Downtrend "Corntinues"!
Fundamentals
"The Weatherman" has looked kindly on Corn producers in 2010, as the U.S. Corn crop is off to a blazing start. Ample moisture and ideal temperatures so far this season have crop condition ratings coming in higher than average for this time of year. On Monday, the USDA released its weekly crop progress report which rated 73% of the U.S. Corn crop good to excellent! The strong start to the growing season has some traders looking for a possible record Corn harvest this fall, especially if the Midwest can avoid any significant hot and dry spell after the July 4th holiday. U.S. Corn exports have been disappointing lately, with this week's exports totaling 35.4 million bushels, which is well below the 47.7 million bushel average needed to meet USDA projections. Before traders start looking forward to the long Independence Day holiday this weekend, there is still one important report that will capture grain traders' interest, as the USDA will release its acreage and quarterly grain stocks report at 7:30 am Chicago time today. Analysts are estimating an increase of 500,000 acres dedicated to Corn production from the March 31st estimate, coming in at just over 89.3 million acres. This is nearly 3 million acres higher than in 2009, and if yields come in better than expected, we could see a record Corn harvest this year. U.S. Corn stocks are expected to be near 4.61 billion bushels, or just over 350 million bushels higher than a year ago. This potential for a huge Corn crop has bears on the offensive, as aggressive selling has sent new-crop December Corn futures prices to new contract lows. So unless the weather forecasts turn hot and dry in the coming months, or U.S. Corn exports improve, we may soon see Corn price quotes starting with a "2" for the first time in 4-years.
Trading Ideas
Although new-crop December Corn futures are trading at contract lows, it is still early in the growing season and any change in the weather forecast that includes hot and dry conditions could be the fuel to spark a short-covering rally. Traders expecting Corn prices to continue lower but who wish to limit the risk on the upside should Corn prices rally may wish to investigate strategies using Corn futures options. An example of such a trade would be selling a December Corn 350 call and buying 1 December Corn 410 calls. With December Corn trading at 344.00 as of this writing, the spread could be done for a credit of 14 cents, or $700 per spread, not including commissions. The premium received would be the maximum potential gain on the trade and would be realized if December Corn is trading below 350.00 at option expiration in November. The potential loss is capped at $3,000 minus the premium received for selling the spread and would occur should December Corn be trading above 410 at option expiration.
Technicals
Looking at the daily chart for December Corn futures, we notice prices trading well below the 100-day moving average since the beginning of the year. Since that time, the market has had several periods of price consolidation before the major downtrend has resumed. The 14-day RSI has once again moved into oversold territory, with a current reading of 28.34. The last time the RSI was at oversold levels, the market staged a minor 20-cent rally back in late January/early February, stopping out weak bears along the way. The next support point for December Corn is seen at 340.00, with resistance found at the 20-day moving average near the 366.00 area.
Mike Zarembski Senior Commodity Analyst
