Follow the Leader
Fundamentals
With much of the Midwest Corn crop "as high as an elephant's eye" and the USDA rating 71% of the crop good to excellent, it is a wonder to some traders why new-crop Corn futures have rallied during the past few weeks. The most-active December contract has climbed above $4 per bushel, not due to its own fundamentals (which on the surface appear bearish), but rather mainly due to the activity in the near-by Wheat market. Severe drought conditions in Russia, Ukraine, and the other Baltic states have sent Wheat futures soaring. Some of this bullish sentiment has spilled over to the Corn pit, where large non-commercial traders (large speculators, such as commodity and hedge funds) have accumulated a large net-long position. Ironically, as the Baltic region heats up, the weather conditions here in the U.S. have been rather ideal for the development of the Corn crop this year, with many analysts looking for a possible record U.S. Corn harvest the year. U.S. Corn export inspections totaled 31.5 million bushels this week, down from 42.8 million bushels last week. It appears that buyers, such as China and Japan, may be waiting for lower Corn prices before booking their purchases, but they could end up chasing prices higher should Russia be forced to suspend grain exports this year. Hedge selling could start to accelerate -- especially if Corn prices start to stabilize, as producers attempt to lock-in good prices, especially given the potential size of the U.S. harvest this year.
Trading Ideas
Although December Corn is currently in a bullish trend, the prospects of a 13 billion plus U.S. Corn harvest this year could ultimately put pressure on futures prices, especially once the harvest begins. Traders looking for Corn prices to peak could choose to explore the purchase of a bear put spread. An example of this trade would be buying a December Corn 400 put and selling a December Corn 350 put. With December Corn trading at 404.00 as of this writing, this spread could be purchased for about 19 cents, or $950 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $2500 minus the premium paid at option expiration in November should December Corn be trading below 350.00.
Technicals
Looking at the daily chart for December Corn, we notice the market trying to hold above the 400.00 level. Although prices remain above the 200-day moving average, Monday's spike reversal could spark long liquidation selling, especially if prices close below 400.00. Major support for December Corn is seen at the recent low of 376.00, with Monday's spike high of 418.00 acting as resistance.
Mike Zarembski, Senior Commodity Analyst
