By John Payne, Senior Broker with Daniels Trading
The corn trade has been incredibly complicated as of late. The situation is one that projects both the most bullish and bearish of set ups, simultaneously. So what is anyone involved in the grain trade supposed to do? What do we focus on going forward that will project prices higher or lower? If market participants or advisors look closely, they will see a Jekyll and Hyde type market that doesn’t come around that often.
Tight Supply and 95 million Acres
Corn futures are now an environment with a two-tiered structure. On one hand, we have the old crop, or cash corn market (grain that is in the bin or would be ready for use immediately). This market is showing bullish characteristics with a historically tight supply on hand. The one factor, beyond all things, that triggers me as a buyer of cash or front month corn futures is the strong basis being reported in Decatur, IL (heart of corn belt) and in the Gulf of Mexico where the export terminals are. As of today, those basis levels are as strong as we have seen in recent times. This reflects the supply shortage that doesn’t seem to be jiving with USDA data. The cash markets don’t lie; the invisible hand will find the inefficiencies in the markets, regardless of what agency data would report. I feel at this point, the price movements of corn are contradicting the situation being panted by the USDA.
On the other hand, we have the new crop corn market (grain that is currently being grown). US farmers are going to put more corn in the ground this year than they have in the last 75 years. Combine that much land being devoted to planting corn with an expected historical yield, the American farmer is planning to grow more corn than there ever has been in history. In a few months, if Mother Nature permits, our tight supply problem should not be a problem for the foreseeable future. It is this scenario that is preventing the faucet of fund money from being opened and being fully invested in corn.
How I Would Play this Dual Market
Because of these two situations, one being very bullish and the other being very bearish, traders have been crossed up with their decision making. With the above information in mind, we are left with no choice but to revert to the old saying, “buy what is scarce and sell what is abundant”. If you are long cash corn in the bin, I would continue to hold until the basis usually peaks sometime in July. If you want to play this speculatively in the futures markets, I think buying July futures and Selling September, December or even March ’13 futures is the play. With the commercials paying up for corn they need and with no supply coming online until the farmers in the south have gotten their crops out of the ground, I believe prices have support around $6.00 in the July futures. Sure, there will be some head winds, with a lot of wheat coming on the market (a substitute for corn) and a twist in the Euro situation developing, but people and livestock still need to be fed. Importing corn is addicting (just look at Japan and Korea). The demand for food is not that elastic, people will spend their last dollar to consume it, which is something they will not do in many other commodity spaces.
There is no sense trying to get creative here. Take what the market is giving you, which is a spread that has the potential to explode into the summer growing season. In 196, we saw the July-Dec corn spread trade to almost $1.90 (currently at $.86). I feel if the right conditions present themselves this market could duplicate the tape from 1996.
Strategies using combinations of positions, such as Spread and Straddle positions may be as risky as taking a simple long or short position.
Be Careful with New Crop Corn
As we look out a few months, we want to be very careful with the new crop corn coming out of the ground after the growing season ends. This growing season is as crucial as any in recent memory. The supply that is being grown now is going to hit the cash market like a ton of bricks, no longer will bulls have a tight supply picture to lean on.That will be the case IF the American Farmer can get max yields on the massive amount of land that is being farmed. I fully expect basis levels to fall in the late summer and into next year with cash corn becoming abundant. The game plan for this year, which was to hold onto your cash grain, hedging in the futures and waiting for basis levels to climb, might not be the play for next year. I would look to save your storage for beans or even wheat, which will have a much better fundamental outlook going forward into 2013.
If the growing season doesn’t go well, you don’t want to be caught short the new crop corn market as it has the potential to trade at or above levels currently seen in old crop corn. Like I said above, this growing season will make or break the corn market for the medium term.
The good news for producers and holders of all grains and oilseeds is that we are now in a seemingly never ending cycle of catch up. We can only plant so much, and the government can’t print more arable land. This past year has been corn’s time in the sun; beans will take their turn for the short to medium term as farmers will chase that action next season. This is good news for farmers and those in the grain business. The challenge now becomes getting yourself in these markets ahead of time rather than chasing them after the fact.
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