You would think that the possibility of the second largest U.S. Corn harvest on record would put bearish traders in the driver's seat. However, Corn futures continue to trade above the recent lows, despite the upcoming harvest and potential hedge selling by commercial traders. Among the reasons for Corn's resilience is the concern that the late maturity of this year's could dampen yields, especially if a frost or freeze occurs. As of last week, only 37% of the U.S. Corn crop was considered mature, which is well below the 5-year average of just over 70% at this time of year. This has also impacted the speed of the harvest, with only 6% of U.S. Corn now in the bins, down from the 5-year average of nearly 20%. However, the crop currently in the ground is overall in very good condition, with 66% percent of the crop now rated good to excellent. It appears that Corn producers are now in a race against time to see if the weather will cooperate and keep damaging cold weather away from the northern Corn Belt long enough to reap the benefit of potentially strong yields.
Yesterday, the USDA released its quarterly grain stocks report which showed that the U.S. continues to hold ample Corn stocks. The report estimated fourth quarter grain stocks of 1.674 billion bushels. This was 50 million bushels above last year's totals, but below average analysts' estimates of 1.72 billion bushels. Traders will continue to focus on both food and fuel demands for Corn, with ethanol production increasing the demands for Corn for fuel production. Domestic Corn usage for livestock feed could continue to decline, as livestock herds have been cut due to poor profit margins. With these two fundamental factors offsetting each other, U.S. Corn exports need to remain robust to support Corn prices into 2010 -- especially if the projected 13 billion bushel crop actually comes to fruition.
Given the potentially mixed fundamentals in the Corn market, it will be difficult for either bulls or bears to gain control of the market. This raises the possibility that Corn futures may be moving to a consolidation phase until one side can gain the upper hand. One trading strategy that may possibly be beneficial if Corn moves into a consolidation phase is selling strangles in Corn options. An example of such a trade would be to sell the November Corn 380 calls and sell the November Corn 300 puts. With December Corn trading at 341.25 as of this writing, this strangle could be sold for 3.625 cents, or $181.25 before commissions. The credit received is the maximum profit on this trade and would be realized if December Corn is trading below 380.00 and above 300.00 at the option expiration on October 23rd. Given the potential risk o short option trades, traders may possibly want to consider closing out the trade early if December Corn trades above 380 or below 300 before the options expire.
Looking at the daily chart for December Corn, we notice prices holding above the 20-day moving average. This is normally considered a bullish signal by short-term momentum traders. However, since the August 3rd highs, we have been making lower highs in December Corn, and we are still well below the 100-day moving average which is hovering near the 370.00 area. The 14-day RSI is moderately supportive, with a current reading of 57.54. 347.75 is the next resistance point for December Corn, with near-term support found at 310.00.
Mike Zarembski, Senior Commodity Analyst