TRADING COMMODITY FUTURES AND OPTIONS INVOLVES SUBSTANTIAL RISK OF LOSS AND IS NOT BE SUITABLE FOR ALL INVESTORS. YOU SHOULD CAREFULLY CONSIDER WHETHER TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR CIRCUMSTANCES, KNOWLEDGE AND FINANCIAL RESOURCES.
Old crop corn has managed a 50 cent rally off of lows in a little over a month. Fundamentally the worst news may now be behind us as low prices have been able to inspire demand. But, now that corn has rebounded how high can corn go before it begins to loose some of this newly found demand?
A few months ago the concern was that the US had a 2 billion bushel plus carry over in corn. This would have been the largest corn carry over in recent history. Since then lower prices have worked well to buy back corn demand. Exports are sharply higher, ethanol is higher and feed demand has increased. This has cut corn carry over to just under 1.5 billion bushels. This is still a big carry over, but the increase in demand at lower prices has been impressive. The question is - how fragile is this new demand base that corn has built on lower prices, and how much of it could get lost if corn prices continue to go higher?
Feed demand seems to be coming back well as the last two cattle on feed reports have shown a substantial up tick of cattle being placed on feed. This comes from a combination of higher priced cattle and lower priced corn. The bitterly cold winter (see polar vortex) has also had a positive influence on corn demand as cattle need to eat more to hold on to weight as their bodies burn calories at a higher rate to keep body temps up. This effect of cold weather is a temporary situation however. Still, both the corn market and the cattle market are trying to encourage more cattle on feed and the trend for higher placements could continue if this relationship holds up. But, how sensitive will cattlemen and the cattle market be to higher priced corn? The last few years have been tough for cattlemen, and they could be quick to slow their expansion or even cut back if input costs go up. Guys certainly remember the last few years and may be rather sensitive to higher corn prices.
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Corn demand for ethanol has been better this year as well. Currently ethanol stocks are near three year lows while production is on the high end. This is a good sign of solid ethanol demand despite the EPA wanting to relax the ethanol mandate. higher crude oil and gas prices combined with lower corn prices are a winning formula for ethanol profit margins and good profit margins usually mean good production. Currently corn used for ethanol is running just slightly behind the USDA projection, but this could increase in the summer months. Crude oil and Gasoline prices will certainly have an effect on ethanol profitability, but for now the crude complex looks like it could go higher. Corn demand for ethanol may be the most resilient on the balance sheet, but questions about the EPA's direction may also keep ethanol producers from stockpiling. Export demand for corn will be an interesting question and may be the most visible and telling indicator of corn demand. It is more difficult to guess how corn prices effect profitability in other countries.
Export demand has been quite strong in the last 2 months with export sales of over 1 million metric tonnes in 4 of the last 5 weeks. However the exception came last week when sales were only about half of the week before. It is too early to tell if this was just a one-off or if exports are now starting to suffer from the 50 cent rally off of lows. But, if export sales continue to fall back this could be an indicator that corn prices may be starting to negatively effect demand.
So, the low may well be in for corn for now but higher prices could snuff out some of the demand that lower prices worked to re establish. The question is where this would happen on a bigger level. Corn prices will now likely try to find this level and then retreat from it. We believe this will begin to happen anywhere from current prices to about 25 cents higher. What the market does not need right now is price out this growing demand base and add bushels back on the balance sheet.
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March Corn Daily chart:
March Soybeans Daily chart:
March Wheat Daily chart:
All this means that speculators should be looking for opportunities and producers need to look to lock up some prices. Give me a call for some ideas. In particular, producers looking to hedge all or a portion of their production may be rather interested in some of the options / options-futures strategies that I am currently using.
In my mind there has to be a balance. Neither technical nor fundamental analysis alone is enough to be consistent. Please give me a call for a trade recommendation, and we can put together a trade strategy tailored to your needs. Be safe!
Ted Seifried (312) 277-0113 or [email protected]
Additional charts, studies, and more of my commentary can be found at: http://markethead.com/2.0/free_trial.asp?ap=tseifrie
Futures, options and forex trading is speculative in nature and involves substantial risk of loss. This commentary should be conveyed as a solicitation for entry into derivitives transactions. All known news and events have already been factored into the price of the underlying commodities discussed. The limited risk characteristic of options refers to long options only; and refers to the amount of the loss, which is defined as premium paid on the option(s) plus commissions.
FOR CUSTOMERS TRADING OPTIONS, THESE FUTURES CHARTS ARE PRESENTED FOR INFORMATIONAL PURPOSES ONLY. THEY ARE INTENDED TO SHOW HOW INVESTING IN OPTIONS CAN DEPEND ON THE UNDERLYING FUTURES PRICES; SPECIFICALLY, WHETHER OR NOT AN OPTION PURCHASER IS BUYING AN IN-THE-MONEY, AT-THE-MONEY, OR OUT-OF-THE-MONEY OPTION. FURTHERMORE, THE PURCHASER WILL BE ABLE TO DETERMINE WHETHER OR NOT TO EXERCISE HIS RIGHT ON AN OPTION DEPENDING ON HOW THE OPTION'S STRIKE PRICE COMPARES TO THE UNDERLYING FUTURE'S PRICE. THE FUTURES CHARTS ARE NOT INTENDED TO IMPLY THAT OPTION PRICES MOVE IN TANDEM WITH FUTURES PRICES. IN FACT, OPTION PRICES MAY ONLY MOVE A FRACTION OF THE PRICE MOVE IN THE UNDERLYING FUTURES. IN SOME CASES, THE OPTION MAY NOT MOVE AT ALL OR EVEN MOVE IN THE OPPOSITE DIRECTION.