Some Thoughts on Corn

1.

I saw some interesting stats the other day comparing 2012 with 1988 (chart below). Back then there were similar estimates for poor quality crops. Prices almost doubled then. We’ve gained only about 60% this year by comparison. That said the dollar value of the gain this time is more than double that of 1988. On one hand you could say we have no gone far enough. On the other you could argue it’s too far.

2.

A grain trader I know just got back from a grain trading conference in Melbourne. Everyone he met was very bullish. So who is left to buy? Take a look at the COT table below. Producers are heavily short and speculators are heavily long. Isn’t that a perfect formula for a sharp reversal?

3.

This trade idea appeared this week on www.ProTrade Futures.com.

New Trade – Corn

Update: 12 August 2012.

Trade Summary

Position

Contract

Entry

Lots*

Current

Equity

Stop

Buying

Dec 2013

1

649.5

Selling

July 2013

1

798.0

Selling at:

+150.0

+148.5

Reason for Entry:
For those watching the Corn market, the last few weeks have been the most interesting in years. It was only a few months ago when planting conditions were ideal (in sharp contrast to last year) and expectations were for an early harvest. We were short Sep12 and long Dec12, riding the spread lower thanks to these expectations.

Then of course came the poor (dry) weather and expectations for a good crop disappeared very quickly. We’ve since had only very bad news including well publicised headlines such as this being the worst crop for decades. In fact some stats suggest it’s the worst crop since the 80’s; others since the 50’s. Either way, the price of your corn dog is on the rise.

New crop Corn rallied around 60% from a base of around 500 to above 800. Naturally spreads have been equally crazy.

We could argue this trade has a seasonal bias – and the long term charts below suggest it does have that bias from mid/late-August to the start of October. However this trade really is a play on an overbought spread. Any seasonal bias just adds to it.

The July12-Dec13 (not Dec 2012) spread has rallied from around +25 to a high of +170 Friday. We do not have the usual stats for seasonal performance as such, but suffice to stay a range of -20 to +40 has been the norm for most of the last 35 years.

Friday’s turnaround from +170 to close at +148 looks as good a reversal signal as any and as such this trade takes on a contrarian view on the current rally.

This is a bear spread so this trade will certainly make money if the Corn market turns around straight away. However it is also likely to gain if we see the Corn market start to level out (i.e. the upward trend halts). In this scenario a slight drift lower in July and/or a slight drift higher in Dec could easily be seen.

Trade:
Sell July 2013 and buy Dec 2013 at [www.ProTrade Futures.com member’s only] or wider, premium goes to July.

Risk and Allocation:
Picking a top after such a strong run is certainly not a risk free trade. As such we suggest [www.ProTrade Futures.com member’s only].

Orders:
This spread is exchange listed. See codes below.

Historical Charts:

Stop loss:
[www.ProTrade Futures.com member’s only]

Allocation:
[www.ProTrade Futures.com member’s only]

Contract codes:
eSignal:
ZC Z3 – Dec
ZC N3 – Sep
ZC N3:ZCZ3 – the exchange traded spread

CQG:
ZCEZ3 – Dec
ZCEN3 – Sep
ZCES2N3 – the exchange traded spread

Contract Specs:
www.cmegroup.com

Data Sources:
eSignal, MRCI and CFTC