An Earful
Fundamentals
December Corn futures are down this morning and continue to trade near the 320-325 range. The forecast of a large Corn crop, in addition to a strengthening Dollar, has weighed on prices and has prevented any sort of recovery. On top of the bearish crop reports, feed use may continue to decline, as evidenced by the extreme weakness seen in the Live Cattle and Lean Hog markets. Cattle production may fall by nearly 3% in the third quarter of the year, and the Lean Hog futures prices are continuing to trade at a discount to cash prices, hinting at further weakness. The Midwest Corn crop has seen steady rains over the past month, but the rains have been below seasonal norms. The recent heat wave may make crops vulnerable to stunted growth going into the fall harvest. It is interesting to note that while the Corn crop remains very large on the surface, the delayed plantings may result in smaller ear sizes, thus lower yields than the USDA had expected. The late start to the season means that farmers are expected to push the harvest back a bit, extending the period in which crops are vulnerable to inclement weather. This is not an overwhelmingly bullish development, but something some traders may wish to keep an eye on.
Trading Ideas
Fundamental and technical outlooks suggest that the downside potential for the Corn market is somewhat limited. Some traders may, instead, try to buck the trend and look beyond the current market fundamentals and test the long side of the market. Other traders could listen to what farmers have been saying - on the surface, the fundamental picture looks bleak, but in the fields, Corn ear sizes may be much smaller than expected and the USDA's estimate may be erring on the high side. The risk of a long play is very high, but with the high risk could potentially come high reward. Traders may wish to consider buying a December Corn 350 call (CZ9350C) and selling a December 380 call (CZ9380C) for a debit of 6 cents, or $300. The trade risks the initial investment for a potential profit of 24 cents, or $1,200, if the December Corn contract finishes above 380 on the November 20th expiration date. More conservative traders may wish to exit the trade for a credit of 15 cents or higher prior to expiration.
Technicals
The December Corn chart shows prices flirting with a potential downside breakout on solid closes below the 320 level. In the event of a downside breakout, prices could test the 300 mark or beyond on the downside. Substantial rallies are needed for Corn technicals to turn positive. Solid closes above the 375 level could turn the tide and result in further price stability. The momentum and RSI indicators are relatively flat and offer little guidance at this point. The slow stochastics, however, have slid into oversold levels, suggesting the market may see some near-term price stability.
Robert Kurzatkowski, Senior Commodity Analyst
