The corn market staged a reversal on Wednesday, October 8th as prices traded lower and through the previous session low and then finished higher and closed above the previous session high. The action does not meet the actual definition of a “key reversal” as we’re not trading at a contract low although the market scored a recent low. It’s my opinion that prices likely hit a low on Wednesday October 6th and should be ripe for a major upside recovery off these lows.
The December corn contract has covered a lot of territory this year, moving higher last winter and spring while reaching record high levels of nearly $8.00 per bushel. The market has fallen nearly 50% with the low on October 8th marked at $4.07. The market was brutal on the way up, putting tremendous pressure on short hedged grain players including grain elevators and corn producers. The drop downward, which exceeded nearly everyone’s expectation, has been equally tough on long speculators of all types, long hedgers and the local trading community.
The fundamental reasons for the dramatic drop in prices are numerous but the recent slide in prices, through the August lows, has been dominated by economic concerns of recession and thus slowing demand for corn. Sharply lower stocks and a crisis regarding the availability of credit has enhanced ideas of a global recession. With a decent crop about to be put in the bin widespread concerns persist in the corn market regarding feed demand, ethanol demand and export demand. In reality, the corn market, in the recent panic of sharply lower stocks has likely overcompensated for declining demand and prices have dropped too far and too fast.
The USDA will issue their next monthly supply/demand report on Friday morning, October 10th. Most in the trade are expecting a national average yield slightly above their projection from last month and a slightly larger projected ending stocks figure from last month’s supply/demand report. The biggest potential for surprise is likely to be contained in the yield projection. Last month the USDA projected the national average corn yield at 152.3 bushels per acre compared to their August projection of 155.0 and compared to last year’s yield of 151.1. The crop was planted late this year but the overall growing season went well in most of the Midwest. The crop is approximately 20% harvested.
Trading in corn futures, as with most commodities of recent, can be difficult if not outright dangerous. Fundamentally, it’s been difficult if not nearly impossible to know what the near term trade focus will be. Price moves have been quick, volatile and one-way. I’m recommending conservative low risk strategies designed to allow a trader to have a position yet not be forced out in times of high volatility. Because I believe that, technically, the market is showing signs of a bottom, I’m recommending purchasing December call options to hold over the next thirty days. More specifically, traders can look to buy the December $4.70, $4.80, $4.90 or the $5.00 strike price to hold. The premium required to pay for these options ranges from 15 cents ($750) to as low as 6 cents ($300) as of this writing. Over the next thirty days, if the market indeed puts in a bottom, I would anticipate a recovery to at least $5.10 basis the December corn futures with a move toward $5.50 as possibility. Thus, traders holding multiple call options should look to take partial profits when/if December corn futures reach the $5.00 to $5.10 range and look to unwind all positions should prices approach the $5.50 mark. Your total risk is represented by the amount of premium paid plus commissions and fees. The profit is difficult to predict as it depends upon the exact premium paid, the strike price of the call option selected and how quickly prices rally to the objective. Taking ownership of out-of-the money calls, in this market environment gives one the opportunity for profit at a given, pre-determined level of risk.
Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff. The information provided is designed to assist in your analysis and evaluation of the futures and options markets. However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.
Dennis Smith
Senior Account Executive
Archer Financial Services, Inc.
If you would like to open an account to trade grain and/or livestock futures please send me an email or give me a call. 877.377.7905 dennis.smith@archerfinancials.com
