The recent run up in corn prices has brought out the grain bulls in the agricultural futures arena this week.

As we discuss in our latest Futures Magazine article, springtime and the crop perils that come with it can often mean higher prices for fearful industry participants and profit-seeking speculators. Yet these planting related fears can often be unfounded and this could currently be the case in the Corn market. While we still feel bulls may consider selling puts underneath the soybean market due to longer term stock builds, corn is facing a different set of fundamentals.

Tuesday's monthly USDA supply/demand report showed US corn ending stocks for 08/09 at 1.6 billion bushels. This is below last months 1.7 billion bushel estimate and below most analyst expectations. Projected stocks to usage ratio for 08/09 is pegged at 13.2%, slightly above the 07/08 estimate.

While the report was deemed "mildly" supportive by most traders, the market pushed higher earlier this week on the strength of the report and "weather concerns" in the US Midwest. Too much rain is hindering farmer's planting efforts to get the 09/10 crop planted. This is what is really bringing out the buyers. Anxiety over crop planting is almost as reliable as sun and rain itself.

Yes, everyone is getting bulled up. But before you sell the house and buy it all, you may want to consider a few key facts:

My gut feel here is to fade additional strength in corn prices over the coming 10-14 days. We at Liberty Trading recommend selling deep out-of-the-money calls far above the market, which will give traders plenty of room to ride out additional price strength should the market continue to focus on rain.



Chart 1: Sept 12, May 12, 2009

Coincidentally, there is no conflict being short soybean puts and short corn calls. Both can be successful trades at the same time. Soybeans do not have to move higher and corn does not have to move lower. They simply need to stay above and below their respective strike prices.

The weather related volatility has pushed premiums up for distant strikes on both sides of the market. Indeed, May weather has its advantages.

Note: The opinions presented here are that of Liberty Trading and not necessarily shared by Optionetics and/or its instructors.

James Cordier & Michael Gross
Contributing Writers, Liberty Trading Group/Optionsellers.com
Optionetics.com ~ Your Options Education Site