Corn Futures Rally Despite Bearish USDA Report
Today's Idea
With Corn futures trading near all-time highs, traders should be prepared for heightened volatility, especially as we enter the summer growing season, when grain "weather" markets can send prices up or down the limit on changes to weather conditions. Some trend-following traders who wish to be long Corn futures but who want to limit their potential risk may wish to explore buying bull call spreads in Corn futures options. For example, with July Corn trading at 774.00 as of this writing, the July Corn 800 calls could be bought and the July Corn 900 calls sold for about 26 cents per bushel, or $1,300.00 per spread, not including commissions. The premium received would be the maximum potential risk on the trade, with a potential profit of $5,000.00 minus the premium paid which would be realized at option expiration in late June should July Corn be trading above 900.00 per bushel.
Fundamentals
The recent rally to all-time high prices in Corn futures remains intact, despite a surprisingly "bearish" ending stocks figure from the USDA in its April Crop Production and Supply/Demand report. The USDA left U.S. Corn ending stocks unchanged at 675 million bushels for the 2010-11 season. Many traders were expecting a nearly 100 million bushel decline, as demand for US Corn remains strong despite record high prices. The USDA raised the demand for Corn usage by ethanol producers to 5 billion bushels, which is up from 4.95 billion bushels in last month's report. However, the USDA lowered feed usage demand to 5.15 billion bushels, which accounted for the unchanged ending stocks estimate. However, there was much doubt about the USDA figures for Corn from traders on the floor, with several commenting that the USDA may have been too conservative in its forecast, as even at 675 million bushels, carryout would be a 15-year low. Though old-crop Corn futures opened lower on the USDA data, prices rallied to close higher on the session and just off the all-time highs. Some traders believe that old-crop corn will need to trade to over $9 per bushel before we start to see supplies being rationed. Though U.S. producers are expected to plant nearly 93 million acres to Corn this coming season, and if yields come in as expected, we could see a whopping 14 billion bushel Corn crop this season. However, with Corn demand expected to be at or near record levels, the U.S. will need to produce every bushel, and Mother Nature needs to cooperate in order to help replenish inventories.
Technical Notes
Looking at the daily chart for July Corn, we notice that Corn has "minded the gap" left on the charts after the bullish USDA Prospective Plantings report. Prices closed higher to end the week on Friday on extremely heavy volume, which should support the bullish cause. The 14-day RSI is strong and holding just below overbought levels, with a current reading of 66.31. There is a bearish divergence forming in the RSI that is one of the few indicators Corn bears are holding onto. Though chart resistance is seen at the contract highs of 781.00, it appears that 800.00 might be the more important psychological resistance level. Support for July Corn is seen at the March 22nd high of 722.00.
Mike Zarembski, Senior Commodity Analyst
