Will an Already Large Corn Crop Get Even Larger?
Fundamentals
If the analysts at the USDA are correct, the answer is a resounding YES! Friday’s release of the September crop report has government statisticians calling for a U.S. Corn crop which totals 12.955 billion bushels, up nearly 200 million bushels from the August estimate. Average Corn yields also improved, rising by over 2 bushels per acre to 161.9 bushels per acre. If the current production trend continues and the weather cooperates, we could be seeing the second largest Corn crop on record. Although the U.S. production estimate was deemed bearish by traders, there was some bullish news in the form of the world Corn carry-out estimate. The USDA lowered its estimate for world Corn carry-out to 139.12 million metric tons. This was down over 2 million tons from the August estimate, as feed usage estimates were raised. Corn has seen some support recently, as traders have begun unwinding long Soybean/short Corn spreads lately as new-crop soybeans start to come to market, which helps to elevate the extremely tight old crop carry-over that sends the Soybean market into a backwardation. Small speculators are holding a large net-short position in Corn futures according to the most recent Commitment of Traders report released on Friday. This large position could spark a bout of short-covering buying should December Corn fail to take-out major psychological support at $3 per bushel. However, many analysts feel that any rally may be short-lived, as producers use any strength in futures prices to hedge their production since the Corn harvest is about to begin shortly.
Trading Ideas
Traders that may be expecting Corn prices to continue to trend lower may wish to possibly consider the Corn options market for possible trading ideas. One such trade might be buying bearish put spreads in December Corn options. An example of this trade would be buying the December 300 puts and selling the December 2 70 puts. With December Corn trading at 317 ¼ as of this writing, the put spread could be purchased for 7 ½ cents or $375 per spread before commissions. The premium paid would be the maximum risk on the trade, with a potential profit of $1500 minus the premium paid if December Corn is trading at or below $2.70 per bushel at the option expiration in November.
Technicals
Looking at the daily chart for December Corn, we notice prices continuing to hold just below the 20-day moving average. This is keeping short-term momentum traders in the bearish camp. However, the large short position being held by small speculators is setting the stage for a short-covering rally as these weak shorts run for the exits when buy stops are triggered. The market failed to take-out the key $3.00 level last week, and this area remains a very key support point. The 14-day RSI is neutral to weak, with a current reading of 42.68. The next resistance point for December Corn is seen at 337.50.
Mike Zarembski, Senior Commodity Analyst
