"Corny" Headline
Fundamentals
Now that the calendar has turned to March and Spring is (hopefully) right around the corner, it is time to turn our attention back to the land and focus on the planting intentions for the 2009-10 Corn crop. The USDA last week in its annual Agricultural Outlook Forum, estimated that U.S. producers will plant 86 million acres of Corn this year, which is about the same as last year. However, production from these acres is expected to increase, with yield estimates up just over 3 bushels per acre from last season to 156.9 bu/a. If projections are accurate, the U.S. Corn growers would produce 12.365 billion bushels of Corn, or the second largest crop since records have been kept. Although the potential size of the Corn crop seems large, many analysts are looking for even more acres to be planted now that fertilizer prices have come down sharply from last year, which can put a large dent into production costs. On the demand side of the equation, the USDA expects Corn usage to increase to 12.450 billion bushels this year, up 500 million bushels from 2008. Corn usage for ethanol production is expected to increase to 4.1 billion bushels according to the USDA, despite sharply lower Oil prices and lackluster gasoline demand. The wild card for this season, outside of the weather, could be the strength of the U.S. Dollar and its effects on U.S. Corn exports. A weaker Dollar makes U.S. Corn exports more attractive to buyers, and higher exports would be necessary to offset the loss of demand from U.S. Livestock producers who curtailed their herds due to high feed costs last year. However, the greenback is currently in an uptrend, with the Dollar Index futures hovering at 4-month highs. Should this strength continue in 2009, the current export projection may need to be lowered as the season progresses.
So what strategies should traders look into to prepare themselves for the upcoming growing season? Given the potential for volatile trading conditions as the season progresses, many traders look to buy options on Corn futures outright as the risk is limited to the premium paid for the option. However, one needs to be careful which month options they wish to buy. The "new" crop, which is the crop that will be planted this season, begins with the December 2009 contract. Fundamentals such as weather and crop conditions can affect prices for new crop futures. Contracts earlier than December are considered the "old" crop futures, which can represent the carry-over from the previous crop year. Some fundamentals that can affect old crop futures include export demand, current stock-to-usage ratios, and domestic feed demand. It is possible that new crop futures prices can behave quite differently than old crop futures, with prices in one crop year being higher and the other lower not uncommon.
Technicals
Looking at the daily chart for the December 2009 futures, we notice that since the beginning of 2009, prices have been caught in a downtrend, falling nearly $1 since early January. The market has made a 78.6% correction from the contract lows made in December to the recent highs of early January, and this key area must hold or a test of the lows just below $3.50 is likely. Prices have failed to close above the 20-day moving average since mid January, which shows that bears were in firm control of the market. We are approaching this key MA again, and should we manage a daily, or better yet a weekly close above this indicator, we should look for a bout of short-covering buying to emerge. The recent lows of 3.75 1/2 remain support for December Corn, with resistance found at the February 26 highs of $4.11 ¾.
Mike Zarembski, Senior Commodity Analyst
