This year, ethanol has been the main driver of increasing corn prices. MTBE is being phased out as a fuel additive and replaced with ethanol, derived from corn. From a fundamental perspective, weekly demand and export inspections have been steadily robust throughout the year. Americans appear to be growing very tired of dependence on oil from unstable parts of the world and looking for alternatives.
The potential for profit and the willingness to wean off of the "oil addiction" is spurring a boom in ethanol. In the United States alone, three ethanol plants are being built per month. When these plants come on line, I believe demand for corn should accelerate further. Also, keep in mind we will still need a record crop to keep up with the pace of ethanol demand.
From a technical point of view, there have been several peaks and valleys on the daily charts, but the weekly charts could be forming a "W" pattern, as illustrated in the chart below.
A weekly close above $2.63 per bushel (basis the front month corn contract) would signal an upside breakout. I can offer a couple strategies to play this market from a bullish point of view.
· You can consider using options for a long-term play. Sell the March 2007 240 puts/buy the March 2007 300 calls at 4 cents. Place a 10-cent stop on the 240 puts.
· If there is a weekly close above $2.63 in the front-month corn contract, you could buy September 2006 corn (CU6) at the market on the evening of July 30, 2006 (Sunday), and then sell at $2.61 stop-close only (SCO) / good until cancelled (GTC).
Carol Hurley is a Senior Market Strategist with Lind Plus, Lind-Waldock's broker-assisted division. She can be reached at 866-790-4371 or via email at churley@lind-waldock.com.
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