On Demand

Corn: Look At Bearish Reaction To USDA News

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Strong export sales and robust ethanol demand have shifted sentiment over recent weeks from neutral/negative to positive in the corn market.

After closing above $4.30 last week, March corn futures traded up to $4.49 Monday morning before the USDA supply/demand report late Monday morning. Severe winter weather has played havoc with shipping and buoyed cash markets artificially as users have been forced to pay up for needed supply. It is my belief that once shipping returns to normal and China cancels outstanding sales; the fundamentals will once again shift normally.

EXPORTS

China continues to reject a large portion of US corn imports but it appears that exporters have been able to rejections to other Asian destinations readily. Japan, South Korea, Mexico, and Spain have been larger importers than expected just a few months ago.

A BEARISH SIGNAL

The lower close after a bullish report on Monday’s supply and demand report from the USDA is a bearish signal. On paper, the USDA report was considered bullish against trade expectations as the USDA pegged 2013/14 ending stocks at just 1.481 billion bushels, compared with an average trade guess near 1.619 billion bushels and the 1.631 Billion bushels estimated last month.

The stocks number even came in below the range of estimates of 1.574- 1.748 billion bushels. Exports were revised up by 150 million bushels to 1.6 billion bushels, and the rest of the demand figures were left unchanged. Talk following the release was that feed and residual use remains too high.

Currently sales are at 91 percent of the USDA forecast, shipment however are only at 42 percent. The U.S. has currently 1.7 million tons of corn on the books with China which leaves the risk of cancellation despite that the aforementioned nations of Japan, South Korea, and Mexico have picked up the slack.

Simply put the bearish reaction to a bullish report means that traders simply don’t believe the numbers or are looking ahead to growing season. It is my view that the only way that corn could hold up would be from a strong rally in beans. Unless that happens I suggest the following trade.

Those who listened to my last trade recommendation to buy March corn futures just below 4.30 were rewarded if they went with the trade.

THE TRADE

This time I am reversing course and suggesting that traders purchase the May Corn 4.30 put for 8 cents or $400.00 risk per option. The risk on the trade is the price paid for the options plus all commissions and fees. 

WEBINAR

For those interested Walsh Trading holds weekly grain webinars on Thursday’s at 3pm central time hosted by our Senior Grain analyst Tim Hannagan. Tim has been ranked #1 by Reuters and Bloomberg in 2011 and 2012 for his most accurate end of year price predictions for soybeans and corn. Registration is free and if you cannot attend live, a recording will be sent to your email upon signup.

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.

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edjaworska1: http://t.co/ImlzrR9bbO
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Visitor - Sean Lusk: I somewhat agree Jeff, However we feel that corn will be the tail of the dog with beans the leader. Longer term I am bullish corn but not now, I believe that corn and beans will battle for acreage as we head into the quarterly stocks report at the end of March but Im looking for a price break before that happens. There isn't much volatility in corn lately as it seems to take two weeks for the corn to move ten cents. If march beans take out 13.40, next stop up is 75. If this were to occur, corn will lag behind possibly challenging 4.50 basis March. That is a big "IF". Bottom line buying a May put for 8 cents is small risk relative to reward if corn can sell off by 15 to 20 cents in the next 30-45 days.
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Visitor - Jeff: Beans and corns have different fundamentals right now, I'm not sure even a big rally in beans could help corn out longer-term. There's just too much corn out there on global markets.
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About the Author

Sean Lusk is a registered commodity broker and Director of the Commercial Hedging Division of Walsh Trading in Chicago.  Reach Lusk via e-mail here.

 He started in the business as a runner on the trading floor during summer breaks from college in 1993. Upon his graduation from Southern Illinois University at Carbondale in 1996, Lusk began his career on the trading floor of the Chicago Mercantile Exchange (CME). Overseeing billions of dollars of transactions working as a clerk in the Eurodollar pit, Sean took the next step and became a floor broker and member of the CME in 2003. He handled customer orders for banks and investment houses from all over the world from inside the Libor pit at the CME.

 Now, at Walsh Trading, he utilizes his experience in the marketplace and his professional client service skills to aid and assist customers in their trading endeavors.  Contact Lusk to be added to his free daily and weekly market commentaries focusing on both the Precious Metals and Agricultural Markets along with related market activity. He is widely quoted in the media including Futures Magazine, Reuters, Forbes, Kitco, Nikkei Press, and CCTV.com

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