soybeans.  Additionally, going into the summer months, we look for increased driving and higher demand for corn-based ethanol because of cheaper fuel costs. 

Though winter feed use came in a little bit lower than expectations, the increased hogs, chickens, and cattle numbers on feed look to increase on feed demand on monthly reports.  Tuesday’s monthly crop report put the carry over for corn at 1.827 billion bushels versus 1.877 last month and 1.998 in December.  Clearly, the ending stocks for the old corn crop look to decline further, and with lower acres to be planted this year, we look for a measurable reduction in carry over for next year.  This all sets up a move from a demand perspective and a potential summer weather premium rally to 5.05 basis December. 

For those looking to trade on this premise conservatively, I propose the following options position.

The Trade

  • Buy the December Corn $5.00 calls and sell two December 6.00 calls for a purchase price of three cents or in cash value $150.00.
  • The risks on the trade are the price paid for the spread plus all commissions and fees.
  • With selling the extra call, one assumes risk, if the underlying futures contracts trade over $6.00 before December expiration as being short the 6.00 call will be essentially short futures at the 6.00 level if the option is exercised.
  • Keep in mind, though, that if all options get exercised here, the long 5.00 call and one of the short 6.00 calls would net the position 5,000.00 premium collected, if the options expired in the money.

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RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING.  THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT.  WHILE CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES, A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS.