Commentary
Yesterday’s USDA pegged this year’s corn yieldat 173.8 bushels per acre, down from 175.1 (bpa) in August, but slightly above analyst expectations of 173.5 bushels per acre. (BPA) However, USDA offset that with an increase in area of roughly 800K acres, which resulted in projected 2023/24 ending stocks rising by 19 million to 2.221 billion bushels. The agency made no meaningful changes to demand, which was a surprise in my view. It is my belief they will need to account for the lack of demand should it not show up either in flash sales announcements or weekly export sales data in the October or November WASDE reports. Today’s corn balance sheet update tells me we are going to be swimming in corn once harvest begins in earnest in the Midwest. Does this mean that prices are going significantly lower near term? Not necessarily but what it does say is that corn is going to need a story amid a bulging balance sheet of 2.2 billion bushels and a more than adequate stocks to usage. If one has the corn, the following risk reversal in corn options makes sense in my view given the potential supply/demand scenario.
Trade Ideas
Futures-N/A
Options- Buy the March 24 corn 490 puts, while at the same time sell the July 24 550 calls for even money or parity.
| ZCN24C550:H24P490[1-1] |
Risk/Reward
Futures-N/A
Options-this strategy should be utilized for hedge purposes. It has unlimited risk as the short option is named and has an expiration 4 months later than the long put. The goal here is to finance a put near or at the money with the caveat that corn will make new lows into harvest. One can use a 10 cent stop loss on a good to cancel basis to mediate the risk.
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