Like many traders involved in the grain markets, I always pay heed to the short and long term weather outlooks and what that might mean for price.
Living in the upper Midwest, I have seen 70 degree Christmases and snowstorms and freezing temperatures well into May, so there is no rhyme or reason and the news usually does more than just pique my interest.
CURRENT WEATHER FORECASTS
If the long-term weather into June holds true to what’s being predicted by weather gurus, the Western grain belt of Iowa, Nebraska on west is warmer and drier than normal. Northern plains of North and South Dakota, Minnesota, Wisconsin Michigan and Minnesota will likely have very late planting dates and the Eastern Corn Belt of Missouri, Illinois, Indiana and Ohio with marginally late plantings. Potentially lower yields look to come in the Western grain belt and the northern plains with normal yields in the Eastern grain belt and southern delta.
UPSIDE TARGET
Extremely tight stocks could have December corn futures pushing 7.00 on a rally this summer. We may have about three more weeks of commercial interests telling farmers for the fourth consecutive year how big acres are going to seed which may bring record production and large ending stocks with spiraling lower prices.
It is my belief that ethanol producers, feeder interests, and corn sweetener producers to name a few, need to potentially create that bearish fear to get farmers to sell their corn cheap. They certainly wouldn’t remind them how every year since 2007 brought a summer growing season rally and yearly high off continuing world record import demand. Commercial end-users rely on the harvest breaks to get grain needed at value, but this year could be different with a harvest rally of record proportion. In my opinion, two years of record high prices had end-users short of inventory buying hand to mouth at record price levels.
LOAD UP WITH INVENTORY
This may be the year to get smart and load up with inventory to ensure they have supplies to protect themselves from a collapse, should the next possible weather problem occur.
THE TRADE
Anticipating potential growing season concerns such as drought, planting delays, and strong demand, I will look to add the following trade. I will look to buy the Dec Corn 6.50 call and sell the December Corn 7.50 call for a purchase price of 7.5 cents or in cash value, $375.00.
The risk on the trade is the price paid for the spread, plus all commissions and fees. The maximum amount you could collect is $5,000, if both strikes finished in the money at the time of expiration, minus all commissions and fees. This represents a risk to reward ratio of over 10 to 1, and gives the trader long term exposure to the upside should any possible rallies ensue this year.
