Swine Sell-off
Fundamentals
Corn futures were lower overnight, impacted by the outbreak of the swine flu in Mexico. If the disease continues to make its way across the border to the US, demand for pork could diminish, resulting in lower feed demand. If more cases of swine flu are reported, other nations may restrict their trade with the US, which could result in lower crop exports. This news comes at the worst possible time for Corn bulls. After slumping since the commodity bubble burst in July of last year, it seemed that the slow pace of plantings because of soggy weather finally gave bulls something to build on. Until the outbreak is contained, however, it seems as though traders will be keying on the potential harmful impact of the disease on the demand side, rather than focusing on supply side concerns. Aside from the slower pace of plantings, Corn fundamentals continue to favor the bear's camp. The carryout from last year was much larger than what traders had wanted to see, and demand is simply not there. The stronger US dollar has reigned-in export sales, and domestically, the economic slowdown has curtailed ethanol and industrial use of the grain. The driving season kicks off next month with the Memorial Day holiday, and it could have a huge influence on the direction of the Corn market. If fuel and, as a result, ethanol demand remain weak, it would not be surprising to see Corn prices trade in the low $3.00 range.
Trading Ideas
Given the neutral technicals and bearish technicals, some traders may want to consider trading a credit spread. Given the potential downside risk, traders may wish to stay on the call side by selling the July 420 calls and buying the July 440 calls for a credit of 7.50 cents, or $375 per spread. The maximum loss for this strategy is at $625.
Technicals
Technically, the Corn market has remained in a prototypical sideways market since the beginning of the year. One of the trademarks of a range-bound market is how prices behave relative to the RSI indicator. Prices come down after overbought levels are reached and increase on oversold conditions. The December Corn contract is currently oversold, and traders may make the assumption that prices will increase over the short-term. However, as grain traders well know, the market does not always behave the way it should technically, and fundamental news like the swine flu can make a huge impact on traders' mindsets.
Rob Kurzatkowski, Senior Commodity Analyst
