Let’s first address ethanol. There’s been much talk of cutting ethanol production and its corn usage. This movement started in the drought year prior (2012) when we consumed half the corn crop in ethanol production. This brought the food for fuel controversy and debate.
The government’s foundation for ethanol started with national security. National security advisers and agencies saw the billions of dollars sent to the Middle East for oil ending up in terrorist groups hands to be used against our national security. Becoming less oil dependent was a mandate.
The late 2009 economic collapse saw grain prices drop sharply. Early ethanol producers who got in for the anti-oil clean air movement went bankrupt; their plants were purchased by grain groups that were masters of corn hedging. It took ethanol from the weak hands and put in the strong hands. This led to ethanol plants being so successful that the government has stopped subsidizing their building. Commercial grain groups are happy to use their own money to build these plants.
When president Obama ran for office, he talked of the mandates he would implement that would move ethanol usage ahead into 2020. Even when the drought hit and looked politically unpopular to turn food into fuel, Obama didn’t budge on his mandates to move forward. Now with corn half the price and stocks inventories almost triple a year ago, it would seem obvious not to cut ethanol production, but expand it. The government energy policy to become less oil dependent is designed for the next generation. It’s this reason why I believe there will be no cut in ethanol production for the 2013/14 marketing year.
LATEST USDA REPORT
Corn was the surprise. Everyone was bearish going in. At the report’s release corn was down five cents then quickly up 15. Production was put at 13.925 versus 13.989 on the last report and pre-report estimates of 14.060. Ending stocks were pegged at 1.631, under last month’s 1.792 and pre-report trade estimates of 1.855. Lowest estimate was 1.654.
BIG MOVE IN CORN
Needless to say shorts covered quickly. Hardcore technicians will see the close on the charts as a key reversal with bulls saying lows for the year are in. That’s not certain because when we come in next week and China is still rejecting US corn over the biogenetic controversy, demand will continue to decay with talk of next month’s report lowering exports and raising ending stocks.
We certainly have taken some of the bearishness out of the market. Had ending stocks come in higher, the trade would have talked of higher ending stocks next month. With lower numbers today the thinking is the top in stocks is in and priced in with stocks potential to come in lower now. March corn support is 4.20 then 4.00 with resistance at 4.40 then 4.50.
TRADE IDEA
One trade to look at right now and something I propose is buying the December corn 550 call and selling the December corn 6.50 call for a purchase price of 7.5 cents, or in cash value $350.00. The maximum profit on the trade is $5,000.00, that is if both strikes finish in the money by expiration.
The risk on the trade is the price paid for the spread plus all commissions and fees. With increased demand, lower potential planted acreage, and ethanol mandates staying at their current levels, this could possibly an excellent time to go long the market, with relatively small risk.
I also want to make everyone aware that Walsh trading hosts weekly webinars hosted by our Senior Grain analyst Tim Hannagan every Thursday at 3pm central. Admission is free and if you cannot make them live, recordings are automatically sent via email as long as you sign up.
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.
