Corn Pops, Despite Neutral USDA Report
Fundamentals
There was little for Corn traders to get excited about in Thursday's USDA December Crop Report. This report, which does not include crop production estimates for Corn or Soybeans, places its focus on U.S. carry-out totals, as well as world ending stocks estimates. The USDA raised U.S. Corn ending stocks by 50 million bushels to 1.675 billion bushels. This was slightly above the average analyst estimate of 1.648 billion bushels. The increase in new-crop Corn carry-out was due to a lowering of U.S. Corn export expectations, as the USDA cited slower than expected Corn shipments and strong export competition from Ukraine, which is expected to export an additional 1 million tons of Corn from the USDA's November estimate. The USDA lowered the world carry-over totals for Corn only slightly to 132.3 million metric tons (mmt), vs. 132.4 mmt in its November estimate. Corn futures have fallen from their recent highs lately, as a recovery in the U.S. Dollar and the EPA's deferral on making a decision regarding raising the percentage of ethanol in gasoline have taken some of the bullish momentum out of the Corn price. However, there are still concerns about the amount of Corn still out in the fields at this late date, with some traders estimating that there may be over 1 billion bushels of Corn still to be harvested. With a major winter storm having moved through the Midwest, there are concerns that some of the crop may have been lost or damaged, which could significantly affect the final crop total when the USDA releases its highly anticipated final crop production report on January 12th.
Trading Ideas
With Corn futures already trading off their highs and the potential for a fairly large reduction in the final new-crop production figure next month, some traders may wish to explore bullish strategies in the Corn market. An example of a bullish strategy using Corn futures options would be the purchase of a bull call spread. For instance, a trader could buy the March Corn 400 calls and sell the March Corn 450 calls. With March Corn trading at 391.50 as of this writing, the spread could be purchased for 13.75 cents or $687.50 per spread, not including commissions. The premium paid is the maximum risk on the trade, with a potential profit of $2500 minus the premium paid if March Corn is trading above 450.00 at option expiration in February. More aggressive traders may also want to possibly consider selling a March Corn 360 put in addition to buying the bull call spread, with the premium received for selling the put helping to offset a portion of the premium paid. However, this does increase the downside risk on the trade, and good risk management should be used anytime one sells naked options.
Technicals
Looking at the daily chart for March Corn, we notice Corn prices rising sharply on Thursday, despite a fairly neutral to bearish USDA carry-out estimate. Some of the rally can be tied to a moderate rebound in commodity prices in general on Thursday, but it sure looks like traders are being cautious about selling too much Corn short, given the potential for a much lower revision in U.S. Corn production totals next month. Prices are holding below the 20-day moving average, but above the 100-day MA, which presents a mixed technical picture. The 14-day RSI is moving to neutral territory with a current reading of 46.84. The 100-day moving average, currently near the 368.00 area, should act as near-term support for the March contract, with the recent highs of 425.00 seen as strong resistance.
Mike Zarembski, Senior Commodity Analyst
