Last Friday June 17 saw corn prices achieve new highs for the year at 449.0 new crop futures (Dec16). The bean market not to be undone rallied 30 cents. The main culprit for the rally was weather. Hot and dry conditions were predicted for the remainder of June and into July. Talk of La Nina replacing El Nino in the Midwest resulting in hotter and drier conditions in July and August had been the chatter for some weeks prior and the forecasts had been potentially confirming this near term. Hence it was a classic “nobody wants to be short into the weekend” fear before fact buying that surged grains at the end of last week. Speculative and Funds came into this week long over 250K contracts of beans and 373K contracts of Corn. The market was clearly overbought but speaks of the increased bets of hot and dry weather emerging during key yield development time in July and August for both crops. Weather though threw a curve ball at the bulls over last weekend as more storms were predicted in the heart of the Midwest in the 1 to 5 and 6 to 10 day forecasts giving some parched crops and soils a needed drink. This was the catalyst for the selloff so far this week in corn and beans. It’s important to remember that funds are staring at a quarterly stocks report next Thursday along with the fact that we are inching towards month and quarter end. With a sudden bearish weather outlook for month end and into the first week of July, funds with the profit and therefore risk took profits. The sell-off in Corn which has a larger percentage of old crop carry bore the brunt of the selloff as Corn broke 40 cents in just two sessions this week.
If we take a look at Corn for the year, the low for new crop futures is down at 364.0. The high sits up at 449.0. A fifty percent retracement sits near 407.0. With weather a wildcard, I suggest a call ratio/put options package to take advantage of a significant move in price going forward. On the call side I suggest buying the Dec 16 Corn 4.50 call and sell 2 Dec Corn 5.00 calls collecting 1 cent. On the put side I suggest buying the Dec Corn 350 put for seven cents. As a package I propose paying no more than 6 cents for the options, which in cash value is $300.00. The risk here is the cost of the trade plus all commissions and fees. The second risk is that you are short an extra call at 5.00. Should the underlying futures settle above 5.00 at option expiration, one would be short a futures contract at the 5.00 basis December futures.
For those interested I hold a weekly grain webinar each Thursday at 3pm. It is free for anyone who wants to sign up and link for sign up is below. 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.