Will the Rain Go Away in May?
Today's Idea
With the entire growing season ahead, traders should prepare for a volatile trading period in the entire grain complex, as we need to see the U.S. produce a bumper Corn and Soybean crop to keep inventories from becoming very tight. New-crop December options are quite expensive, especially given the time to expiration and potential volatility expected. Some traders who are bullish new-crop Corn may wish to explore buying out-of-the-money call spreads in December Corn futures options. For example with December Corn currently trading at 648.00 as of this writing, the December Corn 800 calls could be bought and the December Corn 900 calls sold for 14 cents, or $700 per spread, not including commissions. The premium paid would be the maximum potential risk on the trade, with a potential profit of $5,000 minus the premium paid realized at option expiration in November should December Corn be trading above 900.00.
Fundamentals
Grain producers certainly hope that the relentless rain that has occurred throughout most of the month of April will finally subside, as much of this year's U.S. Corn crop still needs to be planted. So far, the USDA estimates that only 9% of the Corn crop has been planted, vs. the 5-year average of 23% and well below last season's 43%. The major Corn producing states of Illinois and Iowa are only 10% and 3% planted respectively. Many traders are anticipating a huge increase in Corn acreage (nearly 4 million more acres) this season, with a large portion of the added acreage expected to come from the Dakotas. However, Mother Nature has not been kind to producers in these states, as the USDA estimates that little to no Corn has yet to be planted. The weather forecasts are calling for some relief for moisture in the western Corn Belt the next few days, which could get some planting done in Nebraska and western Iowa. Producers generally have until the middle of May to get the crop in and still have potentially good yields, so many traders will intently watch the USDA weekly crop progress reports over the next few weeks to see if we can get the majority of the crop in the ground by then. If so, then we can still see a huge Corn crop this year, which will be desperately needed to bring U.S. inventories up from 15-year lows.
Technical Notes
Looking at the daily chart for December Corn, we notice Thursday's sharp sell-off took prices well below not only the up-trend line drawn from the March 16th low, but also below the 20-day moving average, triggering additional selling by short-term momentum traders. We also note the 14-day RSI moving back to a more neutral level, with a current reading of 47.27. The next significant support level is not seen until the April 12th low of 627.25. Resistance remains at the contract high of 684.00.
Mike Zarembski, Senior Commodity Analyst
