2009 will go down as an exciting year for the futures markets, highlighted by Gold's historic bull run, Sugar's rise to near 30-year highs, and the collapse and now rebound in the U.S. Dollar. With 2010 having just arrived, let's take a brief look at a couple of markets that may catch traders' interest in the New Year.
Old crop Corn futures have been confined in a 50-cent per bushel trading range for the past 10 weeks or so, as traders weigh a slow start to U.S. export sales vs. the potential loss of hundreds of millions of bushels of Corn still standing in the fields in the upper Midwest. Some of this Corn will be abandoned by producers, but the exact amount is still a guess. This puts the final USDA Crop production report scheduled for January 12th even more in the spotlight, as traders await the final government figures for Corn production this past season. The last USDA estimate has U.S. Corn production at 12.921 billion bushels; however this was before inclement harvesting conditions severely delayed the harvest. Traders and analysts are looking for the USDA to shave almost 200 million bushels from the November estimate due to losses from the still unharvested Corn. If true and demand, both foreign and domestic, remains on pace, U.S. Corn stocks-to-usage ratios could fall to near 10%, or nearly 4% below last year's totals and the lowest stocks/usage levels since the 2003/04 season.
Fans of the movie "Trading Places" will remember Dan Aykroyd and Eddie Murphy standing in the Frozen Concentrated Orange Juice (FCOJ) ring buying back their short positions in the frenzy of trading as the true crop report was released. This year the FCOJ market may begin to heat up, as the USDA has forecast Florida's Orange crop production will fall to only 135 million 90-lb boxes this season, which is well below the 162.4 million boxes the Sunshine State produced last year. This leaves little room for error, especially going into the winter months when traders' thoughts turn to weather forecasts and any signs that freezing temperatures will strike the groves this coming winter. There are also signs that O.J. demand may start to increase after several years of usage declines, which could further "juice-up" traders' interest in this commodity in 2010.
Bull call spreads -- buying a lower strike price call and selling a higher strike price call in the same trading month - is often thought to be a good way for traders to take a bullish position in a commodity, but you should always know the maximum potential risk on the trade before considering entering the market. This can allow a trader to hold a position for a longer period of time -- especially during volatile market conditions. This strategy can be used in both the Corn and FCOJ markets mentioned the in fundamentals section of this newsletter. An example of this type of trade for Corn futures would be buying a July Corn 440 call and selling a July Corn 500 call. With July Corn currently trading at 435.00 as of this writing, the spread could be purchased for about 20 cents, or $1000 per spread, not including commissions. This is the maximum potential loss on the trade, with a potential profit of $3000 minus the premium paid if July Corn is trading above 500.00 at option expiration in June.
For FCOJ, traders could consider buying the May O.J. 135 calls and selling the May 170 calls. With May O.J. trading at 133.10, the spread could be bought for about 11.00 points, or $1650 per spread, not including commissions. As in the Corn example above, the premium paid is the maximum potential risk on the trade, with a potential profit of $5250 minus the premium paid if May O.J. is trading above 170.00 at expiration in April.
Looking at the daily chart for July Corn, we notice the consolidation pattern Corn has been in the past several weeks. In addition, trading volume has declined during this period, which sets up an increasing potential for a breakout of this range -- especially if it occurs on higher than average trading volume. Normally the market needs some type of catalyst to jumpstart interest in a sideways market, and the January USDA report has all the earmarks to be this catalyst -- especially given the harvest delays the Corn market experienced this year. Current prices are above both the 20 and 100-day moving averages, which gives the market a bullish bias. The 14-day RSI is hovering at a supportive 59.19. Resistance is seen at the recent highs made on 11/18 at 441.75, with support seen at the recent lows of 390.50 made on 11/2.
Mike Zarembski, Senior Commodity Analyst