Where Did The Corn Go?

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Fundamentals

“Shocking!” That is the term used by some grain traders just after the release of the USDA’s yield estimate for this year’s U.S. Corn crop. The USDA projected 155.8 bushels per acre yield, which is well below the 162.5 bushels per acre projected in the September crop report. The much lower than expected yields forecast forced the USDA to lower the size of the U.S. Corn crop to 12.664 billion bushels, or nearly 500 million bushels lower than the previous estimate! Even though this looks to be the 3rd largest U.S. Corn crop on record, demand is so strong for Corn — whether for animal feed or for ethanol production — that the U.S. ending stocks totals for 2010-11 are estimated to fall to just over 900 million bushels, or nearly half of what we had for the 2009-10 season. Sharply reduced yields in the major Corn producing states of Illinois, Iowa, and Indiana were behind the dramatic drop in the crop size and set up the prospects for higher grain prices to help ration demand. In addition, tight supplies of Corn could influence the government mandate on the amount of ethanol that can be blended into gasoline. There has been discussion that the limit could be raised to 15% from 10%, but no decision has been reached as of yet. Traders took Corn futures up the 30-cent limit all the way out to the July 2012 contract on Thursday after the report was released, and many analysts look for hedge selling to dry-up, as producers may be willing to hold Corn in storage in anticipation of higher prices.

Trading Ideas

Given the expectation of tight Corn stocks this year, we may start to see old crop/ new crop Corn spreads move in favor of the old crop, given the potential for rationing this year’s supplies — especially if yield estimates continue to decline. An example of a trade which might take advantage of this situation would be to buy March 2011 Corn (this year’s crop) and sell December 2011 Corn (next year’s crop). Currently, March 2011 Corn is trading at 537.50 and December 2011 Corn is trading at 511.25 — or a difference of 26.25 cents premium to the March. Traders who may choose to be long this spread would want to see this differential continue to widen in March’s favor. Traders should remember that spread trading may not necessarily be less risky than having an outright position, and they should have an exit strategy in place for possible protection if the trade moves against them.

Technicals

Looking at the daily chart for December Corn, we notice prices rebounding sharply from steep losses last week, as the USDA crop production report negated any bearish bias from the 300 million bushels of Corn the USDA “found” in the quarterly grain stocks report issued at the end of September. The limit-up move on Friday has prices near recent highs, which possibly will be taken-out handily once the session resumes on Sunday night. Prices are once again above the 20-day moving average, and the 14-day RSI looks strong, with a current reading of 65.82. We have to go back to the fall of 2008 to find the next resistance area for December Corn, which looks to be near the 550.00 area. Support is found at the October 4th low of 454.25.

Mike Zarembski, Senior Commodity Analyst

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