I have been fielding a lot of calls lately asking my opinion on corn and if its ready for an upside breakout or a new leg lower. For the better part of two months the market has traded in a 15 cent range from low to high, but in reality the range been has within 10 cents. Those anticipating or hoping for higher prices have been disappointed to date but that’s not to say a rally won’t occur down the road. Since the January 12th USDA crop report, the only thing that resembles anything bullish for corn is its relationship vs both Chicago and KC wheat. As the USDA put winter wheat acres the same as last year, surprising buyers looking for a bullish winter wheat acreage number, now find wheat clinging to support levels at the 422 level in Chicago and KC respectively as manged funds have reemerged as willing sellers. This level needs to hold or the market in my view is susceptible to another 8 to 10 cents lower in both contracts. Corn meanwhile stubbornly trades between 348 and 353 in spot March. While the market is short almost a record at 226 K shorts as of 1.16.18, there has been a lack of conviction in either direction at these levels for both old and new crop contracts. What will initiate change for corn then? Most likely it will be weather issues in South America, particularly Argentina. While recent dryness in central and southern Argentina has aided beans higher, the massive short in corn has yet to begin to cover. Should a weather premium be built, I look for some short covering to emerge. Second reason would be slight increases in demand. We have recently seen China continue to be an active buyer of U.S. corn in recent weeks, this morning they bought 256 K metric tons for future delivery. While the totals aren’t impressive, increased buying vs market expectations to re-fill their reserves and meet future expected ethanol mandates is a longer term bullish story. Therefore a low risk trade one might consider moving forward is corn vs wheat. Look to sell KC wheat vs buying corn in the near term at 73 to 74 cents KC wheat over. Use a tight stop at 79 over. I look for this spread to move down to 65 KC wheat over corn. Option players that want to play corn longer term may consider the following trade.
Buy the July corn 380 call for 9.4 cents. Sell the Sell the July 360 corn put for 9.4 cents. If March corn closes below 347.4 this week or next, exit the call/put option in July.
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