Prices Fail to Stall Corn Demand
Today's Idea
Corn fundamentals remain strong and may remain strong for the foreseeable future. The US has had the good fortune of having a bountiful harvest, but much of the world has experienced the polar opposite, including the world's most populated nation, China. However, prices may have gotten a bit ahead of themselves, which could trigger heavy liquidation in the event of a bearish USDA report. Technically, the Corn chart does not seem to have many technical barriers from testing all-time highs made in 2008. However, the lack of a sharp breakout from the recent pennant and divergence of RSI and price can be seen as hints of possible future weakness. Trying to pick tops and trade ahead of USDA reports can be a risky proposition, so only some traders may want to dip their toe in the water, so to speak, and enter into a bearish strategy with predefined risk. Some traders may wish to enter into a bear put spread by buying the March Corn 655 puts and selling the March 640 puts for a debit of 4 cents, or $200. The trade risks the initial cost for a potential gain of $550 per spread if the March contract closes below 640 at expiration.
Fundamentals
Corn futures have rallied to their highest level since mid-2008 on expectations that Wednesday's USDA report will show lower ending stocks. Increasing prices have done little to curb demand, and there is talk that the USDA will increase its ethanol usage forecast. Asian demand, especially from China and Japan, continues to move forward at an extremely brisk pace. Speculation that Chinese imports of the grain will increase to the tune of 9 million metric tons has provided strong support and appears to have shaken detractors out of the market for the time being. This is more than double the previous record Chinese demand of 4.3 million metric tons in 1995. Surprisingly, feedlot demand for grains has remained strong. The pullback in energy prices seems to have little effect on trading ahead of the production and supply and demand reports. In addition to the pullback in energy prices, prices of Corn in the US are higher than prices in China, which could have an adverse impact on prices if the USDA ending stocks figure exceeds expectations. Because of the report's impact on trading activity, some traders may expect to see choppy trading today, as traders fine tune their positions ahead of the USDA data.
Technical Notes
Turning to the chart, we see the March Corn contract continuing to breakout from the pennant on the daily chart. Prices may not meet any significant resistance until they reach 712.50, the close on June 24, 2008. The uptrend that began in July has steepened in recent months, which could be seen as an indication that the market may be getting parabolic. It is interesting to note that the RSI indicator is diverging from prices, which can be seen as a negative. The indicator has come down from overbought levels, despite the strength of Corn.
Rob Kurzatkowski, Senior Commodity Analyst
