Let’s take a look at December new crop corn.
The contact is currently trading around 5.00. Demand remains positive. Weekly export sales are at 100% of the USDA 2013/14 forecast on this marketing year that ends September 1st. Clearly the USDA has to raise export projections and lower ending stocks. There are five months left in this marketing year. If ending stocks drop again on the USDA monthly crop report on Wednesday it will be for the fourth consecutive month.
Our planted acres report on Monday March 31 estimated corn acres to be planted at 91.690 million acres, down 3.615 million acres from the year prior and the lowest in four years. This sets up a lot of concern if weather will be good enough to build ending stocks from production. A measurable weather premium needs to be built in for December futures to allow for weather uncertainties.
The last two years saw December corn trading about 5.50 this time of year.
Going back to demand, Mondays weekly export inspection report showed 51 million bushels of corn was inspected by the USDA and loaded on ships to an importer. This was up for the six of the last seven weeks. Last year’s inspections in April averaged weekly at 29 million bushels. Clearly we will exceed that this April. The quarterly stocks report released the last day of March showed 7 billion bushels were on hand as of March 1st, 90 million bushels under pre report estimates. In the report the USDA estimated that 3.8 billion bushels are being held on farms up 45% from the year prior. That is important as this grain will not come out for sale until the summer growing season high is in. Farmers have learned since 2007 that index and trend following funds take their biggest position of the year from May to August during the planting and growing season. This grain held on farms is unlikely to come to market until after July 10th creating artificially tighter available stocks than the quarterly report suggests. We are going to use the seasonal April correction, when funds clean out their books from the first quarter South American growing season issues, before buying the U.S. growing and planting season, to buy long December corn. December should not trade under 4.80 with a near-term high of 5.26 before the end of May in my opinion.
I propose the following trade heading into growing season provided we see a pullback or sell-off in December Corn futures. I would propose buying the September Corn 6.00 call and sell the September Corn 7.00 call for 7 cents or in cash value a $350.00 risk. The risk on the trade is the price paid for the spread plus all commissions and fees. The maximum one could collect is $5,000.00, if both strike finished in the money at the time of expiration. Remember, Corn hit $8.00 in the summer of 2012, most likely due to adverse weather conditions in much of the Corn Belt due to extreme heat and drought like conditions. I feel this is a good risk to reward strategy to possibly take advantage of such a weather premium rally.
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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