Monday, April 2, 2012
Even new-crop Corn futures were caught up in the bullish frenzy on Friday, despite the potential for a record harvest this year. Once old-crop Corn reached the 40-cent limit, many traders who were caught short rushed into new-crop Corn futures in an attempt to "hedge" their positions. Some traders who may be considering establishing a short position in new-crop Corn may wish to use "rallies" to explore selling call credit spreads in December Corn futures options. For example, with December Corn trading at 539.00 as of this writing, the December 600 calls could be sold and the December 650 calls bought for a net credit of 10.50 cents, or $525 per spread, not including commissions. The premium received would be the maximum potential gain on the trade, which would be realized at option expiration in November should December Corn be trading below 600.00.
Grain bulls had a good end to the 1st quarter of 2012, courtesy of the USDA, who reported overall bullish figures in the quarterly grain stocks report. Old-crop inventories were lower than analysts' estimates in Corn, Wheat and Soybeans, with the Corn figure particularly supportive. The USDA reported U.S. Corn inventories stood at 6.01 billion bushels as of March 1st, or nearly 150 million bushels below the pre-report estimate. Last year at this time, U.S. Corn inventories stood at 6.523 billion bushels. Soybean inventories stood at 1.37 billion bushels, vs. the 1.381 billion bushel estimate. All Wheat inventories stood at 1.2 billion bushels, which was down 35 million bushels from traders' estimates. The highly anticipated prospective plantings estimates confirmed traders' expectations, with a huge expected rise in Corn acreage taking away from both Soybean and Spring Wheat totals. The USDA expected 95.9 million acres to be dedicated to Corn plantings, which was above even the highest estimate and would be the largest Corn acreage since 1937. Soybean acreage is expected to total only 73.9 million acres in 2012, which is well below the 75.5 million acre pre-report estimate and just over 1 million acres less than was planted in 2011. There was no revival in Spring Wheat plantings, with the USDA expecting only 12 million acres being planted this year, which is below even the 12.369 million acres planted in 2011 due to widespread flooding in the Northern Plains. Friday's trading session was volatile, with prices higher across the board. The biggest jump occurred in old-crop/new-crop Corn spreads, which leapt over 20 cents and widened the backwardation in the 2012 trading months. If Friday's trade is any indication, grain traders can look forward to an interesting and potentially volatile trading environment as we head into the heart of the growing season.
Looking at the daily chart for December Corn, we notice that the breakdown from the recent consolidation pattern ended abruptly on Friday, with a "reversal" day formed as prices made new lows before rallying sharply and taking out the previous day's high. The 14-day RSI went from oversold levels just below 25 to a more neutral 39.01 on Friday. Though Friday's rally was impressive given the bearish planting intentions, any further rally attempts should meet some headwinds at the low end of the recent trading range near the 547.00 area, as well as the 20-day moving average, which is currently near the 558.25 price level. Support for December Corn is seen at Friday's low of 523.00.
Mike Zarembski, Senior Commodity Analyst